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CONTENT
Context and executive summary
Growth strategy
Go-to-market
Supply chain
Procurement
Manufacturing
Organization/KPI
Priority areas for phase II and III
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SUMMARY OF PROCUREMENT
Procurement is a possible source of potential savings
Drives a large percentage (xx%) of overall COGS
HuiYuan has been bargaining good prices on many key items which may already be “locked in” through existing contracts with suppliers
But currently, there are a few key issues in procurement
consolidation of weekly request from Beijing plants
Lack of centrally coordinated procurement
Lack of information systems to support and monitor the processes
Opportunities for value creation by improving several key priority areas
System costs
Handling costs
Quality costs
Risk premium
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PROCUREMENT INCLUDES MORE THAN QUOTED PRICES AND HANDLING COSTS
Visible cost
Invisible cost
Quoted price
Handling cost
Freight
Tariffs
Taxes
Transaction cost
Supplier
selection
Contracting
Travel
expenses
Quality cost
Rework
Yield loss
Returns
Risk premium
Delays
Incomplete
lots
Liability
claims
+
+
+
+
Uptime
Throughput
Direct costs
Indirect costs
Key value driver impacts
Unnecessary Costs
Duplication of effort
+
$$
$
$
$
$$
Opportunity
For HY
$
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PROCUREMENT ACCOUNTS FOR XX% OF TOTAL PRODUCT COSTS
RMB
million
Comments/Reasoning
xxx
HuiYuan 2000 Total Product Costs
Further breakdowns of cost buckets if possible
Total
procurement
xxx%
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GREATEST POTENTIAL FOR COST SAVINGS IN XXX FOR PROCUREMENT
RMB
million
Comments/Reasoning
xxx
HuiYuan 2000 Procurement Costs
Further breakdowns of cost buckets if possible
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THE PROCESS TO IDENTIFY AND TEST THE OPPORTUNITIES
Develop the tree and opportunities
Develop hypotheses and priorities
Initial interviews screen
Reprioritize and drill down
Identify value/savings
Cost tree
Opportunites
_______
_______
_______
_______
Opportunity
_______
_______
_______
_______
Hypotheses
_______
_______
_______
_______
Priority
_______
_______
_______
_______
Input
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
______
Backup
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SIMPLIFIED PROCUREMENT COST DRIVER TREE
Procurement Costs
Product Package
Unit costs
Transportation
Quantity
Costs per KM
Shipment
Package
Distance
Fruit sources
Package size
Technology
Product Package size
Technology
Fruit sources
Import costs
Unit costs of purchases
Shipment Package
Other ingredients
Distance
Transport cost
Frequency of distribution
Other
Ingredients
Levers
Import costs
Frequency of
distribution
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INITIAL PRIORITIZATION OF PROCUREMENT VALUE LEVERS
Procurement Value Levers
Package
1. Volume discount from larger order size
2. Product package size
3. Shipment package
Sources
1. Purchases price
2. Import costs
3. Supply Quantity
4. Transportation costs in raw material
Our hypothesis
Package
1. Discount is not maximized
2. Shipment package costs too high
3. Package size costs not proportional to size
Sources & Quality
1. Pay too high the price
2. Import costs too high
3. Quantity bought too low / too high
4. Transport cost too high
Priority
Low
High
High
Low
Low
Mid - High
Mid - High
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SUMMARY : KEY OPPORTUNITIES FOR EXPLORATION / DRILL DOWN - PROCUREMENT
Packaging
Sources
planned tests / review
Data sources
Status
Discount is not maximize
Package size costs not proportional to size
Shipment pack costs too high
Hypothesis
Review contracts & benchmark
Price / Size analysis
Cost breakdown & benchmark
Internal data & benchmark
International Business Dept
Internal data & benchmark
Data not received
Data not yet given
Done
Purchase price too high
Import costs too high
Quantity bought too low / too high
Transport cost of raw material too high
Benchmark top items
Benchmark top items
Historical data analysis on stock-out and inventory
Routing analysis & benchmark
In progress
Done
Data not yet given
In progress
Benchmark
International benchmark
Internal data
internal data & benchmark
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HUIYUAN APPEARS TO NEGOTIATE GOOD PRICES FOR PACKAGING
Unit cost
in RMB
Comparison Of 250ml Tetra Pak Costs Vs Benchmarks
... has proven that Huiyuan has bargained for a very price for package
Package prices for Combibloc locked in at purchase of equipment, no immediate opportunity for renegotiation
GuangMing Milk has about the same number of Tetra Pak lines and volume as Huiyuan, but is currently paying more.
Hui Yuan seems having negotiated a reasonable good prices against Tetra Pak and Combibloc by its growth potential and multi-vendor environment.
PACKAGING H1
Further benchmarking planned
(need to check this for Tetra)
Are alternative suppliers to Tetra cheaper?
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% Change
in costs
Package Size
Juice
Content
Paper
BUT DEAVERAGED PACKAGE COSTS SHOW
LARGER SIZES COST LESS
PACKAGING H2
Paper package changes less when juice content change
... as shown in the increasing proportion of package costs when size decreases
28%
34%
39%
51%
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All vendors charge a high premium on 2L
HOWEVER, VENDORS CHARGE PROPORTIONALLY MORE FOR LARGER SIZES
PACKAGING H2
... and is crystallized when shown in % change
RMB
Package Size
% Change
Package Size
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MARGINS ON SMALL SKUS IS UNPROFITABLE
Example of Apple Juice in Tetra Pak
PACKAGING H2
RMB
Package Size
There is diseconomy of scale for small size in the package and production costs
. . . reflected in the margin
S&M
Production
Other material
Package
Juice
Price
Margin
in RMB
Margin
in %
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OPPORTUNITY TO SAVE IN EXTERNAL PACKAGING
Most of the SKU’s have high cost
. paper box—1L Tetrapack
Big cost saving already realized in some SKUs
. plastic shrink wrap—750ml Combibloc
All paper
Paper +
Plastic Shrink Wrap
Cost:
RMB including printing
Cost:
RMB including printing
PACKAGING H3
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BUT OTHER ISSUES NEED TO BE EXPLORED
PACKAGING H3
Pros for the change
Cheaper
an immediate saving on each box
save printing on the external box
Faster
Save time in printing on exterior
Better weather proof
Cons for the change
Additional Investment
need to invest in the shrink wrap machine
Need to adjustment manufacturing settings
New configuration of stations
New procedures
Training for operators
May not suitable for all SKU
some may require stronger external package
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BENCHMARK SHOWS THAT HY EXTRACTS GOOD PRICE FROM FRUIT VENDORS
Though purchasing price of HY seems to be higher than benchmark...
... it gets products with superior quality at a much lower margin for vendors
Meeting standard quality is the primary consideration for raw fruit procurement
“The peaches HY purchased is of much better quality than others, their standard is so rigorously set that we sell the best peaches bought from farmers to HY and the rest to other juice manufacturers.”
Fruit vendor
Rigorous purchasing price setting through understanding the cost buckets of vendors enable HY to set very low margin for suppliers
“HY is the best negotiator I have ever met. They know every detail of my cost structure and sets a very low price. However, their procurement quantity is so large that I just can’t loose this customer.
Fruit vendor
Price
(yuan/kg)
Purchasing price benchmark
. Peach
6%
16%
Vendor’s
margin
Farmer’s price
SOURCES H1
Where is the benchmark
coming from ?
The vendor ?
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SOURCES H1
HY WORKS CLOSELY WITH VENDORS THROUGHOUT THE WHOLE PROCUREMENT PROCESS
Market survey to glean every piece of sourcing information
Market deep dive to estimate harvest quantity
Collect purchasing price by sending people in selective regions
Intelligence gathering to obtain competitor quotations
Benchmarking to choose optimal sourcing region
Share findings with vendors to help lower purchasing price
HY set maximum procuring price through understanding every component of vendor’s root costs
Set vendor’s purchasing price through market survey
Control vendor’s other cost buckets through external benchmark (transportation, packaging, overhead, labor)
Minimize procurement cost by setting tight margin
Ongoing market review and price adjustment to sustain vendor incentive
Stringent quality control process upfront to minimize mfg. wastage
Both quantitative and qualitative measures in place
Sufficient number of sample check to ensure batch quality
Flexible procuring quantity to allow room for rejection of non-quality
Vendor review and evaluation
Record vendor performance to promote BIC supplying model
Quality control
Screening
Negotiation
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SOURCES H1
FRUIT DISTRIBUTORS CONFIRMED THAT HY PROCUREMENT IS DOING A GOOD JOB
“HY procurement people really know a lot about the market, they are even more knowledgeable than us because they glean info from dozens of vendors. And most of the time they will tell us where to buy good and cheap fruit. ”
--Key vendor of HY
“HY is the toughest negotiator I have ever met. They know every detail of my cost structure and sets a very low price. However, their procurement quantity is so large that I just can’t loose this customer.”
Fruit vendor of HY
“The peaches HY purchased is of much better quality than others, their standard is so rigorously set that we sell the best peaches bought from farmers to HY and the rest to other juice manufacturers.”
-Fruit vendor of HY
Quality control
Screening
Negotiation
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COSTS OF IMPORTED ORANGE JUICE APPEAR REASONABLE
Procurement process well organized to to meet growth target
Global sourcing
Many suppliers reviewed in about 10 countries
Dedicated market survey to get best price quotation
Negotiation & ordering
Procurement from 2 key vendors in Brazil accounts for 95% of total, thus best leveraging bargaining power
Flexible ordering quantity by month at a yearly set price
Safe inventory level set high to minimize stock out risk
Supplier evaluation
Comprehensive record and review on supplier performance in all dimensions
SOURCES H2
... it gets very competitive price from vendors
Importing price
($ per ton)
Since HY is the biggest domestic buyer of imported orange juice...
Import volume
(ton)
50%
100%
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UNPLANNED FRUIT PURCHASING COSTING HY (I)
SOURCES H3
A premium of 130% on the first purchases
Cost in
RMB /
130%
higher
A better planning would save the extra costs
HY bought the first batch of fruit of 200 tons in September at per half KG.
But later it needed to purchase 150 tons more in November. As it did not foresee the requirement and thus HY had to pay a much higher price in the market where there was little stock.
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UNPLANNED FRUIT PURCHASING COSTING HY (II)
SOURCES H3
Purchases of squeezed fruits juice for 2000
Tons
Put in the tons
from Procurement department list of total purchases
A better planning would save the extra costs
HY has been buying the fruit paste from the market. The main reason being its underestimation of fruit requirement.
Should HY had had good
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PACKAGING SUPPLIERS ARE SAYING THE SAME THING, BUT IT DOESN’T RAISE UNIT COSTS BUT DOES CREATE OTHER PROBLEMS
“Ordering of HY is chaotic. They never let us know how much they will buy in advance and always urges us to provide whatever they want ASAP. For many times, we just cannot meet their sudden bulky buying demand.”
“Although the price is set every year so that HY won’t get penalty for its abnormal ordering, we do think that will incur lots of stock out on the mfg. side. That will be deadly for its business in peak seasons.”
“Since HY is our biggest customer, we proposed integrating their procurement plan with the manufacturing plan of us, which is a win-win solution. But the plan met with some obstacles. Actually, we are considering offer HY some rewards if they can operate.”
Packaging vendor
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Fruit
Cost breakdown of fruit vendor by HY
Stack 2
Raw fruit
Other fixed cost
Transportation
% of total cost
TRANSPORTATION COSTS OF RAW FRUIT SIGNIFICANT
And % Vary Widely Because of Different Location and Different Fruit Price
SOURCES H4
% of total cost
Sourcing place
Cost structure comparison of apple
44%
17%
Price
(RMB per kg)
Fruit
Purchasing price year 2001
Apple
Pear
Peach
Kiwi
Strawberry
High
Avg.
Low
16% of total cost
put volume and convey to MM chart
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KEY ELEMENTS FOR BUILDING A CROSS-FUNCTIONAL PROCUREMENT SYSTEM
Market demand forecast
Marketing Intelligence dept coordinating with marketing dept and manufacturing dept input
Salesman forecasts
Industry demand analysis
Historical data analysis
Market survey
Overall plan for procurement strategy
Centrally coordinated planning
Mfg. dept & procurement dept of all plants
Compare economics of outsource and in-source
Set safety inventory level
Sketch out long-term volume evolution
Find supplier with constant quantity and reasonable price
Supplier evaluation on quality, quantity, time and price
Procurement dept
Consolidate order to leverage bargaining power
Bidding system to find key vendors
Manage key supplier competitive dynamics
Order placement and shipment control
Capture enough data to be analyzed with strong model
Procurement dept, Mfg. dept, M&S dept
Integrate orders from individual plants,if viable
Build in ongoing adjustment mechanism
JPI with supplier to minimize cost and achieve stability
Internal review of procurement process
Procurement dept, , M&S dept
Supplier performance grading
Integrated checking of ordering record and inventory level
Investigate root cause of major stock out or excess inventory
What
Who
How
Backup
Demand Forecasting
Procurement planning
Supplier identification and negotiation
Ordering and shipment
Monitor and review process
Support system
Market intelligence & Recruiting / training
KPI and incentive system
Link key value drivers to KPI & Link compensation to KPI
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A FEW ISSUES IDENTIFIED ALONG THE PROCUREMENT MANAGEMENT SYSTEM
Forecasting
!
Procurement planning
!
Supplier identification and negotiation
3
Ordering and shipment
3
Monitor and review process
3
Support system
Market intelligence & Recruiting / training
KPI and incentive system
Link key value drivers to KPI & Link compensation to KPI
Issues
Lack of interactive communication between S&M and procurement and mfg.
Impact of promotions not captured
Rapid product proliferation
Poor historical mfg and sales data records for future forecast
Very short term planning horizon
Safety inventory level for packaging set too high as result of poor forecasting
However, safety inventory level for parts set too low
Lack of central co-ordination across plants
HY has been actively managing the buying process through bidding to look for the best price producers
Good at keeping competitive dynamics among packaging vendors
Need proactive searching for new vendors as company grows
Irregular ordering results in high stockouts and excess inventory
Negative vendor feedback as irregular HY ordering brings vendor mfg. disorder
Unpredictable bulky orders result in excessive long lead time
Consistently reviewing performance of key suppliers
Lack of efficient IT and database system
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INTERVIEWS CONFIRMED THE IDENTIFIED ISSUES ALONG THE PROCUREMENT MANAGEMENT SYSTEM
Demand
Forecasting
!
Procurement planning
!
Supplier identification and negotiation
3
Ordering and shipment
3
Monitor and review process
3
Support system
Market intelligence & Recruiting / training
KPI and incentive system
Link key value drivers to KPI & Link compensation to KPI
Quotes
“The linkage between sales companies and manufacturing plants is not tight enough.”
HY HQ mafg.
“We have a weekly procurement plan, but no yearly or monthly forecasting system.”
HY procurement
“We have tried to help them to minimize stockout.
We reserved some paper rolls for them
to order in the summer. But they did not order as we
expected, the paper is still in our warehouse. It’s quite weird that HY’s procurement plan is not in line with perceived seasonality”
A packaging material vendor
“We have a bidding system in place for buying big items.”
HY procurement
“We know that HY is playing both Tetra and Combibloc. That’s the reason why we are offering them many benefits which other customers don’t have.”
A packaging material vendor
“HY definitely need to improve its ordering management system. We even proposed help them establish a state-of-art inventory and ordering management system. Some of our big clients are using them already.”
A packaging material vendor
“We need to actively manage our cost base because HY clearly knows any change in market price and keeps adjusting its procurement price accordingly.”
A fruit vendor
“A comprehensive supplier evaluation system is in place to keep track of the supplier dynamics.”
A fruit vendor
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Demand Forecasting
Procurement planning
Ordering and shipment
IMPROVEMENT ON MANAGEMENT SYSTEM NEEDED AT ALL LEVELS
Weekly procurement forecast based on inventory and consignment.
Very short-term planning horizon
No interaction with sales company at this level
Weekly procurement forecast based on inventory and consignment.
Safe inventory level set too high as result of poor forecasting
Place order to HQ procurement / International business dept. and wait for approval
Lengthy approving process results in wasted time and efforts
Individual manufacturing plants
HQ mafg. & procurement /
International business dept
Yearly plan based on sales company figures
Interaction with sales company not frequent enough
Add up plant procurement demand weekly and place order till reaching minimum amount
Different ordering pattern of individual plants not considered
Place order to suppliers till aggregate ordering size reaching minimum amount
Different ordering pattern of individual plants not considered
Stockouts or excess inventory owing to inflexible ordering schedule
Practice
Issues
Practice
Issues
Practice
Issues
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ORGANIZATION/CAPABILITIES ISSUES ALSO IDENTIFIED IN PROCUREMENT
Area
Structure/headcount
Organization chart of Procurement
Headcount of Procurement
Responsibility of each position
Qualification of staffs in Procurement
Education background
Years of experience
Capabilities development
Internal training program in place
External training program in place
Talent turnover
Turnover rate by year
Reasons for leaving
Key Issues
Tight headcount control results in working inefficiency and potential risk of loosing suppliers
Only 1 person as the exclusive contact point with several key vendors
Not enough qualified human resource
Percentage of employees earning college degree as low as XX%
Lack of knowledge accumulation because of turnover rate as high as XX%
Training for employees cannot catch up with growth
Low
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AS WELL AS KPI/INCENTIVES ISSUES
Area
Current KPI related to Procurement
Sales
Manuf
Current incentives system related to Procurement
Sales
Manuf
Key Issues
Currently there is no KPI in place for procurement dept
Currently there is no incentive system link to KPI
Data source:
Procurerment, HR
quote & benchmark
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KEY OPPORTUNITIES TO EXPLORE IN PROCUREMENT
Improve
performance
Management
system
Planning for
growth
Opportunities
Big/small?
Joint process improvement with packaging suppliers
Market demand forecasting for 12 months
Install demand forecast system
Lengthen the planning horizon
Long term supply of fruits
Small
Big
Big
Big
Big
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HOWEVER, HUIYUAN MAY BE INCURRING COST BY WORKING WITH COMBIBLOC
“When we buy from Combibloc and Elopack, we need to place order 2-3 months before the actual demand as we have to go through the import procedures.
Also when new package is designed, it takes us months to let Combibloc and Elopack to get the sample done because of the long time in mailing the samples for further revision.”
- HuiYuen manager
“We have some Combibloc lines but we are going to phase them out. They are too inefficient and slow in servicing us. We will switch all lines to Tetra Pak”
- A factory GM of GuangMing
PACKAGING
Need to benchmark with other vendors, not necessarily all procurement issues
Inventory
Product Design
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HUIYUAN HAS TO WORK ON SOME FRUITS PURCHASES ISSUES
SOURCES
Key Areas
Key issues
wastage in handling
poor forecasting
SOURCES
ILLUSTRATIVE
To be confirmed with interviews
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CONTENT
Context and executive summary
Growth strategy
Go-to-market
Supply chain
Procurement
Manufacturing
Organization/KPI
Priority areas for phase II and III
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SUMMARY OF MANUFACTURING
Manufacturing is a good source of potential savings
But currently, there are a few key issues in manufacturing
List of key issues
Opportunities for value creation by improving several key priority areas
List of priority opportunities
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GREATEST POTENTIAL FOR COST SAVINGS IN XXX
RMB
million
Comments/Reasoning
xxx
HuiYuan 2001 Manufacturing Costs
Further breakdowns of cost buckets if possible
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SIMPLIFIED MANUFACTURING COST DRIVER TREE
Costs of
goods sold
Direct Labor
Direct Costs
Overhead
Depreciation (?)
Direct Material
Utilization
Capacity
Indirect Labor
Maintenance
Wastage
Transportation
Location
Product
Inventory
Production line no
Direct labor
Location
Product
Downtime
Uptime
Wastage
Order Quantity
Reorder Level
Indirect labor
Distance
Cost per KM
Frequency of Delivery
Maintenance
Levers
Production
Line No
Uptime
Downtime
Order Quantity
Reorder Level
Cost per KM
Distance
Frequency of
Delivery
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INITIAL PRIORITIZATION OF MANUFACTURING VALUE LEVERS
Manufacturing Value Levers
Product
Product
Assets Productivity
No of line
Uptime
Downtime
Wastage
Direct labor
Indirect labor
Our hypothesis
Product
Too many products to handle
Assets Productivity
Too many Lines
Uptime could be improved
Downtime could be reduced
Wastage could be reduced
Productivity of operators could be improved
Productivity of management could be improved
High
High
High
High
High
Mid
Mid
Priority
Inventory
Order quantities
Reorder level
Wastage in handling / storage
Inventory
Order too much
Reorder level too high
Improve / change way of handling / storage
High
High
Low
Logistic
Distance
Frequency of delivery
Logistic
Plants’ location should be optimized
Routing and load planning could save costs
Mid – High
Mid – High
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SUMMARY : KEY OPPORTUNITIES FOR EXPLORATION / DRILL DOWN - MANUFACTURING
Asset
Productivity
planned tests / review
Data sources
Status
Inventory
Hypothesis
Logistics
Plants’ location should be optimized
Routing and load planning could save costs
Routing analysis
Routing analysis and load rebalancing analysis
Routing analysis
Routing analysis and load rebalancing analysis
Data not yet given
Data not yet given
Too many Lines
Uptime could be improved
Downtime could be reduced
Wastage could be reduced
Productivity of operators could be improved
Usage & Utilization analysis
Utilization analysis & benchmark
Downtime analysis & benchmark
Wastage analysis & benchmark
Productivity analysis & benchmark
Internal data
Internal data & benchmark
Internal data & benchmark
Internal data & benchmark
Internal data & benchmark
Data OK – analysis in progress
Data NA –in progress
Data NA
Data to be collected
Data NA
Order too much
Reorder level too high
Improve / change way of handling / storage
Usage & order analysis
Usage & order analysis
Wastage analysis
Production & stock data
Production & stock data
Production & stock data
Data to be collected
Data to be collected
Data to be collected
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顺义
石河子
右玉
应县
巩义
宜昌
九江
赣州
东里
莱芜
延吉
成都
上海
PRODUCTION LINES ALL THROUGH COUNTRIES,
YET UTILIZATION CONCENTRATED IN BEIJING
Data needed on capacity utilization of all HY plants
Show by volume
ASSETS
PRODUCTIVITY H1
WT 1x1L
ZL 1x 600
LL 1x250
LL 2x250
LL 1x250
1x330
LL 1x330
1x750
1x1L
ZL 1x200
1x600
KM 1X330
1x1L
KM 1X250
PET 1x500
LL 2x250
2x330
2x1L
KM1x2L
2x1L
1x750
1x330
1x250
1x150
ZL 2x125
1x600
1x1L
PZ 2x290
WT 1x2L
1x1L
1x500
PET 1x500
LSJ x2
PZ 1x250
LL 1x1L
ZL 2x200
FBR 1x5T
沃尔派克 1x250
ZL 1x600
WT 1x500
WT 1x500
LL 1x1L
FBR 1x5T
FBR 1x5T
LL 1x330
1x1L
FBR 1x10T
WT 1x1L
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ASSETS
PRODUCTIVITY H1
Plant
Capacity
(ton)
Stack 2
THE BIGGEST 3 PLANTS COMPRISES 86% OF TOTAL PRODUCTION CAPACITY, BEIJING ACCOUNTS FOR 63%
Note: Production capacity calculated for year 2001, Jan to Oct
Source: HY data
86%
63%
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ASSETS
PRODUCTIVITY H2
MANY PLANTS HAS BETTER UTILIZATION THAN
BENCHMARK, THOUGH SOME NEED IMPROVEMENT
Plant
Capacity
Utilization
Note: Capacity utilization calculated for year 2001, Jan to Oct
Source: HY data, BCG interviews
Break-even analysis
total fixed costs of each plants
divided by the contribution margin
of each product
we will get the volume of production
to get back the investment of line
Benchmarks says it is about 50%(need
to verify with data analysis)
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Downtime occurs very often
... due to the following reasons
EVEN WITH LOW UTILIZATION, PRODUCTION
LINE DOWNTIME IS SIGNIFICANT
CHART ON COST AND TIME OF DOWNTIME and reasons
ASSETS
PRODUCTIVITY H3
interview with Combibloc technicians
Week 4
Week 1
Week 2
Week 3
2 days
July
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PRODUCTION PLANNING HORIZON ONLY ONE
WEEK, LEADING TO STOCKOUTS
Stock out
Maximum
Capacity
ASSETS
PRODUCTIVITY H1
Reason for stock out
Lack of capacity – mainly due to poor production planning
Lack of parts – inadequate inventory
Lack of product package – mainly due to ordering system
Lack of raw fruit – mainly due to underestimation of demand
We could not quantify the impact as there are no data available.
Our estimation of cost is around RMB3,600/hr to 6,000/hour
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PRODUCT PACK WASTAGE HIGHER THAN BENCHMARKS
HIGHLIGHTED EXAMPLE ON TETRA PAK LINE
Quotes/data? from equipment suppliers, benchmarks and HY
Comments
Wastage for package is about
(need to check this)
Hui Yuan has negotiated a reasonable good prices against Tetra Pak and Combibloc by its growth potential and multi-vendor environment.
(call Tetra Pak guy)
ASSETS
PRODUCTIVITY H4
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PACKAGE COST NOT STABLE FOR COMBIBLOC
Can HuiYuan Always Purchase At The Low End of the Range?
Volume
RMB
High
Low
Average
Root Causes
wastage
price change from time to time (has to check with Mr. Li of International Business Dept for details)
Why difference Actual
Pending for data and info from
intl Business dept
ASSETS
PRODUCTIVITY H4
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WELL TRAINED & DISCIPLINED FACTORY MANAGERS
AND WORKERS CAN REDUCE DOWN TIME SIGNIFICANTLY
“The salaries level of operators are too low. People left when they get the training and know how to operate the machines. The operators turnover are too high compared to our other clients.”
“The plants do have rules, but whether they abide by it in high discipline is another issue.”
- a Vendor’s Technical Support Engineer
“Our success is mainly from the in-depth experience of the operators who we tried to keep over the years. We have managed to train them so well that they will know exactly what to do and what could be the consequences of any single action. So they know not only how to fix the machine but more importantly, what should and should not do during operation.”
- Plant GM of GuangMing Milk
ASSETS
PRODUCTIVITY H5
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ERRATIC ORDERING LEADS TO STOCKOUTS AND HIGH INVETORY
Current ordering practice
Volume
(00 ton)
Month
Volume
(00 ton)
One good slide on poor ordering policies for packaging and implications
INVENTORY H1
“Compared to the best in class operators using the same production line, HuiYuan’s order seemed chaotic to us.
“Their order cycle is unpredictable and the amount order is erratic, most of the time, they have ordered too much. They should have a better ordering system in place.”
“Their order size is huge and informed us in a short notice. Thus, many times we could not meet their schedule. I wish they could work with us to solve this issue.”
- Sales Director of a vendor
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INVENTORY H1
assume breakdown
here and parts are needed
for fixing
Case of preventive maintenance
Loss of production time = zero
Cost of downtime = zero
Case of keeping parts
Loss of production time = 2 hours
Cost of downtime = 2 hours x 6000 pack (Tetra Pak) x 20 RMB (assumed) = 12,000
Cost of holding parts = RMB300
Case of no parts are kept
Loss of production time = 1 day
Cost of downtime = 20 hours x 6000 pack (Tetra Pak) x 20 RMB (assumed) = 120,000
ILLUSTRTIVE
INVENTORY OF PARTS IS IMPORTANT FOR
HIGH EFFICIENCY PRODUCTION LINES
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HUIYUAN HAS A HIGHER INVENTORY LEVEL IN
PRODUCT PACKAGES THAN BENCHMARKS
ASSETS
PRODUCTIVITY H2
Cost of higher inventory
Inventory level
HY
Time
Ave inventory level HY
Safety stock HY
HuiYuan
Benchmark Company
Impact of high inventory level
Increase cost of carrying
warehousing costs
cost of obsolesce
cost of wears & tears
Increase cost of financial interest
Decrease cost of ordering
Decrease average cost of transportation
Inventory level
Time
Ave inventory level
Safety stock
Inventory level difference
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宜昌
东里
延吉
顺义
GEOGRAPHIC LOCATION OF SQUEEZING LINES SHOULD BE OPTIMIZED
LOGISTICS H1
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TRANSPORATATION ECONOMIC DICTATES THE
SQUEEZING PLANTS BE CLOSE TO THE SOURCES OF FRUITS
LOGISTICS H1
Transport
cost / 100KM
KG
Loss
35% in
Squeezing
Loss
5% in
production
but accounts
for only 40%
in final
products
save 60%
than
shipping
FG
save 30%
than
shipping
raw fruits
Plants should be close
to sources of fruits
Cost of transportation
Volume of fruit purchases
Product of these have the annual transportation cost
minus the cost to ship plasm to other plants
The results use a NPV and will be the saving
compare this to the cost of moving a plant / install new plants
See next page for details
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REALLOCATION OF PLANTS CAN SAVE COST SIGNIFICANTLY
Geographic planning very important
Huge potential savings
X
X
X
X
X
X
X
X
X
X
X
X
X
X
x
Packaging plants
Sales companies
Current cost
Future cost
Transportation of plasm
Transportation of FG
$10,000
$50,000
$8,000
$25,000
LOGISTICS H1
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THE IMPACT OF LOAD CONSOLIDATION AND SHIPMENT OF CONCENTRATE INSTEAD OF FG
Cost before load consolidation &
shipping FG only
Cost after load consolidation &
shipping of concentrate and FG
BJ
A
B
C
YC
A Reduction of 61% in transportation cost
LOGISTICS H2
ILLUSTRATIVE
Data on BJ to other factory and salesCo
Finished
goods
Finished
goods
Finished
goods
Finished
goods
Finished
goods
Finished
goods
Finished
goods
Juice concentrate
& product pack
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A FEW ISSUES IDENTIFIED ALONG THE MANUFACTURING MANAGEMENT SYSTEM
Forecasting
Production Planning
Capital Planning
Production Management
Monitor and review process
Support system
Market intelligence & Recruiting / training
KPI and incentive system
Link key value drivers to KPI & Link compensation to KPI
Lack of integrated planning between Mfg. and S&M dept
Lack of accountability for growth planning at the departmental level
No integrated production plan across plants
HQ Mfg. assumes the role of high level monitoring only
Current weekly plan result in short-sighted forecast
Task-centric workflow with ittle inter-departmental co-ordination
Product complexity limit economy of scale
Excessive capacity in some region
Non-optimized plant location incurs high transportation cost
Lack of data collection to support decision
Process highly automated
Lots of downtime due to poor production planning, raw material and parts ordering as well as proper maintenance
Lack of committed and experienced operators
Effective KPIs implemented in some plants
Lack of proper data collection and information system to monitor
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KEY ELEMENTS FOR BUILDING A CROSS-FUNCTIONAL MANUFACTURING MANAGEMENT SYSTEM
Backup
Forecasting
Production Planning
Capital Planning
Production Management
Monitor and review process
Support system
Market intelligence & Recruiting / training
KPI and incentive system
Link key value drivers to KPI & Link compensation to KPI
Market demand forecast
Marketing Intelligence dept coordinating with marketing dept and manufacturing dept input
Salesman forecasts
Industry demand analysis
Historical data analysis
Market survey
Overall HY production plan
Centrally coordinated planning
Mfg. dept & procurement dept of all plants
Compare economics of outsource and in-source
Set safety inventory level
Sketch out long-term volume evolution
Vigorous demand forecast, economic analysis and logistic optimization as well as system costs analysis
Manufacturing dept
Demand forecast to find out the package preference of local market to identify production line
Economic analysis to justify the investment
Logistic optimization and system cost analysis to determine location
Enterprise resources management system for managing cost, time and quality level
Mfg. dept coordinate all related departments
Inventory system for inventory optimization
Procedures and HR system for skilled staff
Assets utilization system to maintain high usage and conditions of equipment
Quality assurance for high quality level
Internal review of procurement process
Procurement dept, , M&S dept
Supplier performance grading
Integrated checking of ordering record and inventory level
Investigate root cause of major stock out or excess inventory
What
Who
How
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ORGANIZATION/CAPABILITIES ISSUES ALSO IDENTIFIED IN MANUFACTURING
Area
Structure/headcount
Organization chart of Manufacturing
Headcount of Manufacturing
Responsibility of each position
Qualification of staffs in Manufacturing
Education background
Years of experience
Capabilities development
Internal training program in place
External training program in place
Talent turnover
Turnover rate by year
Reasons for leaving
Key Issues
Relationship between individual plants and HQ Manufacturing Dept. need to be clearly defined and accountability properly assigned
Current KPI system vary widely in different plants
Currently only 9% of total manufacturing staff earns a college degree
Average industry experience of operators as low as XX years
Need to fully utilize the trainings offered by equipment vendors
Urgent need in upgrading basic language and computer skills
Plant GM changeover too frequent
Average years in tenure as low as XX years
Attracting more qualified management talent critical for meeting growth ambition
Data source:
Manufacturing, HR department
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CAPITAL PLANNING REQUIRES A DEDICATED PROCESS
Current situation :
- low utilization in some factory
- may due to overestimation of market demand
- mis-allocation of financial resources could hamper growth in mid- to long – term as precious fund are locked in in non-productive assets
Benchmark finding :
- Some producers out-sourced packaging in peak time or in market where an investment will not pay off in short time
CAPITAL
PLANNING
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AN IMPROVEMENT IN CAPITAL PLANNING COULD GREATLY ENHANCED PROFITABILITY OF HY
Return on
assets %
Before allocation, 50%
of the company assets
producing low return
of 15%, thus the
overall profitability of
the company is just
30%
By relocating the low
yield producing assets
into high yield area,
the company profit
sharply increases to
45%
Production line A
Production line B
Overall
CAPITAL
PLANNING
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WORLD CLASS FIRMS USE BOTH TOP-DOWN AND BOTTOM-UP APPROACHES ON CAPITAL PLANNING
Long-term planning
Capital budgeting
Expenditure approval
Monitoring
Top-down investment process
Strategic Planning
Corporate top-down process provides direction of development and rapid control of budget
Profit centers generate investment proposals
based on vigorous analysis of market situations
Bottom-up process
CAPITAL
PLANNING
HY lacks organizational capabilities on the shaded areas
Demand forecast
Financial modeling /
IRR analysis
Performance
Tracking
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INVESTMENT PROCESS THROUGH CAPITAL
BUDGETING CYCLE INVOLVES THREE STAGES
BoD / CEO
Finance
Department
The Company Planning Department
Factory
GM
Unit Finance
Unit/Department
Investment Proposal
Screening and Approval
Cash Dispensing
Initiate Project
Propose Budget
Screen Proposal
Project Screening: Corporate Perspective
Project Screening: Financial Perspective
BoD Approval
Prepare Engineering Package
Prepare
Finance Package
Initiate Project Request
Execute Project
Approval from Finance
CAPITAL
PLANNING
put in the monitoring and planning process
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KM MATERIAL WILL BE ADDED
PRODUCTION
PLANNING
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KM MATERIAL WILL BE ADDED
PRODUCTION
PLANNING
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KM MATERIAL WILL BE ADDED
PRODUCTION
PLANNING
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Rewarding
Monitoring
Definition
of KPI
CURRENT KPIs NOT EFFECTIVELY IMPLEMENTED
Target setting
Current KPIs in ShunYi Plants
Weekly production target
Wastage ratio
Production output and
ex-factory delivery quantity
Wastage ratio
Varies among different plants, based on various factors
Varies among different plants, either in the form of base salary or extra bonus
Benchmark company
100 tons of milk per shift in
bottling line
2% of wastage
operators, quality controllers
20% salaries / 100 tons equals
to salaries per tons
output in tons and wastage
% will be checked everyday
if staff meet the target 100
tons and less than 2% wastage
they got their normal salaries 20%
If they surpass the standard
they will get extra reward
some part are in group
to promote team work
KPI
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HY CURRENT KPI SYSTEM VARIES ACROSS ALL PLANTS
Rewarding
Monitoring
Definition
of KPI
Target setting
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BEST PRACTICE MANUFACTURING KPI
Content
Capacity
Line I
Line II
Line III
.
.
First quarter
Second quarter
Third quarter
Fourth quarter
Objective
Productivity
Output per employee
.
.
.
KPI
km
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KEY OPPORTUNITIES TO EXPLORE IN PROCUREMENT
Improve
performance
Management
system
Planning for
growth
Opportunities
Big/small?
