Inside VWG’s Manufacturing Cost Reduction Programme

Cost leaders enjoy competitive advantage. That is always true. But if ever there was a time to focus on cost reduction, it is now. A conflagration of negative economic factors, exacerbated by the recent ratings downgrade, is going to place extreme pressure on disposable income, dampening demand. The simultaneous upward pressure on input costs is going to squeeze margins, slash profitability and ultimately further hurt the sustainability of what is already a shrinking sector of our economy. Manufacturing companies are going to have to be innovative in driving top line growth in this environment. Executives in manufacturing also need to be focused on sustainable cost reduction if they want to weather this downturn and emerge with a lean manufacturing platform that will maximise profitability when growth returns.

With a plethora of operational challenges to deal with, and cost being just one of those, what can manufacturing managers do to ensure that every single viable cost reduction opportunity is exploited? Our Manufacturing Cost Reduction Programme (MCRP) could be just what you are looking for. So what is it, and how does it work?

The principle costs in manufacturing are those associated with resources: energy, raw materials, packaging materials, water, effluent and solid wastes. There are two primary ways in which these costs can be reduced:

        i.           Use less of these resources (or produce less waste)

      ii.           Pay a reduced price for each unit of resource or waste

With experience in a wide range of industries, and having completed projects on over 100 individual industrial sites across South Africa, VWG Consulting is perfectly placed to assist your manufacturing site with sustainable cost reduction through the MCRP. We have deep expertise in resource efficiency (energy, water, materials and waste) and productivity improvement. A lot of that has to do with the fact that our founders spent a significant period of time in manufacturing management in industry, including at executive level, prior to founding our business over 11 years ago. This gives us a unique empathy for the client’s perspective and operational challenges. We also have invested heavily in skills development for our staff over a long period. Through measurement and a wide range of in-house methodologies and techniques, all of which incorporate global best practice, we can optimise any manufacturing facility, and are willing to guarantee the results.

The Manufacturing Cost Reduction Programme is based on achieving savings through the ongoing management of a portfolio of cost-saving projects on each client site. Each individual project has a life cycle, encompassing:

        i.           Identification of the opportunity

      ii.           Development of the opportunity to prove viability

     iii.           Implementation of the opportunity

    iv.           Monitoring of the opportunity to ensure results are achieved and maintained

We combine this with ongoing monitoring of global site performance using statistical baselines, thereby ensuring that the individual savings delivered flow through to the bottom line. Over time, as more and more opportunities are implemented, the savings pile up and the value of the programme grows exponentially.

So what do we mean when we talk of “opportunities”? Are you going to have to spend a lot of money to realise these opportunities? Well, firstly, we are interested in viable opportunities. So if you need to invest capital, this will have an attractive payback. However, often no capital is required, or only a small amount of money is needed to realise a significant saving. These “low-cost/no-cost” options generally comprise the bulk of the projects on the sites we work with. Here are a few examples of projects that could be pursued as part of a typical MCRP on an industrial site:

*       Improvement in boiler efficiency by reducing excess air. This can result in significant savings, but at no cost. We would conduct a flue gas analysis using our own analyser and then optimise flue gas oxygen levels by adjusting damper valve position, or if possible, changing fan speed. We would them monitor efficiency on an ongoing basis.

*       Reduction in compressor energy requirements by optimising pressure set-points. We would measure compressor input power trends, assess air user requirements and the air distribution system, make small modifications e.g. to pipework, and then adjust pressure setpoints. Energy consumption would be measured and tracked on an ongoing basis to ensure savings are sustained.

*       Reduction in demand charges by augmenting installed capacitance. We would measure demand and power factor, assess reactive power at maximum demand, specify and install the capacitance required and monitor the impact on power factor and maximum demand.

*       Reduction in water use by increasing water use efficiency. As an example, we recently achieved a 20% reduction in site water use by optimising water sprays in an effluent treatment plant.

*       Cost reduction through smarter procurement – this can involve better pricing for existing materials, but could also include an assessment of materials in use to determine if cheaper alternatives are feasible. An example could be a fuel switch, or a change to a lighter packaging material.

*       Capital projects with attractive paybacks, such as economisers in steam systems, high-efficiency shrink-wrappers – whatever delivers the process outcomes with fewer resources in a capital-efficient manner.

The range of options is limitless, and we will scour your site to find and evaluate all technical options, and then focus on those that are most attractive and incur the lowest risk. And while the above are specific examples, our approach is to always take a system-wide view. So for example, if we’re reducing fuel costs, we will seek to model and optimise your entire steam system, encompassing the boilers, steam distribution, steam users and condensate return. We take the same approach with compressed air, refrigeration, lighting, effluent management and all other systems, including your core manufacturing processes.

As you will have gathered by now, we are not talking about a one-off consulting engagement where the client is left with advice, but not results. Through the MCRP, we walk the path with you, delivering the results and ensuring that they are maintained. This is a relationship, a partnership built on operational excellence, trust and a passion for developing our clients into cost leaders. We like to say that our programmes are not something we do to clients, but something we do with clients. Whatever we do is with full client knowledge and approval, through a structured process of continuous engagement that includes a formal monthly review.

So now for the good part, what is this going to cost you? The joke around our offices is that our programme is not just free. In fact, when you choose the MCRP, we actually give you money. Below is a graph outlining the savings made by the first site to adopt our programme two years ago, after our fees have been deducted! We have effectively transferred this sum into the bank account of this client. We expect that by the end of this calendar year, the figure for this site will be closer to R4.5M. Annual energy savings on this site are >20% below baseline, and year to date water savings are at a similar level. This is a fairly small manufacturing site. At large sites, the cumulative impact of the MCRP would be far more. And that excludes further potential savings achievable through tax incentives on sites that take advantage of 12i and 12L opportunities.

We offer clients two options when adopting the programme. A fixed monthly fee, or a pure “shared savings” model. While we would not want to discuss the terms of the latter here, they are extremely attractive. Contact our Managing Consultant, Craig van Wyk (craig@vwgconsulting.co.za) for a discussion and/or no-obligation presentation.

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