Cost optimization in a Medium-Sized Chemical Company

A medium-sized chemical company decided to switch a key raw material from an European to an Indian source in order to reduce costs. The expected savings were in the seven-digit range aiming to secure long-term competitiveness for its key product.

Challenges

1. The raw material arrived in Europe with suboptimal physical quality and had to be processed by a third-party company.
2. The production efficiency decreased significantly, resulting in lower daily output and increased off-spec batches.
3. Off-spec batches required reprocessing, leading to significant additional costs.

While the production team pushed for a swift return to the European supplier, management remained committed to sourcing from Indian suppliers and solving the issues.

Our Analysis

During the analysis phase Hillisch Consulting quantitatively evaluated the situation and developed a joint solution for all stakeholders.

1. Our TCO analysis revealed that even in the "worst-case" scenario, the additional costs were 80% of the savings. Operating with the Indian supplier was still more profitable than reverting entirely back to the European supplier.
2. A workshop with production staff revealed that mixing materials from both suppliers during the transition phase had mitigated the issues.
3. Procurement showed confidence in negotiating better prices with the European supplier by highlighting competition from the Indian supplier.

Outcome

The facility now operates with a 65% Indian and 35% European material mix without major issues therefore securing the original cost savings. A decision to further reduce external processing costs is under evaluation.