Case Study

Drilling company reduces costs to regain profitability

Global provider of exploration drilling services and equipment doubles EBIT in two years

After a prolonged industry downturn, a global provider of exploration drilling services and equipment was realizing new growth, but not the improved profitability itanticipated. Surviving the downturn meant aggressively going after new markets and introducing new products and services. When the market turned for the better, revenue was more widely distributed than before and previous scale efficiencies were lost. When efforts with another consultancy failed, WP&C was called in to take a fresh look, provide actionable insight, and help the companyregain profitability.

The company had adopted a strategy of becoming a ‘one-stop-shop’ for drilling equipment. Aiming to satisfy demand for all needs often meant engineering products of which only a few units were produced for a single customer. This resulted in a massive expansion of the product portfolio which ballooned to more than 90,000 active SKUs. With manufacturing across six centers worldwide and a global distribution network—cost, inventory, and customer service levels suffered from the additional complexity. It was no longer evident which segments or products were actually making money and cash flow suffered. Immediate improvements were demanded.

WP&C embarked on a two-phased program.First, they assessed the performance of the company’s products business at segment, category, and SKU levels. Second, WP&C conducted deep dives into opportunity areas, developed solutions, and motivated the company teams to get moving. Key activities included:

  • Leveraging WP&C’s unique Square Root Costing methodology to quickly and more accurately determine true product profitability
  • Assessing customer profitability and pricing practices by channel and segment
  • Evaluating options for SKU rationalization, pricing improvements, make vs. buy, manufacturing strategy, and inventory policies
  • Understanding company history, strategy, and value proposition in order to shape and align recommendations
  • Aligning executive, commercial, and product management teams on near- and mid-term actions to reduce costs and improve profitability

With a new view of performance aligned to the company’s strategy and value proposition, the team provided a plan to drastically reduce costs and improve profitability. This included transforming the company’s product offering and how they would deliver it. Recommendations included:

  • Rationalizing 50% of the products reviewed, while addressing an additional 37% of products with pricing actions and/or a shift from make-to-stock to make-to-order
  • Eliminating a product category entirely and certain product sizes—across all product categories
  • Reducing SKUs in a major category by 70%, maintaining the technical coverage of the portfolio while nearly eliminating all make-to-stock SKUs
  • Price increases of 5% – 40% across all categories to capture the cost of complexity and in-line with competition pricing
  • Governance controls to prevent further proliferation within the portfolio and to maintain future pricing discipline

WP&C challenged the company to rethink critical aspects of their business in order to gain more meaningful and sustainable profitability. They offered insight into offerings, pricing, manufacturing and inventory deployment strategies, and customer service policies. Cost reduction would not come through a single action, nor by functionally-focused efforts—concurrent actions would be needed. WP&C made clear recommendations and worked with the company to develop specific solutions down to individual product and customer levels, evaluating technical and commercial feasibility. Results included:

  • An expected doubling of EBIT and a ~15% reduction in working capital (inventory) within 24 months
  • Commissioned projects to realize approximately ~30% of the EBIT improvement within four months
  • New metrics for the client PMO team to monitor value realization
  • An adapted, new way for measuring product profitability to be used by Finance on an ongoing basis

The company had adopted a strategy of becoming a ‘one-stop-shop’ for drilling equipment. Aiming to satisfy demand for all needs often meant engineering products of which only a few units were produced for a single customer. This resulted in a massive expansion of the product portfolio which ballooned to more than 90,000 active SKUs. With manufacturing across six centers worldwide and a global distribution network—cost, inventory, and customer service levels suffered from the additional complexity. It was no longer evident which segments or products were actually making money and cash flow suffered. Immediate improvements were demanded.

WP&C embarked on a two-phased program.First, they assessed the performance of the company’s products business at segment, category, and SKU levels. Second, WP&C conducted deep dives into opportunity areas, developed solutions, and motivated the company teams to get moving. Key activities included:

  • Leveraging WP&C’s unique Square Root Costing methodology to quickly and more accurately determine true product profitability
  • Assessing customer profitability and pricing practices by channel and segment
  • Evaluating options for SKU rationalization, pricing improvements, make vs. buy, manufacturing strategy, and inventory policies
  • Understanding company history, strategy, and value proposition in order to shape and align recommendations
  • Aligning executive, commercial, and product management teams on near- and mid-term actions to reduce costs and improve profitability

With a new view of performance aligned to the company’s strategy and value proposition, the team provided a plan to drastically reduce costs and improve profitability. This included transforming the company’s product offering and how they would deliver it. Recommendations included:

  • Rationalizing 50% of the products reviewed, while addressing an additional 37% of products with pricing actions and/or a shift from make-to-stock to make-to-order
  • Eliminating a product category entirely and certain product sizes—across all product categories
  • Reducing SKUs in a major category by 70%, maintaining the technical coverage of the portfolio while nearly eliminating all make-to-stock SKUs
  • Price increases of 5% – 40% across all categories to capture the cost of complexity and in-line with competition pricing
  • Governance controls to prevent further proliferation within the portfolio and to maintain future pricing discipline

WP&C challenged the company to rethink critical aspects of their business in order to gain more meaningful and sustainable profitability. They offered insight into offerings, pricing, manufacturing and inventory deployment strategies, and customer service policies. Cost reduction would not come through a single action, nor by functionally-focused efforts—concurrent actions would be needed. WP&C made clear recommendations and worked with the company to develop specific solutions down to individual product and customer levels, evaluating technical and commercial feasibility. Results included:

  • An expected doubling of EBIT and a ~15% reduction in working capital (inventory) within 24 months
  • Commissioned projects to realize approximately ~30% of the EBIT improvement within four months
  • New metrics for the client PMO team to monitor value realization
  • An adapted, new way for measuring product profitability to be used by Finance on an ongoing basis

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