CIMA knowledge fast forward

hythm of the Maroons” (R.O.M.) 2013 organized by the Music Circle of Ananda College was successfully on 9th November 2013 at the Peter de Abrew Memorial Hall at Museaus College.

The Music Circle, which carries a legacy over 36 years of excellence, organized the musical fiesta R.O.M. for the 8th consecutive year. R. O. M. 2013 being the grandest orchestral musical extravaganza ever organized by a school in Asia overwhelmed the audience with its epic display of talent and the participation of several leading school choirs, dancing troupes and solo singers. R. O. M. 2013 was able to create

CIMA knowledge fast forward is a knowledge sharing initiative which strives to improve the conceptual clarity of the business community with regard to a core management/financial accounting or business related knowledge area, describing the concept, and explaining how it applies in practice.

This issue features the case study presented by a team representing Ceylon Cold Stores at the CIMA Business Case Awards 2013, at which they were adjudged the winner. The team comprised Sasanke Jayawardene, Thilina Abeygunawardane and Pradeep Kumar Manthriratne.

The CIMA Business Case Awards is a competition that awards the best business case recognising a turnaround or a success story. The aim of the competition is to enhance knowledge on how success is achieved and sustained in an organisation, and the ability to effectively communicate such cases. It also aims to facilitate cross-company knowledge sharing by showcasing organisational success stories.

Disclaimer: Opinions expressed represent the authors’ attempt to apply business theory to analyze a Sri Lankan business case and do not necessarily represent the views of the institution or the organisations by which they are employed.

Journey of a thousand miles begins with a single step: how focus on syrup made results at Elephant House sweeter

Ceylon Cold Stores PLC (proud owner of the household brand, Elephant House), more than 140 years old, one of Sri Lanka’s leading food & beverage industry giants, was facing profitability issues partly due to increasing sugar and oil prices as well as the result of a decline in carbonated soft drinks market back in 2008. This was after reinvesting Rs 1 billion (GBP 4.8 mn) on two high speed stateof-the-art bottling plants to increase capacity.

Due to economic conditions and the competition that prevailed, taking price increases was not a viable option to increase return on investment to shareholders, who would have felt couple of jitters down their spines that time. However, the Elephant House management remained calm and identified the biggest cost driver to focus on for improvements. It was very important not to topple the apple cart whilst trying to save costs as factory workers are heavily unionized. To mitigate reduction in profitability, Elephant House wanted to first look at reducing syrup wastage as syrup is more than 50% of the total material cost, which in turn is 55% of the total factory production cost.

Since Elephant House is competing with two Fortune 500 multinational giants in the carbonated soft drinks industry who have deep pockets to capture market share at the expense of profitability, it’s paramount that the team challenge the status quo daily to achieve operational excellence in every aspect of the business. Unlike its competitors who thrive on a few key flavours with longer production runs, the key strength of Elephant House is the range of about 14 flavours with which it connects with the con- sumers when they go through various emotions in their lives. As much it’s an advantage in terms of being available for indulgence during several consumption occasions, it is a manufacturer’s nightmare when having to shift from one flavour to another during daily production. According to SAP, (Enterprise Resource Planning software used by the company) two new bottling plants averaged a syrup yield (standard consumption in the recipe as a percentage of actual consumption) around 91% & 93% during a 6 month period from January to June 2008. The more established bottling plant which was installed in 1998 was performing at 95%.

In order to reduce syrup wastage, senior management facilitated a brainstorming session that involved production, engineering and finance teams. Though several causes and effects were identified at the session, it was decided to focus on key issues and collect data to quantify the waste over a period of one week, which was deemed sufficient based on the consistency of the level of performance of equipment. This helped to prioritize and identify the biggest issue, which turned out to be overfilling.

Since management resorted to a structured approach, yet another brainstorming session was arranged to focus only on overfilling as a problem. Elephant House management believed that the devil lies in the detail. External expert support and the practical knowledge of internal teams together enabled them to considerably reduce the problem. Since more than 1,600 bottles get filled every minute in bottling plants, adjustments to programming of the plants, slight modifications to valve were done to precision. Just a reduction of overfill by 3ml from a 200ml bottle, helped to additionally fill 7,000 bottles for a day with the same amount of syrup, thus increasing the yield.

As Elephant House was relentless pursuing continuous improvement, subsequent collection of data revealed that wastage due to flavour changes had become the biggest whilst the problem of overfill considerably reduced. The need for more accurate demand plans from sales team was identified and both teams coordinated to improve production planning that saw longer production runs.

Investment in a software solution that gives visibility to sales distribution, and stock levels also enabled them to avoid flavour changes as much as possible. Due to the stringent quality process during a flavour change, 20 gallons of concentrated syrup gets wasted. This could be used to additionally fill 850 bottles of 400ml pack size by just avoiding one flavour change. Filling lines are cleaned for 45 minutes until production commence with a new flavour. Reduction in flavour changes helped to increase the daily overall output which enabled an increase in efficiency. Overall syrup yield increased over 5 years and 99% became the new 95% at Elephant House as the accepted level.

As a result despite sugar prices increasing cost of syrup wastage declined during last 5 years. Achieving higher output resulted in overall line efficiency improving from 66% to 77% over a period of 5 years. Improved efficiency enabled to avoid variable overheads (45% of factory overhead is variable) such as overtime, energy, extra meals and transport on additional working days.

Elephant House is continuously monitoring the syrup wastage and other factory related overheads at the monthly supply chain cost meeting to ensure standards are maintained. The continuous improvement initiative was a collaborative effort by production, engineering and finance teams at all levels. Senior management gave much-needed impetus by constantly reviewing the progress until the mindset to continuously improve was inculcated in all concerned teams. Some ideas of factory workers were considered and even nominated for Kaizen awards competitions organized by external institutions. Management decided to include a profit sharing plan with work force in the collective agreement with the labour union so that unstinted corporation to the initiative is received.

Employees who have contributed to this initiative have seen career progression over the 5 year period discussed in the case study. The end result of this initiative was a saving of Rs 309 million in material cost and factory overheads against the syrup yield and overall line efficiency existed in 2007/08 financial year. This was savings of just 4% of sugar cost and 2.6% of total factory overhead in the 5 year period considered. Cumulative savings reflect the importance of not getting deluded by percentages.

The positive mindset at the soft drinks factory, enabled to cater to the surge in demand without a fail in the aftermath of the civil unrest, to record historical profits. The contribution from the soft drinks category enabled Ceylon Cold Stores Plc. to join the billionaire’s club in terms profitability in 2011/12. The focus on operational excellence helped repeat the feat despite sluggish market conditions that prevailed in 2012/13.