Prokura Case: Packaging Paper Reduction Strategy

• Labor costs (e.g. workers, supervisors)
• Maintenance of machinery
• Transportation cost (Inbound and Outbound)
• Rent for production facilities
• Overhead cost (e.g. Accounting, Administration, Security, Insurance, Tax Consultants)
• Materials prices

• For both packaging papers the paint contributes the most to costs.
• Our client should investigate ways to reduce costs for the paint.

The client spends 845 EUR/ton on “white paint” and 1,230 EUR/ton on “other paints” = 2,075 EUR /ton in total

• Re-specification: With same suppliers, change to different (cheaper) paints that still fulfill the client’s requirements
• Standardization: Reduce the number of “Other paints”
• New suppliers: Search for new suppliers on the market (Global sourcing)
• Bundling: Shift current volume (spend) of different suppliers to a single supplier and try to negotiate a discount

• Currently, the cost for raw materials to produce paper packaging is 120 EUR/ton (see table 1). To achieve one third overall cost reduction, they would need to cut costs by 40 EUR/ton.
• Currently for paper packaging, the white paint contributes 80 EUR/ton, so our client would need to cut costs for paints by 50% to achieve the targeted saving only through savings in white paint.
• Right now, our client pays 845 EUR/ton for white paint from all suppliers. This needs to be reduced to 422,50 EUR/ton.
• If our client buys all paints from supplier E (cheapest supplier), the client price for white paint would cost 550 EUR/ton – 33% overall savings cannot be reached.

• With more volume under supplier E, a new price for white paint could be re-negotiated.
• 127,50 EUR/ton would need to be realized. This would mean to obtain savings of over 20% (23%=127,50/550 EUR/ton).
• Even when combining volumes under supplier E, the targeted savings seem overambitious.

• Our client would be “putting all eggs in one basket” and will have to rely entirely on supplier E for the white paint (e.g., supplier E may increase their pricing at any time and that can lead to higher costs for our client long term).
• Supplier E may not have enough capacity.
• If our client wishes to add suppliers later, going from one supplier to two is much harder than going from two suppliers to three.

The solution to this case is not obvious given the provided data, and the candidate can come up with a variety of reasonable recommendations. However, in general, the candidate should recognize that (1) purchasing white paint from only one supplier is a risky option and (2) cutting costs by 33% is not achievable in the short run.