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Cost Reduction

in the Manufacturing
Process
David Cresswell
Agenda
• Background
• Elements Of Cost
• Operations Conversion Cost
• Future Cost Pressures
• Summary
ITG Acquisitions
1997 Rizla
1998 Van Nelle Tabak
1999 Brand acquisition in Australia and NZ
2000 The Baelen Group, The EFKA Group, Mayfair Vending
2001 Tobaccor SA
2002 Reemtsma Cigarettenfabriken GmbH
2004 Business and assets of the CTC Tube Company of
Canada
Background
the virtuous circle
Continued
Growth
Shareholder Value
Reinvest in Business
Grow Volumes
Strengthen
Existing Shares
and
Enter New Markets
Cost &
Productivity
Focus
Re-investment
in Brands,
Markets
& People
Background
the virtuous circle
Continued
Growth
Shareholder Value
Reinvest in Business
Grow Volumes
Strengthen
Existing Shares
and
Enter New Markets
Cost &
Productivity
Focus
Re-investment
in Brands,
Markets
& People
Elements of Cost
• Leaf
• Non Tobacco Materials “NTM’s”
• Operations Conversion Cost
• Central Manufacturing Cost
Operations Conversion Cost
• Cost Management
• “The Way We Work”
Operations Conversion Cost -
Cost Management
• Complexity reduction
80
180
280
380
Blend Rationalisation
Tobacco Blends
09/02 09/03 09/04 Target 2005
Number
of blends
OTP
137
OTP
137
Cig.
250
Cig.
250
387
OTP
100
OTP
100
Cig.
188
Cig.
188
288
OTP
93
OTP
93
Cig.
155
Cig.
155
248
226
-99 (-26%)
-40 (-14%)
-22 (-9%)
0
100
200
300
400
500
600
700
Previous position
Current position
RYO / MYO Cigarettes
(except EE)
Pipe BTM
Specialities
600
85
588
120
475
185
454
82
-86% -80% -61% -82%
Ingredient Reduction
0
500
1000
1500
2000
2500
3000
SKU Reduction
2002 2003 2004 Target 2005
Number
of SKUs
2739 2739
2465 2465
2125 2125
1913 1913
-10%
-14%
-10%
Operations Conversion Cost -
Cost Management
• Complexity reduction
• Standard systems/processes
Operations Conversion Cost -
Cost Management
• Complexity reduction
• Standard systems/processes
• Productivity growth
Productivity Total Operations –
Equivalent Units per Paid Hour
10.00
11.00
12.00
13.00
14.00
15.00
16.00
17.00
18.00
Actual 2003 Actual 2004 H2 2004 Target 2005
100%
106%
111%
Operations Conversion Cost -
Cost Management
• Complexity reduction
• Standard systems/processes
• Productivity growth
• Capacity optimisation
Capacity Optimisation
Closures to date
• Cambodia – Cigarette
• Slovenia – Cigarette
• Slovakia – Cigarette
• Hungary – Cigarette
• Netherlands (Meppel) – OTP
• Hungary – Special Filters
• USA (Plattsburg) – Paper Tubes
• UK (Avonmouth) – Distribution
3%
3%
Operations Conversion Cost -
Cost Management
• Complexity reduction
• Standard systems/processes
• Productivity growth
• Capacity optimisation Cigarettes 2%
Cigarettes 2%
OTP 7%
OTP 7%
Papers 2%
Papers 2%
• Reducing unit costs
Operations Conversion Cost -
Cost Management
• Complexity reduction
• Standard systems/processes
• Productivity growth
• Capacity optimisation
• Reducing unit costs
16%
16%
• Focus on capital employed
Operations Conversion Cost –
“The Way We Work”
• Functional
Operations Conversion Cost –
“The Way We Work”
• Functional
• Integrated manufacturing team
Operations Conversion Cost –
“The Way We Work”
• Functional
• Integrated manufacturing team
• Lead factory
Organisation
6 Regions 6 Regions
4 x Cigarette 4 x Cigarette
1 x OTP 1 x OTP
1 x Paper 1 x Paper
3 Regions 3 Regions
All products All products
Previous
Structure
New
Structure
Organisation in place Manufacturing centre
Hamburg
Lead Factory - Benefits
• Efficient resource allocation
• Regional expertise focus
• Speed of response
• Improved communication and control
• Cost savings
Operations Conversion Cost –
“The Way We Work”
• Functional
• Integrated manufacturing team
• Lead factory
• Team Imperial
Future Cost Pressures
• Volume pressure
• Counterfeit/Traceability
• Political stability
• Inflation
• Cost of doing business
Cost Reduction
The Manufacturing Process
• Fundamental to Imperial strategy
• Main integration objective
• Continual process
• Sustainable
• People driven
• More to come