DuluxGroup Makes Two Significant Supply Chain Investments

DuluxGroup has made two significant supply chain investments. The construction of a new factory in Melbourne to make water-based decorative paints, and the establishment of a new, purpose-built distribution center in Sydney, replacing two existing distribution centers.

The new paint factory will produce nearly all of Dulux Australia’s water-based decorative paints, which are currently manufactured at the Rocklea factory in Queensland. The Rocklea factory will be retained, but will operate at a reduced manning level, focusing on the production of solvent-based decorative paint products.

It is expected that the new paint factory will cost approximately $165m, though after taking account of capital expenditure savings at Rocklea and elsewhere in DuluxGroup, together with the expected sale of the Glen Waverley site, the net expenditure will be approximately $130m, spread over the next three years.

The company stated that unfortunately, the reduced activity at Rocklea will result in some redundancies. A provision of approximately $9m will be recognized in FY15, with payment in FY17 or FY18 once the new site is fully operational. Planning for the new factory is well-advanced, with construction expected to commence late in calendar 2015 and completion targeted for late in calendar 2017. A 17 hectare site north of Melbourne has been secured.

This investment will deliver significant financial and operational benefits to the business. Cost savings will be achieved through automation, better raw material utilization and freight savings. In addition, a planned program of capital expenditure to upgrade Rocklea to support the company’s significant volume growth will be avoided. From an operational perspective, the new factory will enable the company to produce more advanced paint products using evolving higher technology resins with even greater levels of quality and consistency. Importantly, this investment will significantly reduce the current risk of our water-based paint manufacture being interrupted by fire (due to the current co-location at Rocklea with solvent-based paint manufacture) or flood (as demonstrated by the 2011 floods at Rocklea which significantly impacted operations).

Under base case assumptions and assuming no revenue upside, the cost and capital saving results in an at least neutral NPV outcome. DuluxGroup managing director Patrick Houlihan said that the new paint factory was an important investment that would set up DuluxGroup’s Australian decorative paints business for decades.

“We’ve spent considerable time evaluating various options drawing on expertise from the global paint industry. The new paint factory is by far the most compelling option strategically, operationally and financially, delivering a solid financial return, primarily through operating cost and capital savings. “Our Dulux paints business is world class on any measure. This investment further strengthens our product quality, innovation, customer service and cost competitiveness. “We also greatly appreciate the support of the Victorian Government for this significant investment in manufacturing.”

A new distribution center will be established in Sydney to replace Dulux’s NSW distribution center at Padstow and Selleys’ national distribution center at Moorebank, NSW, both of which are currently operated by DuluxGroup. The new distribution center will be built, owned and operated by Linfox, to DuluxGroup’s specification.  DuluxGroup has been successfully operating in partnership with Linfox under a similar arrangement at its Dulux distribution center in Victoria.

The key driver of this change is the significant growth in volume for both Dulux and Selleys over recent years, with both businesses now having outgrown their current distribution centers.

“The closure of our existing distribution centers will unfortunately result in the redundancy of roles at those sites,” said Houlihan. “We will look to redeploy where possible, however there will be retrenchments. A provision of approximately $8m will be recognized in FY15, with payment in mid to late 2016 when the new distribution center is scheduled to be operational.

This project has a strong financial payback and positive NPV, driven by lower operating costs under the new arrangement, largely due to the benefits of a single site and a reduction in future outside storage costs. In addition, the Padstow distribution centre, which is owned by DuluxGroup and is adjacent to the Selleys factory, will be freed up for other future purposes. DuluxGroup Managing Director Patrick Houlihan said, “The new Linfox owned and operated Sydney Distribution Centre allows us to maintain and further improve our customer service levels in a cost and capital effective way, catering for the ongoing growth in our Selleys and Dulux businesses.”