Taking Costs Out Of A Business Without Sabotaging It – Part 2
August 29, 2010 by Keith Bailey
Filed under Supply Chain
My last blog highlighted a real-life case study to show ways of looking under the covers for the opportunities to improve margins and cash flow. To refresh yourself on the issues we discovered in this business, click here: Taking Costs Out Of A Business Without Sabotaging It.
Now, I’d like to step through the corrective actions we put in place to help the automotive accessories company with cash flow problems achieve a $3.5 million improvement in the first year.
Corrective Action Implemented
Pricing:
- We doubled the prices for all the 495 low-volume items, coupled with a minimum order value (our rationale being to improve the return on these items, reduce the total volume from this group, or to politely redirect the customer to an alternative supply)
- The P&L and product costing worksheets were restructured so that labour, materials and overheads were in alignment
- The direct and manufacturing overheads were correctly recalculated, and provided clarity on input materials (such as various consumables) being in overheads or not
- The top 20 items (75% of revenue) had labour times and material costs thoroughly reviewed to confirm the correct costs and actual margins
- The top 13 customers were approached and they agreed to an average 8% price increase.
Purchasing:
- Purchase orders had to be properly authorised by the CFO before release
- Weekly and monthly stocktakes were implemented to improve information on inventory on hand
- A weekly expediting process was implemented which dramatically reduced stock outs, and hence production interruption
- Non-critical items were either outsourced, or suppliers rationalised through consolidation.
Production:
- Spare parts or necessary low volume items were separated from main production area and independently supervised and resourced with progress tracked weekly
- The layouts of the main bottleneck areas were changed to improve product flow and reduce travel distance using principles of lean manufacturing. One product went from 30% delivery on time to 100% and output doubled with fewer staff
- Information for production supervisors was made more visible with improved daily coordination meetings.
- The highest value customer was approached and with the situation outlined, we achieved a change in payment terms from 30 days to 7 days, coupled with a price increase
- The three highest creditors were approached, resulting in short-term debt being converted to long term debt
- Cash flow was aided through price increases and reduction in inventory, and reduction in low-value low-volume items
Outcomes
- The first year resulted in a $3.5 million cash flow increase through the actions outlined above
- After the sixth month, the business began making consecutive monthly profits for the first time in three years
- Delivery-on-time performance on average doubled, with some segments consistently achieving 90%-100%
- Inventory levels decreased by 20% ($300,000).
There were many other reforms implemented concurrently through this period, including improvements in industrial relations (and setting up an employee consultative committee), improving accountability, reducing the number of shifts, improving communication with customers, suppliers, employees and financiers, focus on safety improvement programs and educating the management team and key supervisors through introducing KPIs.
So with the right sort of advice and focus, it is possible for CFOs or business owners to take costs out of their business without sabotaging it, while improving business performance and customer service levels concurrently.
I’d love to hear from businesses about how they have attacked this problem and what successes they’ve had.
Keith Bailey is Queensland’s Turnaround Professional of the Year for 2010, awarded by the Queensland Division of the Turnaround Management Association Australia. Keith, a client director at Vantage Performance, specialises in assisting under-performing businesses and providing support and resources for recovery, rapid business growth or challenging situations.
Vantage Performance is a member of the Turnaround Management Association Australia and was awarded the 2008 and 2009 national “Turnaround of the Year” awards. Vantage has again been chosen the Turnaround of the Year winner in Queensland for 2010, and will represent the state at the national TMA awards in September.
Keith, that is a great example of how things should be done …..and more business owners should take note. Like Miles, I was wondering about the underlying change in behaviour and culture, and your response summed it up perfectly. Thanks for the great read, well done, and good luck at the TMA National Awards.
Keith, would it be fair to say that a cost saving of this magnitude required a significant shift in the behavior of all employees, from the floor staff right through to senior management? In my experience implementing change hinges on the ability of the change-maker to educate and motivate employees. I’m curious to know how the consultants / CFO achieved the support of the employees, many of whom had likely worked under the inefficient regime for quite some time.
Miles – the last section of the article indicates “many other reforms were implemented concurrently”. An extensive communication and education program was developed to gather focus and momentum. Many knew there was a problem but did not know where to start and the consultant & CFO played a considerable leadership role to awaken the organisation. In hindsight the business needed effective leadership much earlier, before the reformers were involved.
The education program was pitched at different levels of the company including:
a) setting up an employee consultative committee – to resolve grievances & as an internal leadship forum
b) daily production start up meetings with section supervisors to plan and coordinate daily & weekly issues
c) weekly management meetings using KPI’s to improve cash & key decisions
d)fortnightly combined supervisor, leading hand & management meetings in the afternoon (to ensure a/noon shift involvement) summarising weekly performance and the progress of current or planned activities
e) weekly cash flow meetings with accounts payable, payroll, finance & purchasing & production staff – to ensure the cash was used on the right priorities & to ensure everyone knew & understood this
f) fortnightly safety meetings – & focus on fixing up the issues. The company had an historically poor safety record & the staff had to be convinced the isses were getting attention
g) quarterly company wide employee briefings
h) implementation of training on lean manufacturing and the Toyota Production System, aided by governments grants and a key customer proving specialist TPS trainers
i) and to celebrate success, awards and acknowledgments were given publically to encourage positive behaviour & results & staff were encouraged to show their KPI’s in their work areas, and to other work areas.
As you can seen there was a lot of activity focussed on doing the right things. I hope this clarifies your query.
Hi Keith,
Am I to read between the lines that the CEO was “not involved” in this restructure plan. I have seen a company where a recommendation was made to the Board that the leadership issue needed to be addressed before any reforms could be undertaken.
The Board having refused to take this recommendation seriously, is now struggling to deal with decreasing sales and profits.
I supposed that the day the banks and shareholders get involved, the Board will have to face the inevitable decision if it is not too late.
JF
Jean-Francois, regarding your query on the CEO inclusion. The consultant was acting in the CEO / GM role as the position had never existed previously and the business up to this point was run by a single owner director for the previous several years. A missing element was leadership which was provided by the consultant. Thaks for the query.