We Don’t Need to Assess Our Operations – We Are Doing Great!
by Laurie Harbour-Felax
Strategies Spring 2008
The majority of the readers of this publication, along with a majority of other manufacturing companies throughout the country, have probably repeated the title statement far more than one time. In todays environment, many small- to middle-market business owners are struggling with their performance both financially and operationally, but feel they have a solid approach to fix the problems. Many companies have identified the problems and are executing plans. Others are operating in what we refer to as fire-fighting mode and cant see through the smoke to execute effective operational improvement.
A review by a third party not involved in the day-to-day operations is a very effective way to help executives see through the smoke. In todays environment, monitoring the business, keeping bank relationships healthy, and making improvements to shareholder value is essential. Current shareholders, any potential new shareholders (such as a strategic company that may purchase the business), private equity investors, commercial banking lenders, and others will be looking for increased value, which should be evaluated based on the following key points.
Detailed Operational Assessment.
A third party should assess the entire operation from receipt of raw material through finished goods, including all support operations and utilizing a standardized approach. The intent of this assessment is to determine the health of the company operationally as well as the connection to the profitability of the company. A good assessment would review the following:
- The Supply Chain
- Human Resources
The assessment would measure performance objectively and quantitatively and provide benchmarks for a company to compare itself to best-in-class. Companies have to be open to this type of assessment and embrace the input from others in order to continuously improve their operations.
Another critical area of assessment is capacity analysis. In todays plastic market, the amount of overcapacity is staggering which is reflected in the number of plastic molders in Chapter 11 today. Many large companies achieved their size through acquisition; however, they did not take the necessary steps to consolidate manufacturing to maximize utilization and, as a result, have struggled to earn a profit in many of these underutilized plants. The companies that have adequately consolidated acquisitions and have the appropriate amount of capacity for the present and the future will succeed long-term. Manufacturing footprints must be rationalized and a detailed strategy for future growth and capital expenditures must be outlined.
Companies big and small must evaluate their manufacturing strategy to determine their global footprint and what their core competencies are for internal manufacturing. Companies need to decide if they want or have the ability to be global players or if they will remain regional. They must evaluate all the options and make the right long-term decision for their company. Companies may need to evaluate make or buy decisions for components and where those buy decisions will come from. This strategy also must include their performance targets and how they will make cost reduction improvements in future years.
True Cost Analysis.
Many manufacturers that made a ton of money in the 1980s and 1990s, but did not spend time focusing on true costs, now are managing a variety of problems associated with the economic downturn. These companies made decisions as things began to spiral downward and took in top-line revenue at the expense of the margin quality. As a result, these same companies are now losing money on many parts they produce. To correct these problems, companies must utilize a volume-weighted approach to standardized cost in order to accurately allocate their burden and determine true cost performance on a customer by customer part by part basis. Once this is achieved, company executives will have a foundation upon which to make decisions about the correct components to manufacture and which business segments to avoid.
Although somewhat of a given, a companys quality system must be robust enough to provide data that can be used for continuous improvement. Many small- to mid-sized companies have not learned from their mistakes. In other words, their quality systems are not closed loop and do not provide them with the ability to identify problems and prevent them from reoccurring. The best customers in the world are looking for robust systems that solve problems quickly and utilize the data to resolve other issues in their operations.
Regardless of the industry, all companies need to review individual product programs, as well as each customer, on an annual basis. Many companies have focused on growth within a customer base without regard to the specific long-term forecast for specific programs. This has put them in vulnerable positions as market share shifted on certain product lines, and the company did not have the flexibility to react quickly to a new product. During a review of customers, companies should use matrices to identify exposure and risk diversification in order to maintain the correct portfolio of product/customer mix.
It is imperative that companies compare their own business performance to industry norms and best-in-class metrics on a routine basis. Although it is not always the easiest information to obtain, there are many ways to find valuable benchmarking and best practices to help identify how your company stacks up against the competition. As a rule of thumb, companies who actively benchmark their organizations and establish plans to close gaps in performance are more efficient and profitable corporations.
Research & Development/Engineering.
Oftentimes when companies perform self-evaluations or hire outside parties to evaluate their business, they strictly review the manufacturing operations. Yet in many cases, the engineering and product development costs are the highest element of the business and typically contain much of the waste. It is critical that a third-party review covers all aspects of a company, including the research and development and engineering functions. Improvements in these functional areas are absolutely critical for long-term growth and prosperity.
Regular and proactive evaluations of the employment base of a company are critical. Too often, we see performance review processes that simply evaluate people on a core set of criteria. A typical evaluator then spends about an hour per employee, spending five minutes on the things the employee did well and using another 55 minutes to tell the employee about his areas of opportunity. This process does not build a solid team that leverages strengths. Organizations must evaluate their team and then modify the culture to help people better develop their strengths and find the best roles for them to implement those strengths, rather than spend time discussing opportunities.
Companies that struggle to get new business tend to have poor relationships with their customers. The voice of the customer is the most critical element in any business. Having strong relationships with customers is the only way to achieve long-term success. If companies listen and make adjustments to their plans based on the needs of the customer, they dont necessarily have to be the lowest price to succeed with new work. Companies simply have to provide the most flexible solution to customers needs.
All of the elements of a business described above only can be successful given the right culture of an organization. Every company has a culture some more proactive and positive than others. But those that dont have a positive culture need to look at a transitional change in order to create patterns that drive the right behavior within your organization. Leaders who say one thing and do another or who drive negative approaches to problem solving will have high turnover, poor customer relationships, and long-term negative results.
Some companies, like injection molder Thogus Products in Avon Lake, Ohio, are working daily to reinvent themselves for long-term sustainability. The Thogus leadership team realized that business conditions were deteriorating quickly and the need to reinvent the company was critical for success. Thogus didnt want to be known as the shoot and ship molder so it began a quest of investment in R&D for metal to plastics conversions, opening up new windows of opportunity for an entirely new customer base. As a result, the company has now successfully converted many lead and metal components used in the medical and transportation industries into plastics parts.
Although the focus on innovation was essential, the leaders of Thogus quickly realized a full evaluation of the entire business by an outside party was needed in order to prioritize the allocation of organizational resources. Stout Risius Ross assessed the entire operation and identified areas of opportunity to create significant savings to the Thogus manufacturing cost structure. At the same time, the company made a great investment in its data collection systems by using IQMS software. This innovative measure alone will dramatically improve the companys efficiencies and improve cost tracking.
Thogus recognized the need to improve in order to gain market share and reach its long-term financial goals. Companies that work toward a successful balance of the factors identified above exponentially add to their ability to achieve and maintain a competitive advantage in the marketplace. Driving shareholder value, improving the business, and ultimately making more money for the company comes from the alignment of the business strategy, operational performance, and financial performance.
So is the fire and smoke too thick to see through in your organization? Is it time to evaluate your long-term competitive position and operational performance? These are tough questions to answer if you are in the heat of the moment, trying to deal with the burning daily issues of running a business. But without answering, the fire will continue to burn until you decide to change.
Laurie Harbour-Felax is a managing director in the Operational Strategy & Performance Improvement practice at Stout Risius Ross. As a seasoned manufacturing consultant, she has 18 years of experience in operational assessment; due diligence and performance improvement; international growth and global transition planning; total cost and asset management; and strategic advisory services and benchmarking. She can be reached at (248) 432-1321 or email@example.com. Stout Risius Ross is a financial and operational advisory firm that also specializes in investment banking; restructuring and turnaround; valuation and financial opinions; and dispute advisory and forensic services. More information can be found at www.srr.com.