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Leveraging “9-Box Insights” to Find Hidden EBITDA: A Three Part Series

Strategic Decision Making in the Era of Abundant Data

In this month’s Hidden Value blog series we will dive deep on how proactive CEOs and their Private Equity sponsors are effectively using data to identify opportunities for growth and drive operational improvements. We will start by exploring the challenge of strategic decision making in the era of abundant data.

Scottish Wisdom

Leave it to an old time Scotsman to lay down some business wisdom over a century ago that still rings loudly today:

“[He] uses statistics as a drunken man uses lamp-posts – for support rather than for illumination.”
– Andrew Lang, Scottish poet and novelist, 1910

Unfortunately, many modern business executives do just that, using data to support recommended actions rather than identifying insightful actions from the data.

The Dashboard Trap

Businesses are awash in more data than ever before. Today’s modern software tools provide a wide variety of ways to gather, aggregate and present data. Dashboards track every KPI imaginable, highlighting trends and variances for executive leaders to review and digest. With a few clicks, executives and managers can dive deep on what is happening in the company and where problems may exist.

Dashboards and visualization tools are great. They are enormously powerful, allowing “real-time” access to metrics that just 10 years ago would have required dozens of Excel spreadsheets and taken a team of people days, or even weeks to gather. This near-instantaneous access to data makes managers more effective at finding and fixing problems before they become major issues.

But dashboards typically only “look in the rearview mirror,” allowing you to REACT to the latest operational results and course correct as needed. While dashboards help you manage today’s business, they rarely help you INDENTIFY NEW OPPORTUNITIES FOR GROWTH or to STRATEGICALLY TRANSFORM THE BUSINESS.

Strategic Decision Making in the Era of Abundant Data

Another unlikely source of business wisdom comes from classical guitarist and native Scotsman, David Russell, who noted:

“The hardest thing in life is to know which bridge to cross and which to burn”

Echoing that sentiment is famed management consultant and educator Peter Drucker (not a Scotsman), who commented that:

“Management is doing things right. Leadership is doing the right things.”

No truer leadership challenge faces today’s mid-market CEOs and their PE sponsors. With no shortage of strategic initiatives to invest in, how do you make sure you are “crossing the right bridges” and “doing the right things”?

If you’re like many CEOs, strategic planning consists of a series of brainstorming sessions held in Q4 with the executive team to review past performance and establish new performance targets for the coming year (e.g. grow revenue by xx%, reduce costs by yy%, increase production by zz%, etc.) All options to achieve these new targets are discussed and hashed out, then detailed plans are developed. Empowered with reams of historical KPI data, managers come to the table with specific change initiatives supported by objective historical data, cost analyses, and budget projections. Balancing competing interests and funds to invest, the CEO and team select a series of change initiatives and set the action plan in motion.

This top-down strategic planning methodology is flawed because it generally assumes the company is already “doing the right things” and fails to ask the right questions in advance of the planning effort.

Examples of questions that are rarely addressed in strategic planning sessions include:

  • How can we best increase enterprise value?
  • Should we expand / exit this line of business?
  • Who are our best customers and why?
  • How do we get more customers like our best ones?
  • Should we fire some of our customers?
  • Why are our customers buying our products vs. competitors?
  • Do our sales and marketing messages align with our customers needs?

Be Smart

Leading CEOs and their PE sponsors don’t set company goals in a top down fashion. Instead, they avoid the dashboard / KPI trap and adopt the following framework to drive their decision making:

DATA ➔ INSIGHT ➔ ACTION ➔ RESULTS

In Part 2 of “Leveraging ‘9-Box Insights’ to Find Hidden EBITDA’” we will explore the 9-Box Framework in detail and offer suggestions to successfully implement this approach in your company.

Buzzword Overload!

Lean manufacturing, strategic sourcing, spend management, value stream mapping, Kanban, Kaizen, quick changeover, Six Sigma, ISO … AGGGHHH! There’s no shortage of methodologies and best practices to improve your operations and deliver results. Just do a quick web search and you will find hundreds of scholarly articles and case studies touting the benefits of these powerful techniques.

But if you’re a private equity sponsor or a C-level executive at a private equity backed company, it’s not about learning the latest trends in process improvement and deciding which one is right for your organization. The overarching, ever-present goal is to increase enterprise value … period, full stop.

In this month’s Hidden Value Series, we focused on Past Due Orders, one of the most complex, multi-faceted obstacles faced by many mid-sized manufacturing firms. In Part 1 of the series, we showed how to identify a Past Due Order problem and how it will present itself to management and the board. In Part 2 we covered different techniques to drill down on the problem and identify root causes. In today’s final article in the series, we will cut thru the buzzword bingo and use real-world examples to show how solving this complex business challenge leads to enormous gains in enterprise value. And in the end, isn’t that the goal?

Creativity Before Capital: Many Past Due Order problems present themselves as a capacity issue, and the commonly proposed solution is to add equipment, facilities, labor, etc. to increase capacity and eliminate the backorder problem. In addition to being costly, adding infrastructure to a flawed set of processes and procedures is like building a new house on a bad foundation. Before committing to costly capex, build a foundation that will scale as the company grows.

Without diving into the alphabet soup of process improvement methodologies, each have their purpose and will deliver beneficial results when implemented successfully. The most important thing to remember is that Past Due Order problems are nuanced and can arise from a variety of inefficient processes. A “one size fits all” solution is not the answer. Creative analysis and bringing the right tool/methodology to the table is the key to success.

What is possible? The following summaries are provided to highlight the potential benefits you can achieve when focusing the right people on the right problem with the right tools and the right management support.

Case #1 – Pharmaceutical Packaging Company

The Problem:

  • Long production lead times
  • Significant Past Due Backlog
  • Complacent, Uncompetitive Suppliers

The Solution:

  • Implement lean scheduling process and strategic stocking levels
  • Teach root cause analysis and continuous improvement tactics to plant staff
  • Strategic Sourcing project on 6 commodities

The Results:

  • 75% EBITDA gain ($3M)
  • Gross Margin improved by 4.8%
  • 20% increase in effective capacity
  • 53% reduction in overtime
  • On time Shipment rate improved to 95%

Case #2 – Specialty Food Manufacturer

The Problem:

  • Significant new customer demand led to large Past Due Backlog (2 weeks of capacity)
  • Large customer at risk due to production delays
  • New production line planned, but space constrained to install

The Solution:

  • Implement variety of lean techniques to balance operations and eliminate bottlenecks
  • Implemented new Executive Sales & Operations Planning processes and tools

The Results:

  • > 50% capacity increase within 2 months
  • Reduced labor inputs by 28%
  • $1.4M in annualized savings
  • Eliminated past due order backlog in 90 days
  • Eliminated need for new line ($250K capex avoidance)

Case #3 – Chocolate Manufacturer

The Problem:

  • Cost increases eroding profits
  • Space constraints hindered effort to acquire a business and absorb into current facilities
  • Failed project to consolidate US and Canadian operations
  • Equipment downtime was elevated and impacting results

The Solution:

  • Removed obsolete equipment and conducted Six Sigma project to eliminate downtime
  • Changed line layout to improve flow
  • Expanded operating metrics and dashboard to focus performance
  • Implemented numerous lean techniques (Kaizen events, 5S,
  • Quick Changeover, etc.) to streamline operations

The Results:

  • $1.5M EBITDA gain due to cost reductions
  • $2.4M decrease in working capital
  • 75% increase in output from existing facility
  • Equipment uptime increased 50%
  • Reduced labor by 20%
  • Consolidated 3 plants into one existing facility avoiding large capital expenditure

Key Takeaways:

  • One size DOES NOT fit all. Past Due Order issues are multi-faceted and nuanced. No one tool or methodology fits every problem, so be creative and flexible in devising solutions.
  • Don’t build on an unstable foundation. Before embarking on costly capacity expansion projects, make sure you streamline current operations and establish a strong foundation for future growth
  • It’s not about the methodology, it’s about the people. A corporate culture stressing continuous improvement and openness to new ideas, combined with a supportive management team and experienced resources to guide the effort can deliver amazing results.

I’m Givin’ Her All She’s Got Captain!

As Captain Kirk demands more power, Chief Engineer Montgomery Scott, in his classic Scottish brogue, delivers the iconic line, “I’m givin’ her all she’s got captain!”. Facing the impending doom of a Klingon Death Ray is not a good time to discover a capacity constraint, but fortunately for Captain Kirk and the rest of the Starship crew, crisis is miraculously averted and the crew lives on for another episode.

For mid-market manufacturing firms, when customer fulfillment problems and past due order issues arise, a CEO may act like Kirk and “ask for more power”. New equipment, a bigger facility, new technology systems, a new production line, etc. are all natural requests when these problems occur and capacity appears constrained. While these are viable solutions, increasing capacity is costly, takes a long time to implement and may not be necessary. Before committing to more capital expenditures, look for other ways to fix the problem.

In Part 2 of this month’s Hidden Value Series on Past Due Orders, we will dive deeper into the root causes of persistent fulfillment and past due order problems … what to look for and how to devise creative solutions.

Part 2: Getting to root causes

Start with culture: If your corporate culture is built on a company-wide commitment to continuous improvement, then you are poised to successfully deal with any past due order problem that might occur. Corporate cultures focused on continuous improvement start by asking “What happened? How do we fix it? And how do we ensure it never happens again?”. Asking these questions – without placing blame – should be the first step in getting to the root cause.

The process: In addition to a great corporate culture, here are some techniques to employ when searching for root causes:

  • Cross-departmental Working Group. Don’t look at systems and processes in isolation. Bring your leadership team together and get them focused on creative ways to address the issue. A dedicated, cross functional working group is a powerful force in driving organizational change.
  • Data Analysis. Use data, not opinion. Bring your IT team into the working group to bring real data into the discussion. Using data to drive decision making is critical.
  • Workflow Analysis. Mapping the order/product journey through the facility can often show bottlenecks, inefficiencies and sources of delay.
  • Third Party Review. No matter how great your team, it’s easy to get focused on the trees and not the forest. Neutral, third party experts can shine a light on overlooked areas of opportunity.

Where to look: Before committing to more capital expenditures, look for other ways to fix the problem. Here are some places to look for efficiency gains BEFORE approving that capex spend:

  • On-time Delivery and Schedule Attainment: Are we measuring these accurately? Are we monitoring them closely? Are we course correcting regularly?
  • Variations: Does performance, quality or output vary across different shifts, supervisors, lines, facilities, etc.? If so, this is a big opportunity to improve throughput.
  • Performance degradation: Has operational throughput declined over time? If so, what has changed (e.g. management, staff, product mix, etc.)?
  • Labor Issues: Has employee turnover increased recently? Do we have the right staff on the floor with the right training and the right skillset at the right time?
  • True Production Capacity: Are we accurately capturing the true maximum capacity of current operations? What factors are constraining our ability to reach maximum capacity?
  • Data Accuracy and Integrity: Are the BOMs, routings and inventory levels accurate? If the perpetual inventory, BOM’s and routings are inaccurate, then the MRP system will fail … period.
  • Inventory Planning: Stockouts, inventory delays, quality issues and supplier challenges can lead to Past Due Orders. Focus on inventory planning processes and supplier management techniques to minimize inventory issues.
  • Documented Processes and Procedures: Reliance on tribal knowledge leads to the company being vulnerable to tight labor markets.  Improve consistency and minimize the impact of employee turnover by clearly documenting processes and procedures and reducing tribal knowledge.

Key Takeaways:

  1. Start with corporate culture. A customer-centric culture built on a commitment to continuous improvement is critical.
  2. Find answers … don’t assign blame. Instead of getting mired in the details of who caused what, concentrate on teamwork and permanently fixing the problem.
  3. Creativity before capital. Root cause analysis often highlights internal processes ripe for change that require no capex and yield huge returns.
  4. Experience matters. Leverage your internal experts and senior leaders, but consider outside experts to take a neutral, third party view of the situation. The combination is powerful.

Additional Info:

Part 1 – The Biggest Threat to Uber?

The Biggest Threat to Uber?

Pop open your Uber app and the nearest driver is 10 minutes away. While not ideal, you don’t have much choice. You need a ride in a hurry and a cab is nowhere to be found. You request your driver and pray they’ll be early. When 10 minutes turn to 15, then 30 (!!), you are seething and pacing, vowing never to use Uber again. In today’s on-demand, 24/7, “want it now” culture, few things will kill a customer relationship faster than asking a customer to wait.

The same is true (if not more so) in more traditional manufacturing and distribution businesses. Order delays, long lead times, and missed shipments lead to lost sales and unhappy customers. If you see past due orders increasing, you will likely have unhappy customers and a threat to your underlying business. It is time to jump into action.

In this month’s Hidden Value Series, we will dive deep on the topic of backlogs, specifically:

  • Part 1 – How to identify problems in your backlog
  • Part 2 – Getting to root causes
  • Part 3 – Case studies and results

Part 1: How to identify problems in your backlog

To be clear, having a backlog of pending and future orders is definitely not a bad thing for a manufacturing business – for many industries it is common to have future orders that stretch out for six months or more. But when your backlog is growing because you cannot produce product fast enough (defined as when your customer wants it!), your backlog becomes a liability, negatively impacting customer satisfaction and your financial performance.

First things first, if you’re not reporting on Total Backlog and Past Due Orders by product family and facility in your quarterly board packet, change that asap. Be sure to trend these metrics over multiple years and set benchmarks for what is an “acceptable” percentage. Any appreciable increase in Total Backlog and/or Past Due Orders above the benchmark is a signal to dive deeper.

Note that many backlog increases are often just temporary and readily explainable. For example, a large increase in sales will often cause the total backlog to increase temporarily. A quality problem, natural disaster, or key supplier delay can also lead to spikes in past due orders. Temporary spikes should clear up rapidly. However, meaningful, persistently elevated backlog or past due order levels indicate a major operational health issue that should be addressed quickly.

Other signs of a problem: What else should you monitor to identify problems in your backlog? Including the following key metrics in your board packet will help you proactively identify operational issues BEFORE they impact the health of the business. Key metrics to track include:

  • Lead times: Are lead times increasing?
  • On-time Delivery %: Are your on-time delivery percentages declining?
  • Inventory Turns: Are inventory turns declining?
  • Expedited Shipping Costs / Frequency: Are your margins shrinking due to higher costs of expedited shipments?
  • Order Discounts: Are you issuing more discounts to help assuage unhappy customers?
  • Employee Turnover: Is employee turnover increasing (sign of high stress to expedite orders)?
  • New Customer Sales %: What percentage of orders / sales are from new customers vs. repeat business? An increasing percentage of sales to new customers might indicate a customer retention issue
  • Customer Satisfaction Scores: Are your customer satisfaction scores declining or persistently below par?
  • Customer Complaint Reasons: Are you receiving a higher percentage of customer complaints about order delays and on-time deliveries?

Be smart: When the metrics and indicators start flashing, management may fall back on some tried and true root causes. Here are some common refrains when backlogs increase and performance lags:

  • Supplier performance is to blame
  • Customers are hard to forecast
  • It’s a product mix issue
  • We need another production line / a bigger plant / new equipment
  • A tight labor market is creating a labor issue

Here’s where you earn your keep as a board member / investor. Management may be right, but instead of just accepting management’s explanation, spend some time probing deeper into the metrics. Don’t underestimate the power behind candid conversation. Here are some specific questions you can use to challenge the conclusions reached by management and get to root causes:

  • How are our metrics defined? For example, growing lead times with consistently high on-time delivery reveals a mismatch in what is being measured.
  • Who owns addressing the growing quantity of past due orders
  • Why have specific orders not yet shipped? This may seem too granular for a board discussion, but this question is a good way to dig into underlying causes, such as why materials are late from a supplier or what quality issues caused rework.

Key Takeaways:

  1. Backlog problems have material impact on the performance of the business. Fixing them leads to EBITDA gains, improved customer satisfaction / retention, lower working capital levels, and improved competitiveness
  2. Proactively monitoring key indicators can identify issues early … before they impact the health of the business
  3. Ask smart, probing questions in the board room to help get to root causes

Value Creation Tip – Supplier Development

Oftentimes, companies are used to improvement ideas coming with a capex investment (and related justification form/process!) – such as new or improved automation for better efficiency or even a new facility for increased capacity. However, there is often a way to increase EBITDA, inventory turns, and order fill rates simultaneously with little or no capital expenditure. In most companies we assess, under-leveraged supply chains are common, and opportunities for success are often achievable – like the ability to obtain better pricing, to have shorter lead times, to secure a supplier’s active support in rolling out new products, or to leverage a supplier’s resources to address quality issues.

Many entrepreneurially run companies are working hard simply to ship products, and they have not had the bandwidth (or expertise) to evaluate better ways to leverage their sourcing spend. Finding time to conduct a competitive process to test the market is often out of reach for these businesses. More than half the companies we have assessed have not competitively bid their purchased goods and services in the prior 5 years!

Often times, all of these improvements can be achieved with existing suppliers. But in some cases, switching suppliers may be required to obtain things like better pricing, higher performing parts or services, shorter lead times, more flexibility and ultimately a more robust supply chain. But the point is that there can be plenty of latent value still waiting to be tapped, like oil patiently waiting below ground for the current or future owner to tap into it!

Supplier Development

The idea is to work with a core group of suppliers, one by one, to find better ways to leverage the joint supply chain to become more valuable to customers, more enriching to employees, and more profitable to shareholders.  This process often includes one or more of the following:

  • Ways to build the trust necessary to share demand information, forecasts, schedules and existing inventory balances
  • Ways to leverage one member of a supply chain who can compete a task or requirement at a lower (sometimes much lower) cost than the current actor
  • Developing line-ready packaging, pricing schemes that fit in scheduling, and/or freight patterns
  • Including the supplier in planning new product roll-outs, onboarding new customers, or in preparation to handle promotions or special events

One common opportunity is to replace a traditional blanket order / PO process with a shared forecast and schedule. This sharing of information benefits the company by reducing the inventory levels, ensuring that we never shut down a line due to a lack of parts, and reducing administrative duties. In this scenario, the significant benefits to the manufacturer are exceeded by the benefits to the supplier because the supplier can use that information to level load their plant, plan production, and improve their own purchasing, which in turn benefits the entire process. In other words, it is a win-win situation for both the company and their supplier.

However, this approach requires trust. It also requires a fairly complex project plan to develop this capability with your key suppliers. The capex might be minimal, but it will require the strategic intent and efforts of the whole management team.

If you believe that one of your companies is under-leveraging its supply chain or would like more detailed information on relevant initiatives, please contact us here.

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Lessons Learned From Alexander the Great

In 356 B.C., a son and heir, who was to become one of history’s greatest logisticians, was born to King Philip of Macedonia. At age 16, Alexander was already a general in the select army. At age 20, a murderer’s knife elevated him to the throne. Quickly, he built his reputation, striking fear into the hearts of those who dared oppose him. He ruled, conquered, and assimilated countries – including Greece, Persia, and India – into his domain for a short 13 years until his death in 323 B.C.

Alexander’s success was not an accident. He was able to consistently defeat enemy armies and expand his kingdom because of his proactive preparation and logical approach to warfare. Some of the key factors in his success were:

  • Inclusion of logistics in strategic planning
  • Detailed knowledge of opposing armies, surrounding terrain, and harvest calendars
  • Innovative incorporation of new weapons technology
  • Maintenance of a single point of control

These same factors can make any organization successful in today’s complex business environment. There are many striking parallels between Alexander’s ancient organization (the Macedonian army) and today’s modern company doing battle in the marketplace. This article examines Alexander’s implementation of logistics principles and how these same principles can be applied today.

Logistics and supply-chain management

At the most basic level, Alexander was able to perform his legendary feats because he included logistics and supply-chain management into his strategic plans, as any company should do to maintain a competitive edge. For example, he timed his army’s departure so the 30-day supply of rations carried by sea transport would last until 10 days after harvest at the first destination city, which provided a seamless supply of food and water for his men until the conquered city could provide them with additional supplies.

Alexander used the following logistical tactics to ensure an open supply chain throughout his campaigns:

  • He maximized the flexibility of the army by streamlining who traveled with the marching army
  • He developed alliances, enabling his army with a constant and planned schedule for resupplies of ammunition and provisions
  • He marched along rivers, taking advantage of sea transport instead of relying on lower capacity beasts of burden

Ironically, despite today’s complex business environment, most boardrooms still do not give proper consideration to the logistics side of doing business, primarily because its function has traditionally been viewed more as a cost of doing business. Logistics professionals in many companies today have failed to educate their executives on how proper logistics management can add value – a fact on which Alexander the Great based his achievements centuries ago.

Two successful examples

Through careful logistics planning, Nalco Chemical Company was able to develop an innovative method of delivering chemical products to its customers, who previously were having problems with their packaging and experiencing chemical spills during delivery. Nalco’s engineers studied the problems and developed a returnable stainless steel container that completely changed the manner in which chemicals were delivered. Called a Porta-Feed, the container eliminated dangerous and time-consuming handling on the part of the customer, as well as the costs of waste disposal. Nalco’s executives had to strike a balance between any doubts they had and the analytical vision that presented itself. They had to act with a degree of intuition and agree to include logistics in strategic and resource planning. Although the decision to market was made without benefit of quantification, the end result was a strong competitive advantage and return on investment.

Another example is Nortek, where a $600 million division struggled with a complicated supply chain. They managed over 26 high end home audio brands and product lines. They had a high mix / low volume demand pattern with significant demand variation and long (4-6 month) lead times from the China suppliers. Their inventory was growing and their ability to fill orders stagnated. It is hard enough to forecast next month’s demand, let alone demand in 4-6 months (due to their lead time). They did address this, but it was not through complex systems enhancements or beating on their supplier base. Instead, they committed to core suppliers, provided them with rolling forecasts and actual weekly demand. This enabled them to effectively reduce their lead time from 4-6 months to less than 6 weeks. They set up a pulse, enabling their suppliers to resupply provisions on a planned schedule, modified by actual recent demand.

Another well-known example is Amazon. They have set up a logistics approach that enables them to deliver product to customers in a way that brick and mortar stores and even other e-tailers can not mimic. Amazon is less than 25 years old and it controls almost 5% of the US retail market.

Knowledge is power

In the area of limited benchmarking Alexander was, in many ways, best in class. He could not always follow a similar organization’s pattern of success, but could instead rely on his knowledge-based intuition. Benchmarking, while a good tool to use, is not reliable when developing innovative solutions. Organizations must continually challenge their world view and themselves to meet changing business demands. Alexander did not rely solely on process knowledge or on technical knowledge about his competition or the terrain, but rather combined both to develop a strategy that allowed him to meet a specific need. He rarely, if ever, lost a battle. Both Amazon and Nalco are companies that have taken the same approach.

Innovatively incorporating technology

In a military scenario devoid of computer tools and mechanized weapons, technology primarily refers to weapons. Alexander’s father, King Philip, invented a new weapon called a sarissa, which was essentially a 20-foot lance. Alexander used this new weapon (technology) to his advantage, and the men in the rear rows of the army’s phalanx wielded the sarissas to provide protection to the front rows of the infantry.

Unfortunately, many companies use current weapons (business tools) to their detriment. The complex and rapidly changing business environment provides more options among technological tools and services. If not properly utilized, any of them can drain a company’s financial and mental resources. Today’s challenge to business is to prudently choose weapons and fully exploit them to meet specific logistics requirements.

In our modern times, new technology weapons, such as non-digital devices connecting to the Internet of Things (IoT), allow businesses to gather supply chain data instantaneously. With the emerging blockchain capabilities to transfer data between manufacturers and suppliers, delays can be mitigated because data transparency reveals any issues in the supply chain as they occur, which can only improve business relationships.

A more mutually beneficial relationship between customer and logistics providers is a strategic relationship. Working together to solve supply chain needs provides third-party entrenchment and enables the logistics provider to invest assets and technology in the customer. In a strategic relationship, the customer awards a specific part of the business to the supplier and agrees to continue doing so as long as the supplier adheres to all the quality, service, and cost standards established during the negotiation process. (This is how Nortek enjoyed its success.)

  • Complete information sharing (forecasts, costs, strategic plans, etc.) between partners along with trust, which must first exist between customer and third party
  • Cross-functional implementation of strategically planned logistics
  • Regular operational and performance reviews
  • A commitment of supply chain assets and management procedures
  • Involvement in strategic planning and integrated logistics
  • A fair sharing of partnership benefits

Whether the weapon is a sarissa or the latest inventory control technique, effective integration of information technology is critical to success. In addition, to be as effective as Alexander the Great, the resources of allies must be used.

A single point of control

Like Alexander, most great logisticians understand that while knowledge-based decision making and empowerment can be relegated up to a point, there ultimately must be a single point of control, a place where the buck stops, a CEO, who is held accountable. Alexander made the decisions for his army. He was the central point of control, he managed the logistics system, an incorporated it into the strategic plan. While modern CEOs should not personally run the logistics management function, they should appoint someone to run this critical area. This person should think like and report to the CEO.

In addition to having the ability to effectively marshal forces, a leader with authority over all aspects of logistics can help a company avoid the disjointed style of operation that leads so many organizations to mediocrity.

Today’s challenge to business is to prudently choose weapons and fully exploit them to meet specific logistics requirements.

Today, more than ever, a single point of control is necessary to maintain a clear vision for an organization involved in logistics management. For example, many widely accepted business practices, such as Lean Manufacturing, cross functional teams, quality systems and process management optimize portions of a company’s existing operations while implementing ways to improve upon them. Too often, however, the optimization of one task or sub-function is completed at the expense of another.

Although Alexander personally led the logistics organization of his army and included it in strategic planning, this does not mean logistics operated in a functional silo. Rather, much like today’s advanced corporation, Alexander’s decision-making process involved cross-functional information sharing.

Like Alexander the Great and his organization, a modern company cannot be fully effective and productive if bits and pieces of its infrastructure are managed by different people sharing disparate philosophies and with no shared culture or central point of contact and control. Effective logistics management processes today are largely a function of having cross-functional, shared information with a single point of control. In organizations where purchasing, shipping, receiving, traffic, production planning, forecasting, and customer service do not report to one person with an overall responsibility for supply-chain management, opportunities for creating increased cost and service efficiencies will fall through the cracks.

In Conclusion

Alexander the Great was so named not because of his physical stature, but because of his philosophies, strategic planning, and accomplishments. His unification of much of the civilized world made the later Hellenistic period possible and provided an example for organizational excellence for millennia to follow. The ProAction Group would be happy to review your needs and assist you in leveraging the logistics lessons learned from Alexander the Great. Please contact us here.

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Inoculate Your Company Against Employee Turnover

Talent shortages and employee turnover have long been common issues for businesses, but there are several current factors that are exacerbating the problem. The nation’s unemployment rate is at an uncommonly low level (it is under 4% – the lowest it has been in nearly 50 years) and some argue that the remaining 4% are largely unemployable. As many businesses are growing and looking to expand their workforce, the labor supply/demand ratio is at a serious imbalance, causing an environment where employers are aggressively pursuing employees of other companies, and some employees are switching employers for as little as a 25 cents per hour pay raise. It’s an all-out recruiting war and companies are scrambling to invent creative initiatives to recruit and retain talent.

Unemployment

Many businesses have not experienced significant turnover in the past – they have what they view as loyal and committed employees that have been with them for a long time. In these situations, companies tend to have a lot of “tribal knowledge” – key employees that have special knowledge that others in the company don’t, like what to do or who to call in critical situations, how to get a persnickety machine running again, what spare parts need to always be on hand, etc. These silos of knowledge within an organization, where one employee knows a process that has not been documented, can cause big financial losses for a business if one of those key employees becomes sick, incapacitated, or leaves the company. You can only imagine the chaos when multiple employees jump ship at the same time, taking that undocumented tribal knowledge with them! Ouch!

Some of the obvious ways to try to retain your employees is through better job conditions, increased compensation, better benefits, and more recognition. But sometimes that is not enough, and one way to mitigate the turnover risk is by documenting and institutionalizing standard processes across your organization. Don’t resist the turnover as much as making it less impactful.

Inoculate Your Company Against Employee Turnover

Documenting Processes

Defining current procedures is an important step to take toward minimizing the risks associated with employee turnover. When companies go through the process of defining and documenting all the steps a particular activity involves, they often find ways to refine and improve the process, eliminating unneeded steps. Having processes documented helps ensure that if an employee leaves, all of their knowledge doesn’t go out the door with them. It also helps onboard their replacement in a productive and efficient manner.

Standardized Processes

Many companies have a few common processes performed by a number of their personnel. For example, machine operators running the same/similar equipment or on different shifts, warehouse pickers/packers, purchasing expediters, etc. For these functions, there are many important benefits of standardizing the best proven practices. As you look to define the process, it is important to involve some of your better employees to make sure you understand what works and what doesn’t work – it is not always obvious unless you do the function repetitively. This engagement in the improvement process will likely drive buy-in and encourage an environment of collaboration. When the work is designed so that “anyone can do it” by having standard processes that include visual controls, such as color-coding and symbols, companies help ensure staff are aware of what is expected and how to succeed.

These types of documented procedures are critically important to companies that have seasonal labor or a large amount of “flex labor” – temporary employees that are brought in only when needed. Having standardized processes in place with supporting visual aides minimizes the onboarding time and improves efficiencies. Employees that feel like they understand what they are supposed to be doing are more engaged and also have lower turnover rates.

Cleaning Fish – A Streamlined Process

One of our clients processes seafood for distribution/sale to retail stores. We helped streamline a time-consuming process in their plant. They used to have one person clean an entire fish – a complicated process requiring expertise at several different techniques. We divided this work into smaller groups, where one person cleaned fins, one did bruises and one did blemishes, and created standard work processes for each. Each role individually was much easier than all 3 combined and could be done with little supervision. We used other techniques to train the supervisors to look for triggers that a process was not being followed. The client went from having 17 people on 1st shift cleaning fish for all 3 shifts, to 3 people on each shift cleaning fish for just that shift. Not only was this a reduction of almost 50% FTE, it also gave them much more flexibility in what the plant processed and when they processed it.

Communication

Of course, communication always is a key aspect for management to address. Sharing goals, objectives, and targets with employees and providing feedback about the progress toward achieving them, ensures they can be personally vested in the outcome. Their participation is crucial to navigate through many of the day-to-day challenges and to recognize what is or isn’t working so the company can adapt as needed. The old adage that “people don’t care what you know, until they know you care!” has never been more relevant than it is today when combating the dwindling numbers of available resources.

Indicators of Trouble Ahead

Regardless of how your company is being impacted by turnover today, it’s important to note that the labor crisis is not going away. All labor statistics indicate a growing obstacle. Therefore, it is good to be asking questions now about indications of trouble ahead and how to circumvent potential issues. A few questions to ask include:

  • Do you have a long-term workforce of 10-15 years?
  • Does productivity differ per shift/day/time or department/team?
  • Is the productivity difference significant between the highest and lowest performers?
  • Do you run simple products or not perform set-ups on third shift because of a talent gap?
  • Are you already feeling pain from quality issues, output variation, or excessive downtime?

Knowing the answers to the questions above goes a long way to identifying if you have a problem and knowing how big it might be. However, partnering with experienced professionals can minimize those issues before turnover ever occurs. The ProAction Group is skilled at assessing processes, recommending operational changes, and implementing tools to evaluate progress. We welcome the opportunity to discuss your specific situation and can be contacted here.

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Metrics – the Beginning of a Culture of Continuous Improvement

Hawthorne Effect

Have you ever noticed that being watched at work changes behaviors? For example, if there is a new supervisor who is trying to evaluate the performance of their team – the team’s awareness of the evaluation actually changes how they behave. This phenomenon is known as the Hawthorne effect, where being aware of closer scrutiny causes improved performance – at least in the short-term. While estimates of productivity increases vary, an immediate increase of 10-15% can be expected. However, if there is no follow-up on the improvements (reinforcement of the new behavior, goal setting, etc.), those output gains can be quickly lost.

Similar circumstances can happen any time new metrics are introduced in a business. While people are not physically being watched, they know their performance (output, error rate, speed, etc.) is being measured. Identifying metrics and tracking progress against established benchmarks are critical components to creating success for a business. If we know that the initial “Hawthorne effect” gains can quickly disappear, how do we hang onto the momentum after the “newness” wears off?

Using Metrics to Sustain Productivity

An important first step to improving any aspect of your business is measuring performance – identifying the Key Performance Indicators (KPI’s) or set of metrics that most accurately reflect how a department or area is functioning. When these have been established, employees must understand how their activities directly influence these metrics – this helps create ownership and accountability. And once the metrics are in place, it is imperative that goals are set and progress is consistently reviewed and adjusted. Using benchmarks is a very useful tool in establishing goals. These can be external benchmarks (for example, comparing your performance to established industry or competitor standards) or internal benchmarks (for example, comparing On Time Delivery performance of one plant or one product line to that of another of your own plants or product lines).

Any time you implement a new metric, you can expect to have a Hawthorne Effect improvement at the beginning. One way to build on and sustain the productivity increases of a new initiative is to incorporate a simple but effective problem-solving process. Effective problem solving shifts our focus from the negative aspects of a challenge we are facing to generating a solution. It helps streamline processes and encourages employees to look for solutions – and many times very simple solutions can have a big impact.

A recent client was measuring productivity at the department level, which was too high of a level to identify root cause issues. We developed productivity measures at a line and product level, which allowed us to quickly identify downtime issues and micro-interruptions. We assembled a cross-functional team and using different problem-solving techniques we were able to identify an equipment issue that was easy to fix and improved uptime by 11% in less than two weeks. Without the productivity metrics this deficiency would have remained hidden and been an ongoing cost to the business.

Continuous Improvement

A culture of continuous improvement is necessary to sustain and increase productivity, and problem solving is just one aspect of this. Continuous improvement (CI) – always being alert for opportunities to improve products, services, or processes – is simple but not easy. Using the self-propelling Plan-Do-Check-Act (PDCA) cycle is one tool to implement CI.

  • Plan: Identify/plan for change
  • Do: Implement change on small scale
  • Check: Analyze results of the change
  • Act: If change succeeded, increase scale; if not, begin cycle again

The following is a good illustration of what PDCA looks like in a Continuous Improvement environment. As improvements are identified and implemented, standardization is used to cement those improvements in place and prevent “rolling back down” to the prior way of operating.

Continuous Improvement_Graphic

One of our recent clients has an older bottle line that ran with 4 operators. The capper on this line performed poorly, generating crooked and cross-threaded caps and the cap would often even fall off. Between 20% and 30% of the caps were improperly applied depending on the product. The primary responsibility for two of the four operators was to make sure all bottles were capped correctly and to rework the bad caps! Management had attributed the problem to the age of the equipment and felt the only solution was a to put in a new line – a major capital investment.

This was a very fast moving line, but by using an iPhone and taking some slow-motion video, it was easy to see the tops of the bottles were moving out of position in relation to the cap due the tooling gripping them around the middle where the plastic was most flexible. As the client watched the video, we suggested a test by raising the tooling to grip the bottle at the shoulder right below the cap. This was done and immediately the cap problem went away. So permanent tooling was made and the line was able to run with only two operators (one replenishing materials and one casing product at the end of the line). Even better, we observed 0 defects for that condition during the remaining months of our project! This focus on problem solving allowed for a fairly simple fix (and significant financial savings) to an ongoing problem.

We Can Help

We are frequently called in to help organizations that are under performing. While most would expect that all businesses today have metrics in place that they are using to drive to performance, we have found that a surprisingly large number of companies have no metrics in place – or the ones that they do have are based on erroneous data, not understood, or not actively managed using problem solving tools. And it is no surprise that these are the companies that are under performing.

Businesses today must be nimble and adaptive, no matter what product or service they provide, because no organization stays static. They either thrive or decline. By establishing valid metrics to monitor performance and by implementing a culture of problem solving and continuous improvement, you can position your organization to be in the group that thrives.

If you would like more information on how The ProAction Group can help your company use Metrics to improve performance, please contact us to discuss how we can be of assistance.

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TEAM SPOTLIGHT: Kathy Wishnew

Kathy WishnewThis month’s Spotlight is on Kathy Wishnew. Kathy joined ProAction in 2015 and immediately brought added depth to our front office lean and engineering process capabilities, particularly as they relate to our customers in the service and complex-engineered products industries. She has also been integral in expanding our proprietary 9-Box inventory optimization and customer pricing tool, an innovative process that has helped many of our clients drive meaningful improvements to their EBITDA. Kathy makes transformative change happen. Her skills in lean manufacturing, global business operations, process improvement, program management, quality assurance, Six Sigma, and goal deployment have helped her significantly improve bottom-line performance for companies. Kathy uses a top-down strategy of aligning systems, processes, and people to help those changes stick.

Kathy has led many projects for our clients and below are a couple that highlight the depth and breadth of the positive results she brings to an organization:

One midsized medical services firm was turning down new business due to its inability to meet current demand and the extensive learning curve for onboarding new employees. Kathy worked with their leadership team to restructure responsibilities by centralizing like-work content, creating standardized processes, and instituting metrics that provided transparency when the process was not going as expected. The company has not only started accepting new clients and marketing the offering, their sales have grown significantly without the need to hire additional manpower.

Another example involved a midsized manufacturer of large material handling platforms. The company was struggling to meet critical multi-phased customer on-time-delivery dates and a growing list of backorders. Once one phase ran behind schedule, the later scheduled deliveries would not only require re-scheduling, but many times would incur fines and penalties by the end-users and / or installers. Kathy worked with the cross-functional technical team, that operated independently of each other, to standardize internal deliverables between departments. Many non-value added steps were eliminated, rework was reduced and flow was created between internal suppliers and customers. The list of backorders was reduced by 60% and the company is back on track to meet annual growth targets.

Prior to ProAction, as Vice President at Jarden Safety & Security, Kathy established a lean and continuous improvement program that reduced costs by nearly $9 million its inaugural year. The program created transparency and linked operations to strategic plan initiatives, leading to a record number of new product launches and a centralized quality management system.

Kathy served in many executive positions in her 17 years at Panduit Corporation. One she is particularly fond of was as a General Manager and turning a chronic loss leader in to a profitable Business Unit.

After receiving her bachelor’s degree in Industrial Systems Engineering from The Ohio State University, where she became a member of the Alpha Pi Mu Industrial Engineering Society, Kathy received several certifications. She is trained as a Six Sigma Black Belt, ASQ Engineer, Lean Leader, and Shainin Red X Problem Solver. Kathy is also certified as a Franklin Covey facilitator in the Great Leaders, Great Teams, Great Results and the 4 Disciplines of Execution.

Past Due Backlog!

How four companies went from crisis management to demand-driven systems

Most of our clients’ headaches are indicators of systemic problems. One such issue that we are seeing a lot these days is a growing past-due backlog. Sales are increasing!! The client is now seeing more demand than they can handle. It is a classy problem; but it is a problem. If we don’t address the constraint and fulfill all the demand on time, we will start losing sales… and losing customers.

Backlog improvement is one of our specialties. We find and eliminate the contributing causes of the problem. Four recent examples spring to mind, and each had different pain points – from manual inventory systems to lack of communication with suppliers. In every case, sales and customer relationships were in jeopardy.

Background:

  • Past due backlogs led to missed deadlines, damaged reputations.
  • Performance fell short of demand by as much as 30%.
  • Long lead times and poor communication led to customer attrition with potential losses of up to 20% of total sales.

ProAction conducted assessments, provided diagnoses, and even took on interim leadership roles where necessary to stabilize operations. Here are four different manufacturing clients we’ve stabilized in the past six months:

  • Machining and Tooling: This company had past due backlogs in three different product families, demonstrating a widespread issue. There were no formal sales or operations planning tools in place. Inventory was out of control, and processes were both inefficient and entrenched. A two-day assessment helped us pinpoint root causes. We then carried out a short two-month initiative where we created a lean processes and eliminated the past due backlog. In the months since, they have not missed a customer commitment.
  • Building Infrastructure: Another client was suffering from the best of all possible problems– increased demand. This highlighted weaknesses in their existing production systems, as their lead times expanded by four weeks. They risked losing as much as 30% of their sales as their largest client threatened to take its business elsewhere. We took a detailed look at their operations during a two-week assessment, then conducted a “quick kill” project designed to take care of the most pressing problems directly and with immediacy. A more detailed, three-month implementation project ensured that the new model was institutionalized, a crucial component to ensuring sustainment of such a monumental shift.
  • Injection Molding/Sheet Metal Fabrication: This manufacturer came to us out of concern over expanding lead times and a growing past-due backlog. Now they are a classic success story. In this case, after our diagnosis we actually took on an interim leadership role to get the ship on an even keel. The result? In less than 8 weeks, we increased output by more than 300%. Yes, you read that correctly – 300%! This allowed them to substantially increase their monthly sales (see the Quantified Impact sidebar for details.) What’s more, we did this without any increase in labor hours. CapEx? Zero.
  • Plastic Disposables: One of this client’s key plants was a standout for all the wrong reasons. It was losing $2 million a year and inefficiency was the inevitable culprit. The client was also losing new sales because they couldn’t count on the plant’s actual throughput capabilities. This is another example of where we’ve played an interim management role to enable urgent issues to be triaged and symptoms to be quickly relieved – all prior to so that we can relieve the symptoms straight away, even before teaching the organization to sustain the new approach. By implementing production scheduling and lean principles, we were able to demonstrate an 18% increase in throughput within the first 2 1/2 weeks of our 3 month assignment.

Actions Taken:

  • Performed customized assessments tailored to the needs of each client.
  • Applied lean principles to production lines, production scheduling, and inventory management.
  • Participated in one client’s top customer to lay out the changes being implemented and allay fears.
  • Took on temporary leadership roles where necessary to usher in change and create the path to sustainment.

Quantified Impact of Recommendations:

  • Increased one client’s monthly sales by $1,500,000 monthly, a 22% increase.
  • Increased another’s production throughput from 69% to 102.5%, a $27 million annual increase – a company record.
  • Reduced all clients’ backlogs to near zero.

About The ProAction Group

ProAction is an operational consulting firm that works with Private Equity to do three things:

  1. Help you win good deals (and avoid bad ones!) through our pre-close “QofOps”.
  2. Help your management teams as they transition from an entrepreneurial approach to a scalable, process driven leadership path.
  3. Help you maximize the value of your portfolio companies through the implementation of operational excellence.

We focus on three sectors: consumer products, manufacturing and distribution. We have experts in Lean Manufacturing, Six Sigma, Sales and Operations Planning, Inventory Strategy, Sourcing, Logistics and Human Capital Development. We were founded in 1995 and are headquartered in Chicago.

For Further Information:
Timothy Van Mieghem
tvm@proactiongroup.com
The ProAction Group, LLC
445 North Wells St. Suite 404
Chicago, IL 60654
Tel: (312) 371-8323
www.proactiongroup.com

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