All posts by ProAction

Revitalize Your Stale Portfolio Companies

What you can do today to turn things around in 2020

Stale portfolio companies not only impact fund performance, they also drain valuable time and resources. While it may be clear that a portfolio company’s potential is not being realized, PE execs often have trouble getting to the bottom of “why”.  And, management struggles to explain and fix the problems.

So, for each underperforming company in your portfolio, ask yourself: 

  1. Has this company been lagging behind expectations for 3 or more quarters in a row?
  2. Rather than utilizing internal resources to continue propping up this company, might our time be better spent elsewhere? 

If you answered “yes” to both questions for any companies within your portfolio, then it’s time to bring in outside resources. Third-party operations consultants bring focused attention and unbiased expertise to the core problems facing the company. Effective consultants sidestep any ongoing conflicts, identify achievable solutions and provide the evidence and clarity to gain buy-in across all segments of the organization. 

In fewer than 4 weeks, you should expect to receive an unbiased assessment including: 

  • What is affecting performance levels? 
  • What are the hidden EBITDA opportunities? 
  • What is working well? 
  • What operational changes are necessary? 
  • What personnel adjustments are needed to set the company on a path of sustained growth?  

Operations consultants should integrate closely WITH your portfolio company’s management team and build organizational buy-in to any proposed changes. And, following the initial assessment, they should have the capabilities to work alongside your management team to effectively implement identified strategies, and ultimately build the bridge between the company’s performance and your expectations.  

As you head into the new year, don’t let operational challenges linger at any of your underperforming portfolio companies. Contact us today to find out how The ProAction Group can help you take the first steps to making 2020 a home run year.

Leveraging “9-Box Insights” to Find Hidden EBITDA: Part 3

9-Box in Action: Examples of Successful Implementations

Enough theory already, let’s bring it into the real world.  Here are two “headlines” from recent projects that used the 9-Box framework:

Mid-market Manufacturer of High-end Auto Parts Reduces Inventory by 30%, Increases Fill Rates and Improves Customer Satisfaction in less than 60 Days 

“Private Equity Firm Finds $2M in Easy-to-Achieve Inventory Reductions During Pre-close Diligence”

This third part in our series, “Leveraging “9-Box Insights” to Find Hidden EBITDA”, punctuates our discussion by showing specific examples of how Private Equity Firms and their middle market portfolio companies leverage the 9-Box methodology to gain strategic insight and increase enterprise value.

By the way, if you missed either of the first two posts in this series, you can find them here: 

Strategic Decision Making in the Era of Abundant Data 

Turning Data into Insight

Case #1

Mid-market Manufacturer of High-end Auto Parts Reduces Inventory by 30%, Increases Fill Rates and Improves Customer Satisfaction in less than 60 Days 

This business had over 3,000 active SKUs and struggled to source, schedule and manage the inventory for such a broad product line.  The organization segmented its data in numerous ways, and using the 9-Box framework, profiled their sales by SKU and Customer Size.  The following table summarizes the findings: 

The yellow area of the table represents 89% of their total sales, BUT ONLY 9% of their customers and 8% of their SKUs.  Visualizing sales data in this 9-Box format allowed the company to see (glaringly!) that they didn’t need to plan all 3,000+ SKUs the same way.  Instead, they needed to focus their planning efforts on the 89% of sales highlighted in the chart.  Within 60 days, they had increased fill rates, improved customer satisfaction, and reduced inventory by 30% with more reductions to follow over the ensuing 12 months.

Case #2

“Private Equity Firm Finds $2M in Easy-to-Achieve Inventory Reductions During Pre-close Diligence 

In this example, a private equity firm wanted a due diligence assessment of all operations prior to closing an acquisition. As part of the assessment, the 9-Box framework was used to segment and display company inventory. By plotting inventory by SKU based on COGS and Volatility, we found over $2M in inventory reductions without impacting fill rates.

With this insight, the PE firm was able to bid competitively knowing the underlying opportunity to immediately add new enterprise value. Shortly after close, the company reduced inventory by 50% and freed $2.3M in cash which was used to expand sales and marketing efforts to grow the business.

Summary

Numerous proactive CEOs and their Private Equity sponsors are effectively leveraging 9-Box insights to uncover opportunities for growth and drive operational improvements. These examples led to enormous EBITDA gains, working capital improvements and operational efficiency. As companies consider enterprise planning, the best CEOs and PE sponsors will not get lost in “the way we have done things,” but rather, will be forward-thinking and utilize the 9-Box framework to turn segmented data into strategic insights for moving the business forward.

Leveraging “9-Box Insights” to Find Hidden EBITDA: Part 2

Turning Data into Insight

When was the last time your CEO sought board approval for additional capital investment in inventory? Our guess is never. Inventory is not typically thought of as a capital expenditure. Despite thatmid-level production managers will regularly make decisions to spend millions in inventory without executive review, approval or evaluation of the business case. These decisions are “under the radar” and not given the same scrutiny as purchasing new equipment, making an acquisition, or launching a new product line.   

But excess capital tied up in inventory can be deployed to other purposes that drive greater enterprise value. Shouldn’t inventory investments rise to the level of executive / board visibilityShouldn’t inventory investments be viewed as highly strategic and analyzed to make sure they are delivering strong ROI? 

Inventory is just one example where mid-market manufacturing firms have operational blind spots that can severely impact EBITDA and Enterprise Value. In Part 2 of our series on Leveraging “9-Box Insights” to Find Hidden EBITDA, we focus on how the 9-Box framework can turn your data into new insight and remove blind spots from strategic decision making.

Elevate Your Operations

Did you know that on average, over 26% of the increases in portfolio company value come from operational improvements?1 Unlocking this extra enterprise value usually requires multiple initiatives across your entire operational landscape. We advocate taking a thoughtful, strategic approach to sales forecasting, production planninginventory management, order fulfilment and customer success. Leading mid-market manufacturing firms do this by elevating operational efficiency to be a strategic imperative and including operational improvement initiatives in the annual strategic planning process. Insisting that Operations executives submit a formal proposal, business case and tangible ROI objectives ensures operational initiatives get the same scrutiny as any other capital investment.

9-Box: Go from DATA to INSIGHT 

One key tool in our arsenal is the 9-Box framework. The 9-Box model provides a simple and effective way to highlight opportunities for inventory optimization, SKU rationalization, production planning enhancements and pricing opportunities. In short, it is a powerful tool to turn your operational data into strategic insight. 

Let’s dive into how it works.

Segment, Segment, then Segment Again 

Start with sales, margin and inventory data from the past 12 calendar months, then segment that data from a variety of perspectives. For example: 

  • Segment your SKUs by sales volume and volatility 
  • Segment your customers by margin contribution 
  • Segment your sales by SKU velocity and customer size 
  • Segment your raw materials by sales volume

You get the point. 

By slicing and dicing the data into the 9-Box framework, you can encapsulate on one-page some powerful details about your business. Instead of KPI dashboard, the 9-Box framework allows executive leaders to answer tough questions like: 

  • Which of my customers are the most profitable and which should be fired? 
  • Are inventory levels correct and in line with industry benchmarks? 
  • Are we pricing our products correctly, or are we leaving margin on the table? 

One Size DOES NOT Fit All 

Invariably the 9-Box framework will identify large variations between categories of SKUs, customers, raw materials, margin contribution, etc. When variations are large the processes to manage these components should NOT be the same. One size definitely DOES NOT fit all. 

For example, if 80% of your profit comes from 10% of your products, then those products should be forecasted, planned and managed differently from the other 90% of your products. Similarly, if 20% of your products generate little or no profit to the business, shouldn’t you evaluate in detail whether keeping those products in your catalog make sense? 

Be Smart

Smart executives recognize the need to focus company efforts on the most strategic activities. The 9-Box framework allows everyone in the organization to clearly see where the “biggest bang for the buck” will be and to focus their efforts accordingly. It also exposes inefficiencies and areas where capital can be redeployed more effectively.  In short, it is one of the most effective and valuable tools in maximizing enterprise value. 

In our next and final post in this series, we will dive into some specific, real-world examples where 9-Box analysis led to enormous EBITDA gains, working capital improvements and operational efficiency.