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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.