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Team Spotlight

ProAction Profile: Perry Hall

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Perry HallWith over 30 years of experience, Perry Hall, an expert in Operational Excellence, including facility layouts, has helped many of The ProAction Group’s clients improve manufacturing efficiency and facilitate continuous improvement. Perry’s expertise is often leveraged when businesses are building, re-configuring or consolidating facilities.  He designs optimized layouts with project plans for implementation, and he often works with clients through plan execution. 

From automobiles to shampoo, Perry’s manufacturing experience is vast. One ProAction Group client, a haircare company, manufactured their own private label products as well as those of other brands. The business did not have a strong understanding of their capacity and felt there were opportunities to improve efficiency. Perry broke the various jobs into families (shampoo, conditioner, etc.), considered orders and variables such as product viscosity, and designed a new scheduling plan. He was able to redo the company’s standards so that they understood what they should be accomplishing each day. He also implemented The ProAction Group’s process of “Manufacturing for Daily Improvement,” and the financial improvements his work generated enabled the company to command a premium price when they were sold.   

Another ProAction Group client manufactures blister packs for medications. Their employees were always working overtime, and still, customer orders were often late. Perry leveraged ProAction’s “9-Box Insights” to identify optimization opportunities. He created an index for equipment availability, and with better planning and sequencing, the company was able to service customers on-time and dramatically reduce their second shift labor hours.  

Perry has numerous best-practices to share when it comes to plant-layout and manufacturing. He encourages businesses to think beyond the widget-making and consider how materials will flow into and out of facilities. What floor space may be needed for batch manufacturing? How will materials be delivered to assemblers? 

Throughout his career, Perry has lent his consulting expertise to the portfolio companies of Private Equity firms and many mid-size and Fortune500 manufactures. Next month Perry celebrates his 10th year working with The ProAction Group. Click here to engage with Perry or other experts at The ProAction Group. 

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Look for These Signals to Find Hidden EBITDA in Manufacturing Operations

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Smart businesses are always looking for ways to increase operational efficiency and maximize company value. After performing hundreds of operational assessments over the past two decades, The ProAction Group has become adept at identifying hidden EBITDA opportunities for our clients. We all know every business is unique. Some of these indicators may pique your interest and others may represent areas where your business is strong.  Still, reviewing this list can help you consider where some meaningful improvements may be made.

Signs Hidden EBITDA May Exist

  • The Sourcing Strategy is undocumented, poorly defined or under-utilized.

When companies do not have thorough, documented sourcing strategies, they may be missing opportunities to improve costs on goods purchased. Spend may be set-up or managed by untrained buyers who without defined strategies and training may lack skill in negotiating with suppliers. Is the strategy for frequency of competitive supply bidding well defined? Is supplier performance measured? Are individual sourcing agreements documented?

  • Inbound freight fees are “included” in product costs.

“Freight is Free” is a signal to dive deeper. Often suppliers build profit into freight charges. Companies not unbundling freight fees from product costs should investigate to see if cost efficiencies may be gained here.

  • Manufacturing variations aren’t measured or addressed.

Measuring plant performance is critical. Tracking performance – and variations in performance – can highlight problem areas. Management should be tracking things like safety, quality, cycle times, scrap, schedule attainment and on-time delivery. Businesses that identify and measure variation in these can make strategic decisions about changes to employ. When variation is reduced, costs go down.

  • Sales forecast is not effectively managed.

Sales organizations that do not forecast well put unnecessary burden on operations in the form of downtime, expediting costs, overtime, E&O inventory (see below) and more. Do sales forecasts regularly align with actual closed business?

  • Excess and Obsolete inventory is growing.

Companies often do not pay close attention to E&O soon enough, yet avoiding E&O can bring significant cost savings to an organization. Is E&O tracked and measured? Is E&O root-cause analysis performed with corrective action identified? Does aging of inventory show balances that exceed the amount held for reserves?

  • Invoice accuracy, denials and chargebacks are not measured or tracked.

Inaccurate invoices, denied claims, chargebacks and credit memos all indicate potential opportunities for improvement. When these items are not actively tracked and measured, it is unlikely that they are well-managed.

Many manufacturing businesses have operational blind spots (some more than others) that negatively impact enterprise value. This article shares some signs for potential hidden EBITDA, but the list above is far from exhaustive. We hope it gets you thinking about areas for improvement in your manufacturing operations.

Contact us if you’d like to further explore your business’ best opportunities for uncovering hidden EBITDA. We can share with you how The ProAction Group 9-Box Framework leverages your operational data to identify the efficiencies that will make the greatest EBITDA impact on your business. For further reading, see “Leveraging 9-Box Insights” to Find Hidden EBITDA: Turning Data Into Insight.

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The Importance of Pre-Close Operational Diligence in Private Equity Acquisitions

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In today’s fast-paced deal making environment, diligence efforts focused on operations may fall by the wayside or become less rigorous.  After all, “operational diligence” hasn’t traditionally been one of the core “checklist” items. But there are compelling financial reasons for Private Equity firms to make operational diligence a primary focus BEFORE acquiring any new asset. With a thorough understanding of a target company’s operations, PE firms can eliminate costly surprises after the close and can maximize latent EBITDA opportunities. 

Quality of Earnings (Q of E) reports are helpful, but in today’s deal environment, PE firms need to go deeper to fully understand the potential of a target and improve their competitiveness in the bid process. A Quality of Company Operations report looks at how management runs the company today and determines what EBITDA should be.

A Quality of Company Operations report answers four basic questions:

  1. What is the likelihood that the company can replicate current performance in the future?
  2. What risks exist that endanger the stability of EBITDA and free cash flow?
  3. What is the financial impact of realizing the latent or hidden value within the company? (This includes impact on EBITDA, working capital, capacity, lead times, retention, employee engagement, sustainability, safety and more.)
  4. What fundamental changes are needed to scale the company?

PE firms that gain a deep understanding of each target company’s operations have the information they need to refine valuations for competitive bidding and walk away from bad deals. Knowledge is Power – and thorough operational diligence helps ensure that PE purchases are sound investments.

Ways to Leverage Operations Experts Prior to an Acquisition

There are different ways a PE firm might utilize operations consultants prior to closing on an acquisition. Each brings different levels of engagement and insight. 

Confidential Information Memo (CIM) Review: The PE firm sends the operations consultancy the CIM presentation. Upon review of the provided materials (and often more importantly, what isn’t included), the operations consultancy delivers salient insights that provide a guide for areas of opportunity and risk that need to be explored prior to closing a deal. Because of the consultancy’s deep operational expertise, they can suggest to PE firms specific areas of inquiry or concern that can help them better understand the prospective investment. This document can also provide scope for a deeper Quality of Company Operations diligence assessment. 

Quality of Company Operations Report: This report provides deep and granular operational information for the PE diligence team. Typically, the operations consultancy participates with the PE firm in document review and management presentations and has additional access to target company employees and data. Operations experts determine the validity of management assumptions on areas such as revenue gains, productivity, capacity, capital expenditures, ability to serve customers, and more. They also provide insight on the operations capability of the management team and personnel. Upon delivery of the Quality of Company Operations report, PE firms walk away with the thorough operational insights necessary for making investment decisions. 

Planning and Implementation: A change of ownership is a natural time to assess the company and implement change. Findings of the Quality of Company Operations report form the basis for development of a 100-day quick-start plan. Operations consultancies can partner with the management team early (sometimes even before the close) to implement sourcing, lean manufacturing or other operating “quick kills” to hit the ground running and accelerate the pace of change. A strong partnership between the consultancy and management early on increases the likelihood of success. 

The ProAction Group Partners with Leading PE Firms to Provide Pre-Close Operational Diligence 

The ProAction Group specializes in providing operational expertise for Private Equity firms. The company has deep experience in the acquisition and implementation environment and knows how to interact with deal teams, lenders and other advisors in a time-efficient and productive manner. The ProAction Group is also highly skilled at working constructively with target company management and knows how to build trust with boards, management teams and employees alike. The ProAction Group helps ensure sound investment decisions and enables a smoother sale and faster results after the close. 

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Revitalize Your Stale Portfolio Companies

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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.

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

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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.

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

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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 that, mid-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 visibility? Shouldn’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 planning, inventory 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 a 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.

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

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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.

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Buzzword Overload!

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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.

Business Practices

I’m Givin’ Her All She’s Got Captain!

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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?

Business Practices

The Biggest Threat to Uber?

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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