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
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.
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