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Case Studies

Lean – Process Improvement Project

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Our client was struggling with problems on their manufacturing plant floor that were driving their costs up and creating customer issues. Defect rates were far too high– as much as 22% on some lines. They also had excessive scrap. And frequent line shutdowns resulted in workers migrating to other lines – creating unnecessary buildups in WIP. Because most of the parts produced could be retooled, the material cost losses were minimal, but the labor cost of the rework hours were significant. Things were so out of control that all lines even had built-in rework processes, essentially normalizing the problem! Because none of this was accurately tracked, management didn’t have a clear sense of the size or cause of the problems.

We conducted a brief review of their operations and determined that the problems could be resolved by implementing Lean manufacturing principles. During our review we identified specific process and equipment deficiencies that needed to be addressed.

Background:

  • “Fighting fires” was a way of life for our client.
  • Lean processes would realize over $350,000 in annual labor savings, while at the same time creating 25% additional capacity.

As a result of the resulting implementation project, our client was able to:

  • Reduced Team Sizes: During our review we discovered that disconnected processes and a lack of monitoring had resulted in crew overages of anywhere from 13 to 47%. We employed Lean principles to streamline operations, and recommended capital improvements such as investing in dual-head processes. Crew sizes were reduced by 25% on average, with an equivalent gain in productivity.
  • Improved Use of Metrics: Many of the inefficiencies we uncovered had become ingrained processes due to a lack of actionable, OEE-based metrics. In short, no one had the data to illuminate how much EBITDA was being squandered. We implemented ongoing tracking for both training hours and offline rework labor hours. As we streamlined processes, we created clearly defined roles and responsibilities. We transitioned daily line monitoring to a Day-By-Hour model to create a line culture that is responsive to problems and keenly focused on schedule attainment. We trained management to draw maximum insight from the data they were accruing, empowered line personnel with problem-solving strategies, and developed and documented a streamlined change management process to hardwire oversight into future innovations.
  • Setup Reductions: We introduced a “pit crew” approach to doing changeovers. By creating clearly defined roles and cross-training operators from other lines to assist in setup activities, we were able to cut time lost to no more than 3 hours (it used to take a full 8 hour shift to complete a changeover). We redirected kitting and prep from “what now?” tasks to proactive, “what’s next?” activities. And we created forward-facing training and troubleshooting models.

Actions Taken:

  • Analysis of all processes
  • Balanced line operations
  • Built clearly defined roles
  • Rolled packaging construction into process (one-piece flow vs. batching)
  • Integrated training and metrics-gathering into operations

Impact

  • Labor utilization savings $220,000/year
  • Cost avoidance of 4 planned new hires: $166,000/year
  • Reduced Burdened Labor Rate from $64/hr. to $49/hr.
  • Dual Head rework reduced from 500+ units/shift to less than 60
  • Reduced Rigid Line 4 defects from a high of 220,000 ppm to 0

Measurable Results:

  • 22% crew size reduction overall
  • $386,000/year in labor savings
  • 25% capacity increase with current workforce

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 “Q of Ops”.
  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 Street
Suite 404
Chicago, IL 60654
Tel: (312) 371-8323
www.proactiongroup.com

The Competition is Fierce. Change the Rules. ™

Case Studies

Case Study: Unified Processes Free Up Resources

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For our client, putting out fires had become a way of life. Their cycle times were long enough to cause customer complaints and there were multiple culprits, including long lead times, stoppages/bottlenecks during the manufacturing process, and inefficient labor management. These issues were also driving up per unit costs. The result was an operation that was constrained in terms of both physical space and capacity. Two core products manufactured by our client are sold as matched sets, so inefficiencies in the materials sourcing and manufacturing of one product inevitably impacts the other. Resolving the problem meant envisioning the process for both products as one unified, interactive system. The ideal future state would pave the way toward a substantial impact on EBITDA.

Background:

  • Long manufacturing and component lead times
  • Constrained capacity and floor space
  • Underutilized labor

ProAction improved operations flow by realigning relationships:

  • Lean Implementation. Using Value Stream Mapping tools, we were able to identify cycle-times and then dig deeply into processes. We made it our mission to weed out activities that weren’t adding value. As often happens when there are process inefficiencies, we discovered “hidden factories,” workflows that generally developed over time to compensate for existing problems. We also determined where waste and sourcing constraints were impacting the manufacturing process.
  • Layout Changes. We implemented one-piece flow on the manufacturing floor, and Takt-time metrics to ensure that output expectations created a steady rhythm on the line.
  • Possible Futures. Our client wanted a clear path forward, so we identified several potential future state scenarios, including an ideal future state that would increase product velocity, balance line operations, introduce takt and one-piece flow concepts, and reduce labor costs and work in progress.
  • Elbow Room. Our Lean Process evaluation included future state plant layouts for our client’s current facility to accommodate our recommended improvements. This included layouts compatible with expansion and even new facilities.
  • Insourcing/Outsourcing Redistribution. We identified outsourcing opportunities that reduced cost of components, lead times, and in-house component inspections by almost $3,100/unit. We also discovered that insourcing one major component would reduce lead time by over 360 hours.

Actions Taken:

  • Implementation of Lean Manufacturing principles
  • Restructuring of manufacturing lines and materials sourcing
  • Development of an actionable plan to reach the ideal future state

Impact:

  • Manufacturing lead time for both products dropped by 50-66%
  • 12-39% reduction in labor hours ($3,300-$3,800 per unit savings)
  • Elimination of overtime needed to meet current demand
  • Reallocated overtime creates 33% capacity increase
  • More visible, easier to manage “one-piece flow” process
  • 5% to 15% additional savings in receiving, inventory control and shipping
  • Both product areas can now accommodate 100% more assemblies than before within the same footprint

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

  • The first is during due diligence.  We complete a Q of Ops pre-close (similar to a Q of E but with a focus on Operations instead).  We bring a deep and granular operational focus to the diligence team; we evaluate the scalability of an operation and quantify “hidden” opportunities to increase EBITDA and reduce Working Capital beyond management’s plans.
  • The second is post close.  After you acquire a company we act as a resource extension working with your management team to accelerate the path to realizing your investment thesis.  We implement lean manufacturing, global & strategic sourcing, quality systems, sales and operations planning, and inventory planning as needed.
  • Finally, we conduct an operational diligence on “stale” portfolio companies (sort of a sell-side Q of Ops).  The PE firms that hire us to complete this review are most often frustrated with the gap between their expectations and company performance.  In some cases, the PE firm is tired of the additional attention the portfolio company requires.

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 Street Suite 404
Chicago, IL 606546
Tel: (312) 371-8323
www.proactiongroup.com

The Competition is Fierce. Change the Rules. ™

Case Studies

Sell Side Q of Ops

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Our client was looking to seek new investors in a manufacturer of consumer products located in the Southeast Region of the US, and requested that we tour the operation.

Fortunately for everyone involved, we saw immediate opportunities for improvement. The company’s production runs were designed to manufacture 8-12 week supplies of any given SKU. Naturally, this was creating a feast or famine situation. Overproduced SKUs tied up capital, while fulfillment of items still in the queue was delayed and expensive. We believed that implementing Lean Manufacturing principles would result in a 40% increase in production per labor hour. This would dramatically impact the organization’s capacity, throughput and EBITDA.

Background:

  • Identified changes to manufacturing processes could drive a meaningful increase in the company’s market value in less than a quarter.
  • These changes required 8 weeks to implement and a immediately demonstrated a 44% increase in production per labor hour

ProAction illuminated the path forward for our client:

  • Re-designed Processes: The company’s throughput could be greatly increased by employing a one-piece flow manufacturing process instead of batching. This new Lean Manufacturing model is efficient enough to create labor and staffing reductions, and can drive a cycle of continuous improvement. It also substantially decreases lead times.
  • Improved Capacity: During our review we found that one particular product was accounting for 24% of the company’s sales. As we planned for the future state, it was clear to us that implementation of the one-piece flow system would allow the company to realize a 30% capacity improvement for this product with one less line and three fewer people.
  • Facility Layout Improvements: Layout changes dovetailed with the company’s new Lean Manufacturing to accomplish two goals. It made production processes more transparent, making oversight easier and ensuring abnormalities would be spotted quickly. It also reduced wasted travel and motion. The changes enable production rates to be set by product type, leading to more accurate scheduling and increased accountability.
  • Labor Balancing: When considering staffing reductions, we found that continuing the fourth packing line and filling it out with three employees who had become redundant elsewhere would increase capacity improvement from 30% to 38%. Co-locating the company’s two warehouses reduced staffing and expenses.

Actions Taken:

  • Redesigned the factory layout and executed on that design
  • Implemented Lean Manufacturing
  • Streamlined processes to decrease materials handling and improve efficiency
  • Reallocated staffing to realize additional capacity gains and reduced labor spend

Impact:

  • 10% reduction in labor
  • 38% increase in capacity
  • 44% increase in productivity
  • Shorter manufacturing lead times
  • More visible, easier to manage “one piece flow” process
  • Additional savings in receiving, inventory control and shipping

Measurable Results:

  • 44% productivity increase
  • 25x return on dollars spent
  • Full transition in less than 8 weeks

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 “Q of Ops”.

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
150 North Wacker Drive
Suite 2500
Chicago, IL 60606
Tel: (312) 371-8323
www.proactiongroup.com

The Competition is Fierce. Change the Rules. ™

Case Studies

Identifying Operational Opportunities to Improve Pricing During Due Diligence

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This is the sixth article in our series on Identifying Opportunities to Improve Operations. We have divided the opportunities to increase the market capitalization of a company into seven value lever buckets. For each area we describe the signs we look for that indicate the company can improve their financial performance. In other words, we are highlighting points you want to know BEFORE you buy the company; things that expose opportunities to increase EBITDA, capacity and asset utilization.

The Seven Value Levers include:

  1. Throughput. Can we increase the output of a plant, office, service location, or other facility?
  2. Variable Costs. Can we reduce the costs directly tied to our volume and revenues?
  3. Fixed Costs. Can we reduce the costs that do not change in the short term, based on customer demand?
  4. Order to Cash Cycle. Can we shrink the time between investment on our part and collection from our customers?
  5. Pricing. Can we collect more revenue for the services we are providing?
  6. Asset Utilization. Can we increase inventory turns, the use of plant equipment, or the use of facilities?
  7. Risk. How can we reduce risks related to running our business?

In this article we share with you the signs we look for that indicate a company may be able to effectively increase their revenues and EBITDA through pricing. From a results perspective, we are looking for indications that our client can:

  • Increase overall pricing levels, often from 1-3% of total revenues
  • Reduce or eliminate “leakage” from designed pricing strategies or plans
  • Identify price elastic and inelastic items
  • Address any issues related to the gap between gross and net sales
  • Collect more revenue in the current market

This is a powerful topic; finding opportunities to get paid more for what you do. Effective pricing strategies and practices lead to designed increases in margins where customers are willing to pay more. The following indicators demonstrate that a company is not consistent in the pricing approach, is leaving money on the table, or is allowing the company to execute policies that are out of alignment with company strategy and direction.

IndicatorWhat it can mean
Does the company
monitor margins by
product and customer
segment?		If the management team doesn’t have reports showing trends and variation
in actual transactional prices, then there is opportunity; if they can’t measure
it, they can’t manage it.
The best practice here would be to not only track trends and variation in
margins, but to do so by customer and part / SKU (“stock keeping unit”)
segment.
When a price increase
is decided, is the
actual yield
monitored?		One effective approach we use in performing due diligence is to interview
managers and workers on how they address various functions and duties.
Then, we also look at history, at actual numbers. This allows us to
triangulate people’s perception of how pricing is managed with real history.
Fortunately, if a company keeps their sales history, we can retroactively
track pricing change yield. If, however, management doesn’t have access
to this data and does not monitor performance, then the company is
vulnerable to pricing “leakage”.
Can a sales rep or
inside sales person
change the price for
an item based on their
judgment?		Sales people only lose a portion of their commission if they reduce the price
of an item. They stand to lose the entire commission, however, if they miss
the sale. This can provide an unbalanced motivation. Proper controls limit
the ability for any sales person or manager to provide a discount or price
reduction outside of designed parameters. If these controls are not formal
and discrete, there is likely a meaningful opportunity to investigate.
Decisions on prices
and near-price
discounts, deductions
and incentives are
made independently
of each other – rather
than in an integrated
fashion		When decisions are made based on the total cost of ownership, we often
find that well balanced choices are made. There is no opportunity to
squeeze one end of the balloon and simply move the problem to another
department or budget. When determining how we will treat various
customer segments and sku’s, if we do not address all components (pricing,
discounts, freight, accessorial charges, etc.), then there is a meaningful
potential that one group of customers or products are subsidizing others.
People paid as a
percentage of
revenue or gross
margin dollars (e.g.
salespeople and sales
managers) make
some or all pricing
decisions		Whether we are talking about selling standard products off a price list or
complex designed services off a quote, if the people that get paid on making
the sale have a say in the price charged, there is a danger that we are
allowing personal goals and motivations to supersede company strategy
and goals.
Can a price in the
system be changed
by someone not
specifically
authorized to make a
pricing decision?		When we conduct our diligence work in the field, we start with the historic
data. We look for any variance in prices charged; we look for actual
compliance with company policies. When we do find a gap or a meaningful
variance, we then look to see who can change a price or discount in the
system. Often, executives and managers are surprised to find that many
people within the system have the ability (even if they are prohibited from
doing so) to change or set pricing levels.
Margins on lower
volume sku’s and
higher volatility sku’s
aren’t differentiated
from high volume or
stable products		Low volumes and high volatility drive higher costs. Providing the desired
quantity of low volume and volatile parts to customers when and where they
want them adds value. Largely speaking, these items should have a higher
margin than products that drive high levels of steady demand. If the
company does not segment their products by volume and volatility and
monitor margins, there is an opportunity.
Margins by sku and
customer segment
are not tracked and
monitored by the
executive team 		Similarly, providing goods and services to smaller customers when and
where they want them creates value. Smaller customers do not have the
scale to evaluate other options as larger ones do. A company should have
a designed policy or pricing approach that differentiates how we price
different customer segments. If margins are not tracked by customer and
product segment, then we need to investigate.
Is there a structured
set of rules, controls
and baselines in place
to address one-off or
job shop type
quoting?		For custom and designed products and services, companies need to
provide specific quotes during the sales process. If the same item would be
quoted differently based on who in the company completes the quote, there
is an opportunity to improve pricing. Even more so, if the same person
might quote an item differently on two different days, there is an opportunity.
There should be pricing tables, consistent component costing, rates, rules
and worksheet tools to support a consistent and designed quoting process.
Are margins on
projects or jobs
tracked and
compared to the
quote?		For custom projects and services, we need to provide a quote during the
sales process. High performing companies can show how completed
projects and services compare to the original quote. Further, the company
should be able to show what actions they take to improve the quoting
process based on actual performance. If any of these pieces are missing,
there is an opportunity to improve.
Cost plus pricing If we find evidence that “cost plus” pricing plays a meaningful role in setting
pricing levels, then we see opportunity.
Elastic and inelastic
pricing is not
evaluated		Retailers have found success in setting low prices on items that drive
consumer behavior. If the grocery store sets a low price for milk, then
customers flock to the store and they never check the price of snack items,
for example. The same relationship holds true for companies selling to
other companies (B2B). If a company does not analyze and track elasticity
by part, then there is opportunity.

Recently, we worked for a company that had hundreds of sales people in a dozen regions. The company retained us to find out what was causing a double digit gap between gross and net sales. While there was a companywide, executive driven mandate to hold firm on pricing, we found that sales people were routinely providing discounts. The sales people had good intentions and wanted to close the sale, but the executive team had developed their pricing strategy on sound principles and needed their mandate to be carried out. The company’s regional controllers were aware of the mandate, but lacked conviction that it was truly in the best interest of the company. After uncovering the issue, we were able to design simple reports that tracked compliance and allowed management to monitor pricing levels. Within a short time management’s strategy was carried out throughout the company and net margins increased by over 3 points. Because this company had a 10% EBITDA margin to start with, this increase generated a 21% increase in EBITDA.

Another client, a consumer packaging company, recognized that low volume and highly volatile sku’s did not carry any premium pricing over high volume and stable items. Correcting this added $500,000 in margin, an increase of 8% in overall EBITDA.

There are many examples like these. Look for these indicators. When you find them, it is time to investigate and take action!

If you have any questions or requests, please feel free to contact me at tvm@proactiongroup.com.

Case Studies

Case Study: Sell Side Q of Ops

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Big EBITDA Gains Identified in Overstocked, Underperforming Portfolio Company

Eight years after purchasing a consumer product company, our private equity client found themselves in the frustrating position of spending too much time and attention on one underperforming portfolio company.

The issues were clear: inventory kept increasing, and management was at a loss to explain why. Matters were further complicated by some of the inventory’s limited shelf life. Though demand was very seasonal, at the end of their last busy season the company had the highest inventory levels in its history. These issues resulted in an EBITDA to sales ratio of less than 6.5%: earning less than $6.4 million in EBITDA on about $100 million in sales.

Exiting the underperforming company wasn’t feasible, as it would result in mediocre performance for the client’s fund.

Background:

  • Underperforming portfolio company had excess inventory; products with limited shelf life compounded losses.
  • EBITDA performance lagged the industry and fell short of projections.
  • Exiting would drag down overall fund performance.

ProAction performed a Sell Side “QofOps” to identify and quantify their opportunities to create and claim value before their exit. Here are the highlights:

  • Recast Inventory: The company had $28 million in inventory, and we modeled how much they really needed given their supplier lead times, manufacturing capacity and customer locations. They only needed $12 million to run the company assuming solid processes and systems.
  • Segmented the Business: One size does NOT fit all! We segmented the business into 9 segments. We learned where they made money and where they gave it back. This allowed us to develop surgical recommendations to project their position with important customers and their ability to serve other customers in a profitable manner.
  • Targeted Savings: We examined their SG&A spend, their approach to sourcing purchased goods and services, and their DC’s and factories. This allowed us to quantify how much more EBITDA they can generate at the current sales levels.
  • Re-designed Planning Processes: We reviewed the company’s supply and demand planning processes, and isolated opportunities to leverage supplier resources, reduce inventory, and increase order fulfillment levels.
  • Fostered Adoption: By including key members of the management team in the design process, we were able to do more than deliver a report. We generated a detailed implementation plan and laid the foundation for change.

Actions Taken:

  • Optimized processes around the 8% of customers and 22% of SKUs that make up 88%+ of gross margin produced.
  • Built the business case to consolidate 4 facilities into 3.
  • Designed a Lean enterprise and a planning culture, with tracking and monitoring methodology built into all processes.

Quantified Impact of Recommendations:

As part of building a business case for the recommendation, we estimated the net benefits of taking action.  Namely, as a result of the identified changes, the client would realize the following net benefits:

  • Increase EBITDA between 69% and 108%.
  • Pay down up to $16 million in debt.
  • Increase order fulfillment, customer satisfaction levels, flexibility and inventory turns.
  • Reduce customer lead times.
  • Fully leverage recent ERP.

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 Operational Due Diligence and “Q of Ops” Diagnostic Reports.
  2. Facilitate your management team’s transition from an entrepreneurial to a scalable, process driven leadership path.  We act as their training wheels.
  3. Conduct our Operational Diligence on “stale” portfolio companies.  We quantify any latent value that can be freed up through operational changes.

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

The Competition is Fierce. Change the Rules. ™

Case Studies

Case Study: Lean Transformation Enables Smooth Product Launches and Drives EBITDA Improvement

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There would be no “snow days” in the forecast for a leading manufacturer of plowing and spreading equipment. The company was preparing to integrate a new acquisition and to launch two new products. To accommodate this growth, a major layout change and freeing up floor space was required at one of its facilities. Despite a lean effort for over a year, the plant’s performance was lagging behind the company’s other sites.

Lean TransformationThe ProAction Group reinvigorated the Lean transformation effort at the client’s plant with a hands-on application of Lean tools. We employed Value Stream Mapping to assess the opportunity and then began eliminating waste in the facility. The team used 5S, Visual Management, and Takt Time Management to streamline operations. Quick Changeover and Total Productive Maintenance were implemented to minimize downtime. We introduced metrics which allowed the plant to manage for daily improvement in its processes, including first-pass Standards of Work which eliminated costly re-work.

We led the Product & Production Preparation Process which ensured a timely and successful launch of the new products. The team employed a Design for Value approach with a focus on quality. We optimized the arrangement of people, machines, materials, and methods to maximize work flow and minimize waste.

ProAction also supported the client in constructing their strategic plans. We guided the roll-out of Lean practices across the entire enterprise. We conducted organizational capabilities assessments and recommended staffing changes. We also recommended sourcing activities to support the company’s expected growth.

EBITDA ImprovementThe Lean transformation put the plant back on track to meet performance expectations. We reduced the labor cost by 14%. Changing the plant’s layout improved the work flow by 32% and reduced the occupied manufacturing area by 25%, freeing up space for the production of its new products.

Need help with Lean transformation at your company? Contact us today to learn how we can help.

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Case Studies

Case Study: “Hidden” Operational Improvements Drive 50% Increase in EBITDA In 6 Months…

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Operational ImprovementsThe company, a leading international provider of pharmaceutical packaging solutions, focused on the long term care, retail and nutraceutical markets.

ProAction conducted the operational due diligence pre-close for its Private Equity client who was engaged in a competitive bidding process for the business.

Our tasks:

  • Uncover and quantify any EBITDA improvement opportunities beyond those identified by management and the PE client
  • Identify any hidden risks that would prevent the company from realizing their stated plans

We were successful on both counts.

  • The “Hidden” Improvements in EBITDA and Working Capital Improvements: We quantified just over $1 million in EBITDA improvements, and $1.25 million in inventory reduction.
    • These improvements primarily stemmed from 2 opportunities. The first related to lean manufacturing and scheduling opportunities in the plant. Their current approach to running the plant resulted in a significant past due backlog, high overtime costs, and late deliveries. The second related to their sourcing strategy and supply base. We found that they had no clear sourcing strategy and were laden with long term and untested suppliers.
  • The Risk: The company’s IT system was stable, but not scalable. It was built on a set of 5 connected legacy systems and would likely need to be upgraded or replaced prior to a sale to a financial buyer.
    • Given company plans for organic growth, the system would be fine for 3-5 years. We estimated the cost to implement a new system and the sponsor incorporated this into their financial model.

Our client used our information to update their model and our presentation to educate the lenders on the assumptions and evidence of the opportunities. With these enhancements incorporated into their offer, our client won the auction and acquired the company.

Operational Due DiligencePost close, the company retained ProAction to work with management to implement the improvements identified during diligence. We led the company through the value stream mapping process and, together, created the road map. Key parts of the implementation phase included:

  • Developing and implementing actionable sourcing strategies for six (6) different commodities.
  • Creating a lean scheduling methodology/process for strategic stocking levels and delivery improvement.
  • Running kaizen and other improvement events, teaching the plant personnel to conduct root cause analysis and take corrective action (we taught the organization how to improve habitually on their own)
  • Providing training on Lean Methods Tools to management and operators.

EBITDA Improvement OpportunitiesAs a result of these actions, annual EBITDA increased by $2 million, or 50%, in six months. The better news, however, is that this financial improvement was accompanied by increased service levels, reduced stress in the plant and a 20% increase in effective capacity. During this period, the top line remained steady.

Within 18 months of acquiring the company, our Private Equity client refinanced and took their money off the table. Within 36 months they monetized the investment and netted a strong return, all without a meaningful increase in the top line of the company.

Case Studies

9 Boxes Full of Financial Improvement – The Case of Pricing

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When a mid-market company is delivering great profits and cash flow, it’s probably human nature to think, “We’re doing great” and get a little too comfortable. Rose-colored glasses don’t reveal where performance is well below where it could be.

Even when there’s every incentive to find out why a company’s results aren’t so good, it’s still tough for management teams and boards to spot all the areas where results can be improved. Conventional financial and operating metrics just don’t go deep enough.

Both causes of fuzzy vision pose a big problem for incumbent owners and management teams, because very, very few companies are performing at their full capabilities.

For private equity groups, though, management’s fuzzy vision presents a great opportunity:

  • PEGs can develop better information during diligence and use that to advantage in their offer price.
  • Post-acquisition, they can implement the improvements highlighted during diligence and rapidly boost performance and enterprise value.

9-Box & Pricing

The ProAction Group’s 9-Box analysis is like having x-ray vision. It reveals the potential that lies beneath the surface to bump up EBITDA and lower the assets required on the balance sheet. It’s a powerful tool for PEGs that invest in manufacturers and distributors of standardized products.

In addition to showing where production and inventory management can be optimized, 9-Box analysis also indicates opportunities for pricing improvement.

Bob Sherlock of Marketwerks, a ProAction Group alliance partner, observes that “Management typically thinks that their prices are all right on the edge, about as high as they can be. They hesitate to take pricing action for fear that they’ll lose profitable volume. But every single company we’ve worked with was underpricing at least some of their products, for some customers, in some geographies and transaction types. The least risky pricing move in the world is to find where customers would willingly pay more, if you weren’t giving them the opportunity to pay less.”

“ProAction’s 9-Box analysis lets us see areas of underpricing, drawing inferences that we can validate in other ways,” Sherlock says. “The #1 factor in pricing is external—the prices at which enough customers will buy. But it’s also essential to understand prices at which the company should be willing to sell. The 9-Box process gives us insights into both of those.”

Case Study: Who is deciding pricing strategy?

9-Box Case Study

We have a real world case study of a 9-box analysis. Here are the actual conclusions:

Case Study Conclusions

  • Pricing, inventory and approach for “A” customers and “A” sku’s show that leadership understands where money is made. We got the important stuff right!
  • Pricing strategy seems focused on managing “A” customers well. B and C customers get preferential pricing today.
    • Increasing external customer margins to meet “A” Customer margins would increase B & C customer revenues and net income by $575,000. Driving B & C pricing to 4 points above A customer would drive $1.2 million in net income.
  • B & C customer orders drive $390 & $115 in Variable Margin per line respectively. This does not cover labor, overhead, order management, pick & pack and handling costs.
  • About 75% of our line activity drives less than 10% of our variable margin.
    • We need to adapt our processes to manage each segment of our business

The best sales people for this client drove superior pricing at their “A” customers. The more desperate sales people were allowed to decide on pricing at “B” and “C” customers, and it showed. This showed that the company did not have good pricing controls in place. Addressing this drove an increase in EBITDA that was the equivalent of adding over $8 million in new sales.

In addition, 10% of the sales of this company drove 75% of their gross margin. Yet, the treated all SKU’s and customers the same. Seeing this in black and white enabled the management team to develop new channels, adopt some pricing policies on freight and lead times and update their production scheduling approach to protect “A” customers.

In this case, the 9-Box helped the management team see the impact of running the business like a life-style family business. The changes needed to drive the additional EBITDA also increased the service levels to “A” customers and reduced day to day stress throughout the company.

See the link below to download this case study.

Conclusion

While the 9-Box was designed to address inventory strategy, it also brings black and white visibility into actual pricing strategies in practice. It gives the management team, and their owners, a stark and sober look into opportunities to make all of your business segments profitable.

If you would like a copy of the 9-Box Case Study referenced above, click here.

About Bob Sherlock – Marketwerks, Inc.

Bob Sherlock works with executives of manufacturing and B2B services companies whose sales teams lack a compelling answer to “Why should I buy your solution from you—especially when you’re more expensive?” or “Lower your price.”

He helps his clients get paid what their solutions are really worth—and attract customers willing to pay more when they see value.

Bob is president of Marketwerks, a consulting firm focused on those objectives, and the author of Daring Caution: The Executive’s Guide to Pricing Improvement. Earlier, he was a ProAction Group principal, and founder of a venture-funded logistics service provider. Bob previously served as VP—Marketing for Wickes Lumber, and held increasingly responsible marketing and sales management positions in four GE operating businesses and on GE’s corporate marketing staff. He has an MBA from Dartmouth’s Tuck School of Business.