Category Archives: Resources

Metrics – the Beginning of a Culture of Continuous Improvement

Hawthorne Effect

Have you ever noticed that being watched at work changes behaviors? For example, if there is a new supervisor who is trying to evaluate the performance of their team – the team’s awareness of the evaluation actually changes how they behave. This phenomenon is known as the Hawthorne effect, where being aware of closer scrutiny causes improved performance – at least in the short-term. While estimates of productivity increases vary, an immediate increase of 10-15% can be expected. However, if there is no follow-up on the improvements (reinforcement of the new behavior, goal setting, etc.), those output gains can be quickly lost.

Similar circumstances can happen any time new metrics are introduced in a business. While people are not physically being watched, they know their performance (output, error rate, speed, etc.) is being measured. Identifying metrics and tracking progress against established benchmarks are critical components to creating success for a business. If we know that the initial “Hawthorne effect” gains can quickly disappear, how do we hang onto the momentum after the “newness” wears off?

Using Metrics to Sustain Productivity

An important first step to improving any aspect of your business is measuring performance – identifying the Key Performance Indicators (KPI’s) or set of metrics that most accurately reflect how a department or area is functioning. When these have been established, employees must understand how their activities directly influence these metrics – this helps create ownership and accountability. And once the metrics are in place, it is imperative that goals are set and progress is consistently reviewed and adjusted. Using benchmarks is a very useful tool in establishing goals. These can be external benchmarks (for example, comparing your performance to established industry or competitor standards) or internal benchmarks (for example, comparing On Time Delivery performance of one plant or one product line to that of another of your own plants or product lines).

Any time you implement a new metric, you can expect to have a Hawthorne Effect improvement at the beginning. One way to build on and sustain the productivity increases of a new initiative is to incorporate a simple but effective problem-solving process. Effective problem solving shifts our focus from the negative aspects of a challenge we are facing to generating a solution. It helps streamline processes and encourages employees to look for solutions – and many times very simple solutions can have a big impact.

A recent client was measuring productivity at the department level, which was too high of a level to identify root cause issues. We developed productivity measures at a line and product level, which allowed us to quickly identify downtime issues and micro-interruptions. We assembled a cross-functional team and using different problem-solving techniques we were able to identify an equipment issue that was easy to fix and improved uptime by 11% in less than two weeks. Without the productivity metrics this deficiency would have remained hidden and been an ongoing cost to the business.

Continuous Improvement

A culture of continuous improvement is necessary to sustain and increase productivity, and problem solving is just one aspect of this. Continuous improvement (CI) – always being alert for opportunities to improve products, services, or processes – is simple but not easy. Using the self-propelling Plan-Do-Check-Act (PDCA) cycle is one tool to implement CI.

  • Plan: Identify/plan for change
  • Do: Implement change on small scale
  • Check: Analyze results of the change
  • Act: If change succeeded, increase scale; if not, begin cycle again

The following is a good illustration of what PDCA looks like in a Continuous Improvement environment. As improvements are identified and implemented, standardization is used to cement those improvements in place and prevent “rolling back down” to the prior way of operating.

Continuous Improvement_Graphic

One of our recent clients has an older bottle line that ran with 4 operators. The capper on this line performed poorly, generating crooked and cross-threaded caps and the cap would often even fall off. Between 20% and 30% of the caps were improperly applied depending on the product. The primary responsibility for two of the four operators was to make sure all bottles were capped correctly and to rework the bad caps! Management had attributed the problem to the age of the equipment and felt the only solution was a to put in a new line – a major capital investment.

This was a very fast moving line, but by using an iPhone and taking some slow-motion video, it was easy to see the tops of the bottles were moving out of position in relation to the cap due the tooling gripping them around the middle where the plastic was most flexible. As the client watched the video, we suggested a test by raising the tooling to grip the bottle at the shoulder right below the cap. This was done and immediately the cap problem went away. So permanent tooling was made and the line was able to run with only two operators (one replenishing materials and one casing product at the end of the line). Even better, we observed 0 defects for that condition during the remaining months of our project! This focus on problem solving allowed for a fairly simple fix (and significant financial savings) to an ongoing problem.

We Can Help

We are frequently called in to help organizations that are under performing. While most would expect that all businesses today have metrics in place that they are using to drive to performance, we have found that a surprisingly large number of companies have no metrics in place – or the ones that they do have are based on erroneous data, not understood, or not actively managed using problem solving tools. And it is no surprise that these are the companies that are under performing.

Businesses today must be nimble and adaptive, no matter what product or service they provide, because no organization stays static. They either thrive or decline. By establishing valid metrics to monitor performance and by implementing a culture of problem solving and continuous improvement, you can position your organization to be in the group that thrives.

If you would like more information on how The ProAction Group can help your company use Metrics to improve performance, please contact us to discuss how we can be of assistance.

If you enjoyed this article, please consider joining our email list so you never miss a post.

ISO 9001:2015 What’s In It For You?

Tight Rope WalkerIn our last blog, we addressed some of the risks a company faces if they let their ISO 9001:2008 certification lapse.  This is likely not an issue for 90% of your portfolio companies.  Those companies have already taken the steps to comply with the new, ISO 9001:2015 standard.  For those portfolio companies that have not, losing their certification certainly offers the risk of lost competitiveness in the marketplace as well as the credibility the certification brings to their customer base. Avoiding the risk is certainly a strong motivator, but what about the business benefits the portfolio company can realize when an effective and efficient quality management system is in place?

We will answer the following 3 questions in this article:

  1. Why should I care?
  2. Ok, I hear you, but what’s the business impact?
  3. What should I do now?

In a Harvard Business School study comparing 916 adopter versus Quality Quote17,849 non-adopters of ISO 9001, they found that the adopters of ISO 9001 had the following business benefits:
“Quality is when the customer returns and the product does not”

  • Higher rates of survival, sales and employment growth
  • Increased wages
  • Reduction in waste generation
  • Enhanced worker productivity and ability to pay closer attention to detail

Why are organizations who have adopted ISO 9001 able to achieve these benefits versus their counterparts? The ISO 9001 standard provides a framework to maintain focus on key business elements. Why do customers buy our product? Who are our key partners? Why keep our team engaged? What does it take to create an “even better if” culture that is constantly focused on delivering value?

The American Society for Quality (ASQ) estimates that for every $1 spent on quality management, the organization can expect the following return:

  • $6 in revenue
  • $16 in cost reduction
  • $3 in profit

What are some things I should look for to see if my portfolio company has aligned their quality system with their business system?

Are there monthly management reviews where you can obtain a copy of the presentation package? How often are customers, suppliers, standards committees mentioned? How are employees kept engaged and is there an active development program? Are successes celebrated? How often is the leadership team on the floor or in departments? Upon your next visit, observe when / if this happens.

ASQ, in the same study mentioned above, found that:

  • Quality management reduces costs an average of 4.8%
  • Quality management was a significant driver of success for 93% of the organizations surveyed
  • Without quality management, 83% of organizations agree that they could not justify their pricing to their customers

All businesses have a quality management system that should be contributing to the business. If you are not seeing or experiencing some of the benefits highlighted in this article, a good place to start is by asking why. In asking this simple question, you will be drawing attention and initiating action which can be the spark you need to breathe life into that portfolio company that tends to keep you up at night.

Quality Quote 2

Ready or Not: ISO 9001:2015

The Deadline

Is your portfolio company ready for the ISO 9001:2015 QMS? We’re less than six months away from the deadline to comply with this revised standard, which was rolled out in 2015. While we’d like to assume that everyone’s preparations are well underway (if not completed), we also know that many companies have put this on the back burner while attending to more pressing tasks. As our Private Equity clients have begun to escalate this issue with management, they’ve encountered a trio of challenges. One or more may sound familiar to you.

The Pain Points

The first and most obvious is deadline stress. At this point, any unexpected monkey wrench while you’re moving toward compliance could lead to missing the deadline. ISO certifications are one of the ways we build trust with clients, so you could risk your position as a market leader, or even damage specific client relationships.

Another common complaint is that the sheer scope of what needs to be done seems overwhelming, especially in light of the resources you’ve already invested in compliance. How is it possible, you may find yourself asking, that we’re not closer to the finish line than this? When you find that quality and efficiency issues still persist, despite your best efforts to have sound processes, the recertification process can leave leadership feeling demoralized and frustrated.

Clients often raise a separate but related concern – the cost of maintaining a quality system can be high. But for many companies there isn’t a single system, there are two. One is the system your quality management team designed, which meets the highest quality standards. The other is the way things are actually done. This is particularly common when a team was rushing to meet a deadline. Rather than doing a deep assessment, then redesigning processes to meet best practices, the team designed a castle in the air that didn’t match the existing foundation. The disconnect between these two realities is often hiding potential EBITDA and a myriad of headaches.

The Possibilities

While the actual compliance process is frequently viewed as a headache, the new standard offers many benefits. Organizations that adopt ISO 9001:2015 will move toward a much leaner, process-based approach. This new quality standard is also designed to be tailored to your specific product or service, doing away with a more one-size-fits-all approach. We’re also very happy to see a push toward data-driven decision making.

If you’ve been paying attention to our blog, hopefully you’re making a connection right now. The key components of ISO 9001:2015 align with the best practices we advocate every day. That’s not an accident. You can see why we’d be natural partners for companies on the path to compliance.

What we typically do for clients who are working on their renewal is perform one of two kinds of analyses, depending on your needs. In some cases, an all-areas Systems Audit is the right starting point. Or, if there are specific areas where you feel exposed, we can do a more targeted Surveillance Audit. At the same time, we’ll do a Gap Analysis to highlight opportunities for cost reduction and profit improvement.

This is what we love about this new revision: it aligns your business with your Quality System, which is exactly what we do already. Instead of hiring a consulting firm to help with compliance, then having another firm in later to find overlooked EBITDA, clients who work with The ProAction Group on this will kill two birds with one stone. As an additional benefit, you’ll be able to count our due diligence as an Internal Audit, which it just so happens is a requirement of your QMS. If you’re ready to turn your ISO certification journey into a victory lap, reach out to us.

Contact us today to get started:

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. ™

 

More Operations-Side Indicators of Opportunity

In our last blog, we discussed three critical indicators of opportunities to improve EBITDA within a company. Our goal was to highlight how seemingly innocuous issues can become major resource drains for your portfolio companies. We have identified the key indicators for each of the various functions of a company – all told there are over a hundred. Using them as a lens, we can examine every aspect of operations and illuminate issues that might have been previously obscured by inefficient processes and management tools. If our top three got you thinking, this chart of additional common pain points may also resonate with you.

IndicatorWhat it can mean
Sourced materials have not been competitively bid in the last three to five yearsPerhaps counter intuitively, we have found evergreen (ongoing) contracts to indicate that the company does not test the market and leverage their volume and position to their full advantage. Some companies do put specific and narrow needs out to bid. Either of these signals that there is potential to lower the total cost of goods purchased.
Inbound freight costs are buried in product costsA common answer to “Who pays freight on incoming shipments” is, “Oh, well, freight is free.” We often find that suppliers build profit into freight charges. Unbundling freight costs can lead to significant improvements.
Schedule attainment is not measuredOne of the first questions we ask a plant manager during a tour is, “How are things going?” If they respond, “Great, all the machines are running” or “Our efficiencies are well over 100 percent”, then we know they are likely scheduling the plant based on a “push” methodology. There is a good likelihood that they are building schedules to minimize changeovers and downtime. Measuring schedule attainment is most common among higher-performing companies that run the plant to fill customer orders or on some type of pull system.
Forecast is not measured or is low qualityOften, companies that do not have the discipline to forecast well put unnecessary burdens on operations. These burdens lead to E&O inventory, overtime, downtime, expediting costs, and chaos. If forecast accuracy is low or not measured, the company is likely not managing this area effectively.
Service levels are lowThere are rare instances that require a company to provide poor service and quality levels to their customers. If a company does not have an industry-leading perfect order level, has longer lead times than competitors, or has high scrap/warranty costs, then there is likely a significant opportunity to improve operations and EBITDA.
Service levels are buoyed by high inventory levelsOne easy method to lift service levels is to increase inventory. This approach, however, leads to many costs and problems. If a company has competitive service levels, but holds more inventory than others in their industry, there is opportunity.
Significant work in process (WIP) and overproductionWork in process may not be evil, but it is close. When we tour any factory or office, we look for WIP in front of machines, in warehouses, or in inboxes in the office. Any of these can indicate unbalanced lines and processes. Putting lines and processes into balance leads to cost, service level, inventory, and lead-time improvements.
The company has not conducted a value engineering exerciseWe know that lean manufacturing and process re-engineering can work to dramatically improve cycle times and lead times, and lower the costs to process paperwork, products, and services. The same mindset can be applied to the product design itself. Design for manufacturing, value engineering, or similar methodologies can dramatically improve the landed cost for an item.
VariationIf anything is worse than WIP, variation might be the thing. If a company does not measure variation in scrap, quality, cycle times, warranty costs, or key specification measures, the opportunity could be significant. When variation is reduced, costs go down.
Plant observations of the
“7 Wastes”:
Defects, Overproduction, Inventory, Transportation, Waiting, Motion, Extra Processing
These items represent the most fundamental items to observe during the plant tour and to have management communicate their views on the measurement and management of these wastes.
Individually, these items can be identified and quantified for focused improvement efforts.
Collectively, they represent the cornerstone of any operational excellence initiative to enhance profits, service, and morale.
Late deliveries / past due back ordersAt times, poor customer service can be attributed to a real lack of capacity. We simply cannot produce what our customers demand when the want it. At other times, however, it is more accurate to say that we do not produce at the rate our customers require.
Scrap, field failures, warranty costsScrap is a double whammy. Not only do we have to dispose of purchased materials and write off the efforts we invested to complete our finished good, but we also have to re-do the item to fulfill an order. As a result, any reduction in scrap not only avoids the related expense, but it also creates capacity. If we stop making items we have to throw away, we can use the time to make saleable items!
The company does not utilize make vs. buy decisionsOften, there is a substantial benefit to make something you buy, or to buy something you make. In some cases, you have the scale to justify expanding your fixed cost base, and at other times your suppliers offer a cost structure that beats your own. If the company does document make vs. buy decisions, there may very well be an opportunity.
The company has more locations than strictly needed to serve current customersCompanies often have more facilities, or space, than they need to serve their customers. Warehouses can come with an acquisition. Customers can require a facility be maintained to support their operations. A company manager might be comfortable operating on a large investment in inventory (you can’t sell from an empty cart!!). But with multiple such scenarios happening over time, you will have a foot print no one would design from scratch. A quick review of the current distribution network can highlight duplicate locations and might provide the impetus for additional investigation.
Does the company have a designed approach to determining which customers and SKUs are stocked (make to stock) and which are only made to order?If a company turns their inventory six times per year, then they are paying for raw materials and are paying for the labor 60 days before they ship to a customer, on average. If we extend payment terms with suppliers, that will exacerbate the situation. If the company does not develop stocking plans and set inventory levels based on segmented data, then the return on investment and the delay in recouping the investment may be unbalanced and inconsistent.

These are just the tip of the iceberg when it comes to the many indicators we investigate during our initial due diligence site visits. The good news? They’re all evidence that opportunities exist to make meaningful improvements in market position, EBITDA and inventory management. Think of this stage as taking a sick patient’s vitals, like temperature and blood pressure. It provides us with symptoms to investigate. After all, we need to understand before we can diagnose. A partnership with us provides the most thorough physical your company has ever experienced, and the results will do more than simply remedy an illness– they’ll open up new possibilities for growth.

Reach out to Tim Van Mieghem to explore how an operational diligence can turn your underperforming company into a thriving asset.

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. ™

The Big Three: Top Indicators of Opportunity

When a portfolio company is underperforming, it’s hardly surprising that investors are frustrated and management is stymied (or perhaps stagnant.) Our goal is to bring a fresh perspective to the company and provide analyses that provide actionable data. When we perform an operational diligence, certain indicators highlight opportunities to improve a company’s position in the market and its financial performance. While we have a multitude of targeted indicators we use to address the various aspects of a company’s operations, here are three that cut right to the chase.

Inventory Turns

Does your company turn inventory at rates that are consistent with the top performers in your industry? Since “good” inventory turn levels vary by industry, comparing your company to its competitors provides a good benchmark. It’s also important to review turns based on their ABC classification and margins generated. From these vantage points, you can examine where your current production schedule results in inventory that gathers dust and ties up capital.

Order Fulfillment

Are your service levels competitive, or are they holding you back? Examples of meaningful pain include growing past due backlogs, late deliveries, quality exceptions, and customer complaints. Rising costs, growing inventory, and stretched lead times may all contribute to the problem, as can excessive employee turnover. If you have any of these issues, it’s time to do some digging. You may have process problems that contribute to employee frustration. You might also be suffering from a lack of insight into customer needs. Thorough forecasting is a necessity. Without it, you’re left scrambling to catch up. If you’re constantly employing day-to-day tactics instead of a long-term strategy, customers are bound to notice.

Metrics

Does your company maintain a closed-loop metric system? If so, do they post visible metrics? If you can’t measure something, it doesn’t exist. This may seem like a strong statement, but it is hard to overestimate the impact of measuring performance, conducting root-cause analysis, and implementing corrective actions. Companies that do this show continuous improvement. Companies that don’t go backwards; no one stays stagnant – you either get better or you get worse.

We often see a 10-15% improvement in performance when we start effectively measuring it, for one simple reason: leadership that doesn’t use metrics is running on gut instinct. While many of us discuss “good instincts” in an admiring fashion, our judgement is most finely honed when we’re well-informed. Management without metrics is largely theoretical.

Pain Points As Opportunity

At the end of the day, if a company turns inventory and fulfills orders at the top end of their industry, they are likely tapping the potential of their company well. And if they have a problem-solving culture, they’ll continue to achieve. If any of these three components are missing or in disarray, then we know there is opportunity to improve the competitive position of the company and its financial performance.

If you’re ready to turn pain into profit, reach out to Tim Van Mieghem to explore whether an operational diligence is the right investment for you.

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. ™

What is Q of Ops?

In a “Quality of Earnings” (Q of E) report the accounting firm audits the financial statements to vet EBITDA, to determine what it is.  Their report will also likely assess the risk of maintaining recent performance at a relatively high level (customer concentration, product mix/margins, etc.).   The Q of E has always been a standard component of the diligence process.  But in today’s deal environment, for a PE firm to understand the full potential of a target – and therefore be competitive in the bid process – they need to go deeper.

A buy side Q of Ops diligence (similar to a Q of E but with a focus on Operations instead) looks at how management runs the company today and determines what EBITDA “should be”.  It answers three basic questions.

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

Why do a Q of Ops?

Our clients that perform a Q of Ops report the following reasons:

  1. They are tired of losing on a deal and then seeing the winning PE firm succeed in growing the value of the company.
  2. They are frustrated when they end up having to “write a check after writing the check”.  They want to know what they will have to do to maintain EBITDA and grow the company before they close.
  3. They are concerned about hitting the ground running post close.  They want management focused on getting ahead of plan early in the hold and on building momentum for sustainable value growth while they are onboarding the portfolio company.

Sell Side Q of Ops

One major accounting firm we work with reported that they did 0 sell side Q of E’s in 2013, 2 in 2014, 54 in 2015 and over 130 in 2017.  It is a real trend and is proving to be a good investment.  This preparation leads to a smoother close and gives the seller a chance to prepare answers to likely questions and objections.

A sell side Q of Ops is most relevant when the PE firm is:

  1. Worried that selling a portfolio company with mediocre performance will drag down fund performance.
  2. Concerned that the portfolio company is, as one client put it, “a $5 million EBITDA company doing $3 million”. 
  3. Exhausted from investing so much personal time into a portfolio company.

The sellside Q of Ops quantifies the latent value hidden beneath current management practices.  It provides the PE firm and the management team a clear data-driven path to realize that value BEFORE entering the exit phase.

First Steps?

If you relate to the any of the symptoms described above, reach out to Tim Van Mieghem to explore whether the Q of Ops would be a good investment.

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. ™

The ProAction Group’s 9-Box System

Owners and CEOs are constantly working to improve EBITDA and trim waste at portfolio companies. However, no matter how proactive you’ve been in the past, it’s possible to reach a plateau. When you’ve addressed every clear opportunity to reduce waste, but it’s often difficult to identify next steps. This can leave you feeling frustrated, your efforts diluted as you do shallow dives into different aspects of your business looking for places to streamline.

It’s natural to find the process overwhelming, because correcting it requires a deep dive into your company’s data. When your focus is on the day to day running of operations, you may find yourself thinking, “How will I carve out the time?” Your best intentions end up being derailed by more immediate matters. That’s understandable– and that’s why we developed the 9-Box tool. It’s designed to find the dormant potential in your company, through three key ideas:

Triangulation: We begin by looking at your business from multiple vantage points. We’ll draw knowledge and insight from a variety of stakeholders (from the line workers to the C-Suite). In this way, we can provide you with the practical and raw insights you’ve been seeking even if you’ve been trapped under the hood– and we can identify exactly where your hidden, untapped capital might be. Triangulation gives you a sober direction in which to move.

Segmentation: Customers are not equal or the same.  Products are not equal or the same.  Many companies, in fact, treat customers and products the same.  This leads to companies making good money in some segments and actively giving it back in others.  By segmenting your business we expose the patterns and give you clarity.  Clarity that will help you tailor your approach and retain what you earned.

Experience: Theories and models are great, and they can be dangerous.  Decisions about how we treat customers, plan inventory and set pricing should not be left solely to a model.  Experience ensures that practical choices are made and poor decisions are avoided.  During the analysis stage of the 9-Box process, we’ll bring key players in your organization together, combining their expertise with ours to make the bold leaps that will consistently yield the increase in EBITDA you’ve been looking for.

So many companies are draining their own capital without realizing it.  Perhaps their pricing controls need attention, or maybe they’re maintaining the same level of inventory in every item across the board. The company might be giving equal attention to segments of the market that account for very little of its revenue. Somewhere, your company has capital tied up in resources on which you won’t see a return. We can find and free up those resources.

We’ve worked with more than 30 private equity firms, and 170 of their portfolio companies, to tackle this challenge. Let the 9-Box tool be the offensive line that cuts through everyday distractions, and creates room for you to charge forward and make the bold moves that will drive your EBITDA up and working capital needs down.

Request More Info