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

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.

Buzzword Overload!

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.

The ProAction Group promotes Doug Blanchard to Partner

Doug BlanchardThe ProAction Group is pleased to announce the continued growth of its team with the promotion of Doug Blanchard to Partner. Since joining the firm in 2003, Doug has had a significant impact on client service, team leadership, process and tool development, and overall growth of the firm.  In particular, Doug has led the firm’s Lean, Quality, Sales and Operations Planning, and New Product Development work for our clients across many industries.  With his extensive background, commitment to client satisfaction, and overall leadership capabilities, Doug has had a major impact on the firm and its clients.  We are honored to welcome him to the Partner team and look forward to his continued influence in the firm while he continues to deliver clients the exceptional service they have come to expect.

Prior to joining ProAction, Doug worked for Lexington Home Brands as COO/Executive Vice President of Operations, where he was responsible for a $450 million division with 15 plant locations. Prior to that, Doug worked for Emerson Electric, where he had P&L responsibility for a $300 million division. Doug also has experience at Darling Store Fixtures, Tenneco Automotive, and Goodyear Tire and Rubber. Doug has a BS in Industrial Engineering and Management from the University of Akron. 

Welcome to the ProAction Team, Greg Hayward

Dear Guest:

I am pleased to announce that Greg Hayward has joined The ProAction Group.  As you would expect from ProAction, Greg brings over 30 years of leadership experience in manufacturing and operations.  We very much look forward to integrating Greg’s ITW strategic planning, commercial, engineering and operation experience; M&A skills & experience; and the focus that the 80/20 mindset brings into our client work.

Greg began his career almost 30 years ago and rose to a General Manager role at multiple ITW divisions. During his time there, Greg had full P&L responsibility including strategic planning, financial planning/accounting, sales/marketing, distribution and direct channels, manufacturing, R&D/engineering, new product development and team building/talent development. Since leaving ITW in 2011, Greg has been providing consulting services in a variety of short and long term capacities.

For Greg’s complete bio and the ProAction website, please follow this link.

Please join me in welcoming Greg to the ProAction family!