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Taking Costs Out Of A Business Without Sabotaging It – Part 2


My last blog highlighted a real-life case study to show ways of looking under the covers for the opportunities to improve margins and cash flow.

Now, I’d like to step through the corrective actions we put in place to help the automotive accessories company with cash flow problems achieve a $3.5 million improvement in the first year.

Corrective Action Implemented

Pricing:

  • We doubled the prices for all the 495 low-volume items, coupled with a minimum order value (our rationale being to improve the return on these items, reduce the total volume from this group, or to politely redirect the customer to an alternative supply)
  • The P&L and product costing worksheets were restructured so that labour, materials and overheads were in alignment
  • The direct and manufacturing overheads were correctly recalculated, and provided clarity on input materials (such as various consumables) being in overheads or not
  • The top 20 items (75% of revenue) had labour times and material costs thoroughly reviewed to confirm the correct costs and actual margins
  • The top 13 customers were approached and they agreed to an average 8% price increase.

Purchasing:

  • Purchase orders had to be properly authorised by the CFO before release
  • Weekly and monthly stocktakes were implemented to improve information on inventory on hand
  • A weekly expediting process was implemented which dramatically reduced stock outs, and hence production interruption
  • Non-critical items were either outsourced, or suppliers rationalised through consolidation.

Production:

  • Spare parts or necessary low volume items were separated from main production area and independently supervised and resourced with progress tracked weekly
  • The layouts of the main bottleneck areas were changed to improve product flow and reduce travel distance using principles of lean manufacturing. One product went from 30% delivery on time to 100% and output doubled with fewer staff
  • Information for production supervisors was made more visible with improved daily coordination meetings.

Cash flow:

  • The highest value customer was approached and with the situation outlined, we achieved a change in payment terms from 30 days to 7 days, coupled with a price increase
  • The three highest creditors were approached, resulting in short-term debt being converted to long term debt
  • Cash flow was aided through price increases and reduction in inventory, and reduction in low-value low-volume items

Outcomes

  • The first year resulted in a $3.5 million cash flow increase through the actions outlined above
  • After the sixth month, the business began making consecutive monthly profits for the first time in three years
  • Delivery-on-time performance on average doubled, with some segments consistently achieving 90%-100%
  • Inventory levels decreased by 20% ($300,000).

There were many other reforms implemented concurrently through this period, including improvements in industrial relations (and setting up an employee consultative committee), improving accountability, reducing the number of shifts, improving communication with customers, suppliers, employees and financiers, focus on safety improvement programs and educating the management team and key supervisors through introducing KPIs.

So with the right sort of advice and focus, it is possible for CFOs or business owners to take costs out of their business without sabotaging it, while improving business performance and customer service levels concurrently.

I’d love to hear from businesses about how they have attacked this problem and what successes they’ve had.

Keith Bailey is Queensland’s Turnaround Professional of the Year for 2010, awarded by the Queensland Division of the Turnaround Management Association Australia. Keith,  was former client director at Vantage Performance, specialises in assisting under-performing businesses and providing support and resources for recovery, rapid  business growth or challenging situations.

Vantage Performance is a member of the Turnaround Management Association Australia and was awarded the 2008 and 2009 national “Turnaround of the Year” awards. Vantage has again been chosen the Turnaround of the Year winner in Queensland for 2010, and will represent the state at the national TMA awards in September.

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