Executive Summary:
While the President of this electroplater (annual revenues around $800,000) knew he had problems, their sheer volume overwhelmed him leaving him unable to address them consistently and follow through.
Roy Sequeira helped him:
- Create a problem list:
- Defining each problem area
- Quantifying its impact on the business
- Prioritize the problem list
- Create an action plan that addressed each problem on the list
- Execute to plan
Background:
This family-owned and operated firm in the business-to-business space was established in the late 1800s. The current President joined the firm thirty years ago and took over when his father retired. His staff has been with him for years, with the oldest employee having over 30 years of service with the firm and most having over 10 years.
Electroplating / surface preparation is the sole remaining line of business with three major sub areas, zinc electroplating, “passivating”, and “phosphating It also provides heat treatment and coats metal parts with black metal oxide as required by customers. To assure quality work, the firm applied for and received ISO 9001: 2000 registration. It has also invested in computerized equipment to ensure plating thickness meets customer specification.
The economic downturn in 2000 affected the firm severely as many of its major customers either went out of business or reduced the amount of work they sent for processing. With cash flow severely affected, management focused exclusively on keeping afloat and neglected maintenance and other (perceived) non-essentials. Faulty cash management resulted in many payment cheques “bouncing” which in turn caused the affected vendors and suppliers to demand cash up front before supplying raw materials and other supplies, exacerbating the “cash problem.”
Another major problem was that the firm derived most of its revenues from just a few customers which left it very vulnerable should any default on payment or switch suppliers. This was brought home when a customer responsible for about 40% of total revenues switched suppliers. The resulting shortfall in revenues caused severe problems that almost put the firm out of business.
Cash Management:
The very first step was ensuring we had a clear idea of the cash position at all times. We created a spreadsheet-based cash monitoring tool that showed exactly how much cash was on hand each week for the next 13 weeks. This sheet was updated daily to reflect cheques and invoices created. The client entered newly issued invoices daily offset by the customer’s payment schedule. For example, if a customer normally paid with 45 days his invoice would be entered in the week spanning 45 days from the invoice date. Similarly with accounts payable, we offset all payments by 60 days from the invoice date. The cash flow spreadsheet was the main control mechanism for issuing cheques. It flagged scheduled payments by week. However, cheques were issued only if issuing them left a positive operating cash balance for the week. Else, they were deferred until sufficient funds came in to cover the payment.
We simultaneously instituted a program to monitor accounts receivable and ensure payments were received in a timely manner. All new customers were called 20 days after issuing their first invoice to ensure they had received the invoice and that they understood that we expected payment net thirty. This sent a clear message to new customers that helped bring payments in on time. We also monitored payments from established customers, established their payment norms, and called those whose payments were later than their established norm. This allowed us to quickly contain and correct delinquent accounts before they became serious.
Pricing:
Pricing had been a reactive process. The firm charged what ever it could to beat off competitors and get the job. This often resulted in jobs that contributed little if anything to profits. We created a model that helped price jobs to yield a desired margin of profit. It also told us when a job was not worth chasing after. Most importantly, it helped define a price that could be sustained in a competitive situation while yielding desired margins. In most cases, this resulted in a price increase.
The President called all affected customers explaining why the price increase was necessary to ensure they received the best value for their money. The main message emphasized quality and service rather than price. The message was well received, customers stayed with the firm and there were no cancelled orders.
Plant Maintenance:
A breakdown of production equipment that choked off production for a few days highlighted the need for scheduled preventive maintenance. At current production levels, this breakdown cost the firm well over $6,000. It could have been prevented had we had spare parts costing around $250 on hand.
We set up a program of scheduled maintenance and hired a person with a background in maintenance as well as other needed qualifications. With his assistance, we started a program of keeping critical spare parts for the production line on the shelf. We also started a program that proactively and regularly inspected production line components and scheduled maintenance as needed. This program practically eliminated unplanned down time.
We next created a program to clean up the production and storage areas getting rid of a large volume of clutter. Besides making a significant improvement in appearance, the clean up freed a lot of space and made moving work-in-progress between the loading dock and various production points much easier. The whole area looked and felt more spacious. It also allowed us better access for maintenance and showed us further areas that needed attention. An added benefit was the effect it had on improving personnel morale.
Marketing / Customer Relations:
On finding 78% of revenues came from twenty customers, with 30 customers responsible for 94% of revenues, we set up a regular scheduled program where the President contacted each of the largest customers to ensure they had no issues of any sort and were totally satisfied with their relationship with the company. He contacted production management as well as purchasing agents to talk about perceived quality of product, any potential changes in business volume, changes in “production mix,” and any other matters that could affect the relationship. Initial reaction was mixed, but when customers realized this was a sincere effort to make sure they received the best possible quality of product and service, they opened up and spoke quite freely. One of the important results was that we had advance warning of expected changes in volume and could adjust schedules accordingly.
We also created a program that actively contacted potential customers to learn their requirements and offer them a trial or sample run so that they could see the quality of the work and overall responsiveness. This led to more business.
Yet another program created a web site that show-placed the company, its various production offerings, and its responsiveness to customer needs. This allowed the company “web presence” and served as an easily updated “brochure” that helped pre-sell potential new customers.
Personnel Management:
The company had a number of personnel issues that, while never serious enough to warrant drastic action, tended to undermine productivity. The senior-most production employee was very risk-averse and tended to escalate every problem rather than resolving it himself. The front-office manager tended to being very demanding and critical and made no allowance for production needs. The resulting conflagrations took a lot of time and effort on the part of the President and wasted a lot of time on all sides.
We trained the President to require all employees reporting issues to also make at least one suggestion on correcting or resolving it. This was done in a non-confrontational manner that invited total participation. All employees were made to understand that they would not be penalized for making decisions at appropriate levels. This soon cut the level of bickering to negligible levels and smoothed production flow. Most importantly, it freed the President to focus his time and efforts on things that really mattered.
We created a daily schedule laying out the next day’s production that was discussed with the production supervisor every afternoon. This allowed him to plan out the day’s work. It also gave the office manager a good idea of when work would be done so that she could deal with customer enquiries appropriately without interfering with production staff for updates.
We trained the front-office manager to be more aware of production needs and redesigned interactions with production personnel to eliminate opportunities for friction. We created forms and business processes, such as the daily production schedule, that allowed the front-office to keep abreast of production schedules in a non-intrusive manner. The schedule also allowed production staff to work at their own pace without being abruptly called from their work to inform the front-office about where a customer’s order was in the production process.
These steps freed the President from refereeing conflict and increased overall production and front-office effectiveness.
General Management:
The firm also had a number of outstanding issues with creditors threatening to take actions to foreclose on the business. In helping the President in his search for acceptable alternative financing to pay off the creditors, we prepared a number of analyses that showed how much progress had been made in nine short months and how the new programs ensured company was now profitable and would stay on track. We also reviewed and rehearsed presentation of the information to the lenders with the President to ensure he was able to negotiate on equitable terms. These steps were quite successful and helped secure the needed financing.
The company appears to have turned around and is now on a sustainable track to increased effectiveness and profitability. Personnel problems have been corrected. Business processes are in place that monitor vital signs and provide an “early warning” system in time for pre-emptive Action.
In tangible terms, compared to the previous year:
- Gross revenues were up by $73,000 to $879,000
- Gross Profit was up by $22,000
- Expenses were down by $55,000 to $412,000
- Net income went from ($58,000) to $19,000
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