Introduction:
There are times when consulting calls for reasoned analysis over a reasonably short period of time in order to develop an appropriate strategy with the client. Then, there are times when no such luxury can be afforded and its all hands on deck for a rapid delivery. The turnaround of a $280 million engineering, design and service group was an example of the latter. The results of this three week business review lead to a further 15 weeks of implementation work culminating in $6.8 million in benefits.
My client had become the Chief Operating Officer of a medium sized engineering design and service group of companies with operations in the UK, America and Asia. They had run into serious difficulties as world banking took a turn for the worst taking the oil price with it in a downward spiral. As this group relied heavily on oil revenues and had used their reserve cash as well as all of their private equity backed investment on the purchase of 9 companies over a period of 18 months, the bank collapse meant they were looking disaster in the face. Unless they could quickly resize operationally, they could only expect a fire sale or at best heavy penalties for failing bank covenants.
As with all of these situations, the financial data camouflaged a host of complex human issues including a good dose of denial. As with so many private equity backed organisations, the incumbent senior team had re-mortgaged their houses and put their families at risk, gambling on a quick return on the investment and the inevitable early retirement to a place in the sun. We all came to the conclusion that for these managers, having ‘skin in the game’ only led to a paralyses of good decision making in a fast changing environment.
We were asked to perform a rapid three week business review to assess the situation and provide private equity and management with a set of scenario solutions and financial benefits. We deployed staff into three global locations with a same assessment tools and techniques. Our goals were:
- To identify recurring annually recurring savings of at least $4 million that could be implemented by Q3 of 2009.
- Design a sustainable and flexible manufacturing and service strategy for the group that could deal with demand changes in the market.
Plan of business case development
The time scales for this piece of work would be very tight as bank covenants were due for review by the end of Q3 and any benefits needed to be in the process of realisation by then. We were now in May 2009, so time was short.
Method and results of the business review:
The aim of the review was to compare the sites operationally which means the complete supply chain from order intake to delivery and payment. The team and I were always very open with staff on each site and remained very honest about what was occurring. In a situation as grave as this one, honestly is always the best policy to ensure co-operation in the development of workable scenarios. All of the suggestions made during the presentation of the business review data had been developed and critiqued by staff on each site. That is not to say that agreement was reached on the interpretation of data with staff, but at least we agreed the data was factual.
During the first week, we interviewed key members of staff, mapped processes in detail, and collected financial data. We also confirmed forward orders and contracts. All of this viewed together created a snap shot of the organisation and some idea of future predictions.
We also noticed the considerable rivalry that existed between the sites, each of which, after an improvement initiative, was capable of taking on the work load of the other. This phenomenon was so extreme, that at they competed with each other in the market on price and delivery frequently engaging in negative PR to shared customers. This later presented problems in interpreting data in an objective way for the senior team, some of whom were wedded to certain factory sites for personal reasons.
The operational comparison data was laid out in the following way:
Table to show comparison data
The diagram above was the final results table of some very detailed data gathering and interpretation. Although the results appear inconclusive for the benefit of our business review, they showed that even with site cost reduction initiatives at each site, the required level of efficiency would never be reach to come close to passing the bank covenants. Clearly one or more of the sites would have to be closed and operations located in place.
Our team developed 5 financial and operational scenarios for a critique session with the senior operational management team during week three. All of the site leaders flew over to the U.K. and spent 4 days carefully working through the data. As I mentioned earlier, they were divided and rather than work towards a common goal, spent an inordinate amount of time trying to prove that “the opposition sites” should be closed. There was a great deal of lobbying going on with many a meeting held up for clandestine phone calls to be had. Eventually, this proved pointless apart from to highlight to reason for the organisations poor performance in the first place. It all came down to a basic cost figure where one site had a labour cost twice that of its counterpart. Sometimes the answer is simple once that more complicated solutions have been exhausted and simplicity stands alone like a beacon. It was important for the senior team to have their say and to lobby for their sites and regions during the implementation phase as they were then bound to act professionally in support of which ever scenario was chosen. The staff at the site that closed performed with dignity to the very last day, a testament to their professionalism.
After the 4 days of discussion the following conclusion was resolved. Only scenario 2 (shown in the table below) could deliver the required financial savings whilst maintaining a viable operational presence in the market. Site A’s manufacturing and assembly was to be closed and moved to Site B whilst an engineering design capability would be retained in the region.
Table to show 5 Scenarios discussed
There had been a very strong lobby for scenario 3 whereby all three sites remained operational but with greatly reduced headcount, however, this merely destroyed manufacturing capability across all regions and disabled the organisation from reacting quickly to any market upturn. Staff and skills would be lost across the board rather than in just one geographical area making recovery very time consuming and costly. Scenario 3 also did not secure the required financial savings the group required for the bank covenants, so despite being strongly supported by the senior team, it was always a non-starter.
In the end, choosing scenario 2 saved the organisation $6.8 million year on year against a basic requirement of $4 million to sustain it through its bank covenants.
Table to show high level savings of Scenario 2
The conclusions were presented to the board including the private equity backers and a resolution was passed to implement the findings. The evidence in the business case was over whelming and there seemed little point in delaying.
Along with the financial and operational data presented was a high level plan to develop sustainable manufacturing capability that would bring the organisation closer to its customers that ever before. This was through a light regional presence in assembly, test and service whilst retaining a main design and manufacture in one or two locations.
The savings were realised within 15 weeks of the implementation project commencing and the bank covenants passed.
