THE CLIENT:
The company is in the business of buying and distributing various fasteners, nuts, bolts, and specialty fasteners for a variety of industries. A couple of examples would be on large oil platforms where there is a need to secure large equipment to the deck of a floating platform. This application requires extremely large nuts and bolts to be very high in tension and specific torque standards. Another application is how towers need to be fastened to the foundation ring. Again, these would be very large specialty nuts and bolts to hold significantly high and dynamic loads. Additionally, there are sometimes special applications requiring a specially made fastener as part of another assembly.
To fulfill the needs of the various customers, the business buys a wide variety of fasteners in bulk quantities. These are then stored and, as orders come in, they are picked, repackaged into smaller quantities, and shipped to various customers. This particular business also has a small machine shop with saws and lathes to cut and form specialty threaded items.
THE SITUATION:
When we arrived, the business had recently lost a customer of a significant size, and this was coupled with a large downturn in the oil and gas industries, one of their primary customer markets. The remaining customers announced they were going to extend themselves sixty-day payment terms. Simultaneously, vendors were shrinking their payment terms and beginning to put a hold on any new deliveries until the company had caught up to the new accelerated payment schedule.
Accounts Payable exceeded Accounts Receivable and they had exhausted their available lines of credit and the bank was threatening to call their loans. The company’s Liabilities also exceeded Assets. Therefore, by definition, this was a business that was insolvent.
Furthermore, they had a Director of Sales who apparently self-proclaimed the title, but who was totally ineffectual in the position, and NOBODY (including himself) could explain what he did to bring value to the company.
Nothing in the business was being measured with the exception of the end of month financials, which is historical and too late to make any adjustments.
THE SOLUTIONS:
- Cash Flow: The first action was to find cash and find it quickly. We discovered some aged receivables (customers who owed the company money in excess of sixty and, in some cases, ninety days). An aggressive collections campaign was started, and this helped cash start dribbling in.
- Key Personnel Review: Next, we did a thorough review of the Sales Director’s activities and results. It was concluded that he was not doing the job the business needed him to do, and he did not have the capacity for the job. He was terminated, and an existing Sales Manager rolled into the position while maintaining his book of business. The elimination of this position reduced payroll by close to $7,500 monthly.
- KPI’s / Management Team Meeting: We developed and instituted some Key Performance Indicators (KPIs) to measure the critical aspects of the business. This was broken down into three major areas; Finance, Sales, and Operations (which included some machine shop and picking/shipping metrics). These KPIs were presented weekly at a newly established senior management meeting we instituted. As in most small businesses, managers and owners perform many jobs, so the weekly meeting, lasting one to one and a half hours, allowed the management team to step away from the daily grind and focus on the business at a higher more strategic level. The meetings also provided a means to communicate across mutually supporting functions in a clear and unemotional way.
- Inventory: The next thing to tackle was the inventory. They had close to $1 million in inventory, with a significant amount that was not moving. The nonmoving items were still viable, they just needed to find a willing customer. The business needed to liquidate the inventory as a way to generate cash. Each week the Operations/Warehouse Manager would develop a list of ten items and the sales team was offered a significant bonus to move these items. Even with the extra incentives paid, the inventory sold was worth much more than if it were sold as scrap metal. This generated additional, and much needed, cash on inventory that was considered “dead”.
- Payables / Receivables: The next course of action was to regain control over the spending and paying of vendors. This required a two-pronged approach. For those suppliers where we had allowed our payables to exceed sixty and sometime ninety days, the business owner called the key suppliers to explain the situation and develop a predictable payment plan for the past due amount. Then, there was an agreement to keep any new purchases current. This worked for about 65% of the suppliers and provided the business with working materials to take and fulfill orders. The second course of action regarding payables was to pay bills once weekly and only after a rigorous review of who was owed what amount and the consequences of not paying a vendor that week. Prior to this, the Controller was showing the owner what was to be paid, then went ahead and paid whatever she thought was appropriate in many cases. This brought down the small planned cash reserve to zero and actually over-extended the business a couple of times. Sales activity under the new sales manager increased, which provided for additional receivables, but unfortunately not for sixty days. However, additional revenue was needed and was greatly appreciated when it did finally come in.
- Roles and Responsibilities: Roles and Responsibilities were developed and written for each of the key employees. Once these were vetted, each manager sat with their direct reports and reviewed the roles and responsibilities that clearly outlined the expectations and metrics they would be compared to. This added the much-needed element of accountability at all levels of the business.
- Volume Discounts / Cross Docking: Lastly, we developed a cross docking process for those customers who ordered full containers of materials. To incentivize customers, a discount was offered for taking a full container of material. In many cases, we found the customers were happy to increase their order a bit to achieve these discounts. When the items were ordered from the suppliers, notations were made on the purchasing and shipping documentation indicating these items were to be cross docked. When the items were delivered to the warehouse, they were received to a special location to be shipped to a customer without any additional handling (storing, picking, packing, and restoring).
THE RESULTS:
In the short term, due to a lack of working capital, the business struggled while new receivables started coming in and the stringent payment plans were adopted. But after about four difficult weeks, the company started to get some air under its wings. There were some very positive trends developing in increased sales revenues and in new sales with higher margins.
As employees started to get used to the measures and the expectations we had for them, they worked into a very good rhythm. Productivity increased in the warehouse where they were shipping 21% more orders for the same labor.
In January, typically the worst month of the year, they had record sales in quantities and revenue which finally turned a very modest profit. This was the first profit the business had seen in several months. February continued to have robust sales and they achieved even greater profits in comparison to January. The business is not completely out of the woods just yet, but there are metrics in place indicating a significantly improved situation and the start of a successful turn-around.
Moral: There is seldom just one thing that needs to be improved. In this case, multiple activities had to occur simultaneously.
It is important to find critical, forward-looking metrics to run the business. A small business MUST keep its eye on the money coming in as well as the money going out. Just a small change in either can create a perilous situation.
KPIs must be developed for all aspects of any business, and Managers must force themselves to spend some part of the week in a higher-level and more strategic view of the business.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:
