The Growth Paradox - Effectively Resizing to Drive Profits
Companies in this new economic environment cannot rely on cash from outside sources to help resolve their financial problems, nor can they increase revenue to create profitability in the near future. What they must do is resize the business.
Many companies try to "slash and burn" themselves to viability. The goal is not just to change the size of the business but to do it in a way where the future increases in costs are scalable when the economy turns around. Otherwise, the business will return to the same level of inefficiency and costs will be increased too rapidly.
That is why we recommend "Re-visualizing" the business at the new revenue levels. One client's revenue had to be reduced from $500 million to $200 million and they were certain they could never be profitable at that level. We asked the client if they were profitable at $200 million when they were growing to which they answered "yes" and the room grew quiet. We then created an organization, systems and operational structure suitable for the reduced size. The business, by the way, is very profitable and has since grown. The challenge then was to compare this structure to the current structure and make the necessary changes in an orderly fashion. This cannot be done internally because key executives protect each other and often resist the consolidation of functions, facilities and systems.
The benefits of this process are many and vary with each entity but the process results in:
- Reduced operating costs through the elimination of waste.
- The creation of a vision for the future and a road map to tell you how to get there.
- Reduced cost of goods through better management of the supply chain.
- Improvement of the distribution channels.
- Reduced transportation costs through management of outside and internal fleets and changing the modes of shipping.
- Creation of the systems and the necessary organization structure to minimize current costs while providing for scalable growth in the future.
- The introduction of lean technology to create off the chart savings and service performance.
- Inspired management that is motivated to make changes and implement continuous improvement.
- A plan that inspires confidence from the Board of Directors, shareholders, employees, lenders and other interested parties.
- Marketing strategies that identify competitive opportunities and attracts target customers.
Here are a few short examples of the power of this process:
- A client was first shipping its product through major distribution centers then to its local facilities. We created a system where product was shipped, as need, directly to the local facilities. This eliminated in excess of 200,000 square feet of warehouse, reduced inventory by 50% and added over $10 million to the bottom line.
- A client achieved over $9 million in improvements by eliminating unprofitable customers and adjusting pricing to selected customers. The program significantly increased the gross profit for each dollar of sales, reduced the size of the sales force and resulted in an important change to the compensation system.
- A manufacturing client was producing its products based on sales forecasts and long production runs because they believe it minimized production costs. Using “just in time” technology and organizing the supply chain we reinvented the system so that small lots were produced against firm orders. The inventory levels were cut in half, there was no obsolete finished good inventory, the number of SKU’s was reduced by 40% and the company went from a $6 million dollar loss to a $6 million dollar profit.
- A client was purchasing material from Asia with enormous lead times, poor quality and high transportation costs. After all costs were understood, we moved the purchases from Asia to Mexico resulting in savings of over $8 million dollars and a 50% reduction in inventory
These kinds of savings and benefits need to be rapidly realized, which is why an organized process is necessary. KGI has researched over 1,000 of its clients to develop a practical, meaningful program that focuses our consultants on the sources of savings. Shown below is a small sample from this forty page document.
- Can the number of management positions be reduced through the consolidation of functions?
- Can salary reductions be effectively implemented for some positions?
- Can certain service departments be eliminated?
- Is there duplication of effort and/ or responsibility?
- Can a hiring freeze be implemented?
- Are there economies in centralizing and decentralizing certain functions?
Finance, Accounting and Management reporting
- Can the flow of paperwork be reduced?
- Is the cost accounting system capable of identifying unprofitable products and departments?
- Can a cap be put on capital expenditures?
- Is the cash management function centralized to ensure maximum utilization of scarce resources?
- Can outside costs related to any audit or tax work be reduced?
Manufacturing and Distribution
- Can purchasing be simplified and personnel reductions implemented?
- Has direct labor been reviewed to improve work flow?
- Has the bill of materials been reviewed to ensure the proper products are purchased on the best terms?
- Have general overhead expenses such as insurance and engineering been recently evaluated?
- Can manufacturing square footage be reduced and new available space be sold or leased?
- Is there excessive supervision of direct and indirect labor?
- Can distribution changes be made to reduce costs?
- Is inventory too high to offset a poor inventory management system including distribution control?
- Are warehouses properly located to minimize cost?
Marketing and Sales
- Can travel and entertainment costs be reduced?
- Can the business reduce its advertising commitments?
- Can cost reductions be realized by altering the marketing approach (e.g. by using brokers, direct mail or agents)
- Can the method of selling be re-organized to reduce costs?
- Can the commission structure we be modified to reduce costs?
In short, there is a science to resizing and re-visualizing a business to drive profits. Whereas the questions can go on and on, a qualified professional can be of immense help because it is mission-critical to do it right the first time. "Out of the box" ideas are not obvious and the use of a trained professional is the only way to overcome substantial barriers to fundamentally changing a business and positioning it for future growth.
Whether a Company is struggling financially or on the cusp of breakthrough growth, KGI can help. Our seasoned experts work alongside management to solve complex cash flow issues, operational challenges and other business crises. If liquidity or sale is needed, KGI provides a powerful combination of services and expertise to achieve outcomes that cannot be duplicated by other standalone consulting firms.