driving profitability through process proprietary and confidential ™ &© sustainability...
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Driving Profitability Through Process
Proprietary and Confidential
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SUSTAINABILITY
Presented by Ed Brill
February, 2012
OPTI
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My Sustainability Definition
• 8 core systems tied to• 18 - 26 MCP’s• 5 – 7 sub – MCP’s• Documented• Trained• Measured• Managed
Connectivity affects a company’s resiliency through infrastructure dependency, effectiveness, and creation of long-term value
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The Operational Integrity of A Company’s Systems/Mission Critical Processes
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Agenda
• Current Sustainability Paradigm• Move To True Sustainability• How To Build Sustainability• Financial Statements and Sustainability• Framework To Fix Broken Companies• Case Studies
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Current Sustainability Paradigm
Sustainability Myths
• Accounting– Financials determine ongoing concern
• Banking– In loan covenants equal company health
• Venture Capital/Private Equity– Hitting ROI targets define growth potential
• Insurance– Financial-based risk models minimize issues
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Macro Economic Effects
Difficult times ahead:
• Commodity prices going way up • Fed easing created bank deleveraging • National debt focus will cut services • Unemployment to hit public sector • Uncertainty in Mid-east to keep oil high
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What Owners Will Tell You
• If I only had another $1.5 million…….• The economy is wrecking my business……• It’s the Union…….• I can’t find anyone who wants to work……• My customers won’t pay me on time…..• Once we get the order we can’t deliver……• Why is my bank doing this to me?......
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Owners Response: Death Spiral
• Fire Marketing Department• Let go of Sales Team • Eliminate Senior Operators• Quality fails rapidly • Production clogs• Your Banks call loans
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Move To True Sustainability
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Let’s Start With The Basics
Five questions you need to ask:• Tells you how engaged ownership is in business• Reveals how profitability is calculated • Validates that there is a system to understand
true costs of business • Confirms if company has built sustainable
infrastructure
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What You need to ask What You want to hearWalk me through how you calculate velocity of money?
We calculate velocity of money by tracking the steps and how quickly $1 of investment is returned to us. This enables us to know exactly how long it takes to get our return on investment.
If You Hear It Means
What do you mean by velocity of money?
They do not actively manage/measure key financial activities like creating an invoice, A/R collection duration.Typically they are using a line of credit as a lifeline that continually grows .
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Question 3What You need to ask What You want to hearWhat is your cost to quote? How much does it cost you to prepare a quote?
There is a fully cross-functional team; there is a template that all participants contribute to; prices updated monthly on all core buy items; targeted GM vs gross GM.
If You Hear It Means
What do you mean or we have a quote engineer who reviews?
Suspect accountability at best; little traction/reporting on how quotes are developed and priced.
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Question 4What You need to ask What You want to hearWhat is the smallest order you'll entertain?
Actual order numbers based on gross margin relationship to cost to prepare quotes.
If You Hear It Means
I don’t know what you mean? Company is packing dollar bills with each order.
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Question 5What You need to ask What You want to hearWhat is your WACC? We know exactly what our costs of
equity and debt are.
If You Hear It Means
What is WACC?Or, my CFO calculates it only when we need to do a transaction!
Business Owner and Stakeholders do not know the relationship between WACC and cap rate.If the company wants to sell ultimately, have no idea how to approach.
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Building Blocks Of Sustainability
How do we build?
1. Start with the systems that make up a business
2. Move to the underlying processes that make up the systems
3. Determine KPIs/CSFs
DesignManageMeasureRepeat…
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Tools Available
• Software products• Process consultants• Cost reduction experts• In-house operators• Subject matter experts
– Including Six Sigma, TQM, Lean Flow etc.
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A Good Sustainability System …
• Integrated 360 program• Experienced turnaround
owners implementing • Full lifecycle –identification
through implementation• Integration without
interruption • Tools for continuous
monitoring and improvement
Chief Restructuring
Officer
Assessment
Validation
Retooling
Drives
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Core Systems To MCPs
New Product
Dev.IT
Operations
Human Resources
Sales
Finance &Accounting
Marketing
Customer Care
MissionVisionCultureAlignment
MissionVisionCultureAlignment
Mission Critical Processes
Material: define MRPS flowMaterial: ID initial notification of material purchase requirements
Production: Validate human utilization
Production: Validate capital utilization
Training: Match skills with demand
Eight Core Systems
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Process Management
CCG Admin compiles approved solicitation
email alerts and outbound-reviewed
solicitations
CCG Admin passes Master Solicitation
List to CCG
CCG Admin inputs all solicitations into
Master Solicitation List
Inbound emails database solicitations
to CCG Admin
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• Eliminate inefficiencies• Compress cycle time
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Measurement Of Processes
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CSF Action Plan100% Finalize in next two weeks
or fire supplier
25 days Analyze gaps, provide terms to holdouts
2.5 days No action plan, exceeded target
2 days Re-review of process, clean up gaps and issues
98% Schedule server downtime, perform full maintenance
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Financial Statements & Sustainability
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Financial Statement Use
• Financial statements are an end result– Fixing the statements does not fix core issue
• Owners often unfamiliar with key financial drivers– No ability or know how to track profitability
• Connected systems drive financial health– Mission Critical Process management promotes efficiencies– Efficiencies directly impact financial statements
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Impacts Key Lending Ratios*Metric Status 30-60-90 Sustaining
Debt Coverage Ratios: - Times Interest Earned - Principal Coverage Earned
.1x
.5x1x1x
2x2.2x
Leverage Ratios: - Debt/Tangible Net Worth - Debt/Total Capitalization - Utilization Ratio
2x to 3x60% to 70%20% to 30%
1x to 2 x40% to 50%
45%
.5x33%82%
Capital Utilization Ratios: - Days Sales Outstanding - Days Payable Outstanding - Raw Material Inventory Turns
180 Days365 Days
2
90 Days180 Days
6
30 Days90 DaysMin. 12
Other Key Ratios: - Gross/Direct Margin (%) - EBITDA (%)
10% to 15%Directionally
Negative
15% to 20%Drive to
Break Even
>20%Directionally
Positive
*Source: Average BBS DataProprietary and Confidential
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Targeted Financial Ratios*
Metric Status 30-60-90 Sustaining
Liquidity Ratios: - Quick Ratio - Current Ratio
Upside DownArtificially High
NeutralityNeutrality at
Best
1.2 to 12 to 1
Capital Utilization Ratios: - Return on Assets - Return on Capital Employed - Velocity of Money
NegativeNot Measured
No Idea
00
Measure for First time
12.5%20%
3 to 5 Turns per Year
Other Key Ratios: - WACC - Borrowing Base/Debt Capacity
Way Too HighNo Clue
Measure for First Time
33%33%
*Source: Average BBS DataProprietary and Confidential
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Framework to Fix Broken Companies
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Framework To Fix
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Quick Gap Identification
Fast Financial Results
Enables Facilitates
Sets Up
Foundation for Growth
CSF/ KPIMeasures
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Quick Gap Identification
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MCP Identified Gap
MRPS
Operations is not involved with any of the sales and marketing efforts
MRPS Significant number of SKUs
MRPSToo many real time schedule updates/changeovers
MRPSSchedule is given at most a day in advance, many times less
MRPS Significant amounts of product in storage
MRPSNo setup before first shift, creating downtime before production
MRPSNo checklists exist, particularly for set up and take down
MRPSNo formal system for addressing the scrap on the floor
MRPSShort runs continually disrupt ongoing operations
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Fast Financial Results: Identification
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Operational Leakage Factor BBS MCP Line Item Lost Cost Estimate 2011-6 Months Analysis 2012
Quality Process Training/Loading
Inventory = less purchases (less money needed for purchases
because get higher yield)Quality Control & Federal
InspectionReturns (?)
Labor Dir Labor/Indirect LaborScrap
$3.5 million - Cookdown
Total: $2.1 Million Available
5% $100K (Very Well)10% $200K (Superb)
$0.4000
HR Rightsizing
Utilization/Training Utilization/Training/Loading
/MRPSMRPS/Loading
Training
Equipment Repairs & Maintenance
Vehicle Repairs & Tires
$2.5 million as a result of 60% productivity
$1.0 million as a result of firing leasing
5 Ghosts immediately @ 24K = $120K
Eliminate 10 temps = $240kDelta on Henry = $30k
Conversion = $600k$1million total available
we'll do $500k
$0.0000
One Additional Earned Hour
Utilization/Training/Loading/MRPS Labor Dir Labor/Indirect Labor
If get an extra hour, make $10.5 million, if get 10% of
that = $1.1 million in revenue
if costs are 30% then $330k $0.8800
Utility Costs Utilization/Training (Maintenance) Heat, light, power, & utilities
currently $1.2 million, plus other utilities,
assume $1.3 million
Assume: $390 is 30% of 1.3 million, we'll get half of that
about $200k$0.3000
Total $7.300
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Fast Financial Results: Action
Finance & Accounting
Operations
Marketing
A/R turnsExpense Outlays
Increase “Velocity of Money”
Identify “Pain Points” and achieve quick impacts
Drive to “Break-Even”
Realize early team wins
Inventory Costs Vendor Pricing
MarginsSales Mix
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Foundation For Growth: Design
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Processes mapped to
activity detail
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Foundation For Growth: Manage
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Baseline diagrams translated into detailed tables
Activity Owner Mins.Salary
(FL)Total Cost
MRPS
Long Term Production Plan ID Material Requirements
Input six week/ future sales projections into Sales Database J. Doe 10 $50.00 $8.33
Calibrate scheduled orders over six weeks J. Doe 90 $50.00 $75.00
Determine under utilization of Machines W. Smith 90 $35.00 $52.50
Access six week/future sales projections CFTeam 45 $250.00 $187.50
Calibrate six weeks sales projections with parts needed CFTeam 45 $250.00 $187.50
Email invite and Matrix to Company Management CFTeam 3 $250.00 $12.50
TOTAL $536.33
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Measurement Of Processes
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Case Studies
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Case Study 1: Electric Motor Company
• Revenue of approximately $80 million• Three plants • 400 employees • Hemorrhaging cash• Loss of market share • Highly leveraged • Severe quality issues • Customer litigation drain
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Case Study 1: Year 1 Results
Key Metrics Before the BBS Key Metrics After the BBS Operations:• Productivity at minus 5%• Massive product inefficiencies
Operations:• Got productivity above 3% (8% improvement)• Increased product efficiency by average of 7%
Finance:• Bloated cost structure• Highly leveraged cost structure• Inefficient supplier network
Finance:• Drove $3 million from cost structure• De-leveraged 100% in eight months • Increased on time deliveries to 92% --
significant increase in “Velocity of Cash”
Marketing:• Abundant useless inventory
Marketing:• Drove inventory down by 64%; increased turns
to 17
Customer Care:• Delivered quality at 27,500 defective parts
per million
Customer Care:• Drove delivered quality to 1,100 defective parts
per million • Received the John S. Smith Champion for
Quality award
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Case Study 2: Power Conditioning Company
• Revenue of approximately $46 million• Two initial plants• 175 employees • Severe quality issues
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Case Study 2: Year 1 Results
Key Metrics Before the BBS Key Metrics After the BBS Operations:• Bloated inventory • Highly burdened overhead costs• “Earned Hours” of four hours per day
Operations:• Reduced inventory by 40%• Eliminated 37% of overhead costs • Increased “Earned Hours” to over Seven Hours per Day
Finance:• 25% Decline in Revenue • Inefficient supplier network – 47%
On-Time deliveries
Finance:• Grew sales 12% from bottom • On-Time deliveries increased to 82%
Marketing:• Loss of position in two vertical
markets
Marketing:• Regained position in both markets and expanded into a
third market
Customer Care:• Suffered from national recall of
installed product base (Approx. $6 million)
Customer Care:• Completed change-outs to their satisfaction in less than
6 months
• Sold to industry competitor
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Case Study 3: Sheet Metal Fabricator
• Revenue decline from $4.8 million to $2.5 million• Single plant with 51 employees• Hemorrhaging cash/severe tax problems• Highly leveraged/unable to purchase raw
materials • Loss of major customer • One large customer accounted for 50% plus of
sales
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Case Study 3: Year 1 Results
Key Metrics Before the BBS Key Metrics After the BBS Operations:• Inefficient production flow • Routinely late deliveries• Low “Inventory Turns” (Approx. 2X)
Operations:• Restructured and drove Lean/Six Sigma through entire
operations• Implemented an integrated CAD/CAM system to
facilitate rapid and more accurate quoting• Drove raw material turns to 22X
Finance:• Highly leveraged cost structure• Negative shareholders net worth
Finance:• De-leveraged 75% in eighteen months • Drove Balance Sheet to a positive book value
Marketing:• Highly concentrated in one customer
Marketing:• Re-negotiated with major customer to higher margin• Identified and secured other high margin accounts in
new verticals
Sales:• $2.5 million upon entry
Sales:• Drove sales to a record $5.8 million • De-concentrated sales base where top 16 companies
accounted for 76% of sales
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Case Study 4: Technology Product Manufacturer
• Revenue just over $2 million/negative net worth• Single plant with 40 employees• Aging products in commodity market• Great industry reputation • Production floor totally constipated • Significant portion of sales through independent
distributor
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Case Study 4: Year 1 Results
Key Metrics Before the BBS Key Metrics After the BBS Operations:• Inefficient operations • Producing at less than 10% plant
capacity
Operations:• Restructured the total plant and maxed internal capacity• Implemented Lean and Six Sigma • Outsourced to strategic vendors
New Product Development:• Existing product line tired and
commoditized
New Product Development:• Took from concept to design and manufacture market-
leading product
Marketing:• No marketing plan • Minimal international presence
Marketing:• Developed and implemented a comprehensive strategic
marketing plan• Drove 30% of sales internationally
Sales:• Just over $2.0 million upon entry
Sales:• Drove sales over 5X the first year • Developed and grew internal sales force
• Sold for significant multiple to strategic acquirer
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Contact Information
Ed Brill, Founder & CEOOPTI & [email protected] (c)
Morgan Baird, PresidentOPTI [email protected] (c)
George Gordon, [email protected] (c)
www.brillworldwide.com
6 Sentry Parkway Building 630, Suite 110A Blue Bell, PA 19422
484-351-8305 - Office
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