Hot Spots Of A Turnaround
Dec 01, 2010
Whenever I come across a company that is a struggling turnaround candidate, I normally look at the following areas for root causes: Marketing Strategy, Pricing Strategy, Labor, Spending, and Working Capital. The first two items delve into the most commonly found top line issues, the second two items address most commonly found cost issues, and the fifth item identifies the most common non-P&L cash flow issues.
Marketing Strategy – does the firm have a marketing plan? If so, what’s the strategy? Are they presenting themselves as the low cost producer? Are they the premium-priced, high quality producer? Are they in an identified niche? Are they in the right market segments? How have they set up their sales organization in order to cover their identified markets? Are there any gaps in sales coverage? What’s their sales approach (selling on price alone or value-added consultative selling)?
Pricing Strategy – does the market establish the price (commodity pricing) or does the firm establish price based on cost plus desired margin? The pricing strategy goes hand-in-hand with the marketing strategy. They must be consistent. In addition, does the pricing strategy reflect, or cover, cost increases (or decreases) in major materials or freight costs? It’s one thing to let the market establish the price but it is another thing to let the market ignore price increases to materials and other major inputs like steel, paper, oil, etc.
Labor – what’s going on with the company’s labor costs? What are the trends in their labor metrics like labor cost per unit, labor cost per hour, labor cost per job or project? What about labor efficiencies like labor hours per unit, per job, or per project? What are sales per hours worked or production per hours worked? What is the firm’s labor mix? With the recent downturn in sales, has the firm downsized indirect and administrative labor along with reductions of direct labor? What are the direct versus indirect labor costs, hours, and headcount? Is the firm managing all labor costs to volumes or just the direct labor?
Spending – what are the firm’s overhead costs compared to budget? Compared to standard costs? Are volumes down but engineering is spending like drunken sailors? Are overhead costs being managed to volume (cost per unit produced, overhead cost as a % of sales)? Are SG&A (selling, general and administrative) costs managed to volume levels like a % of sales? Are spending controls tightened (lower dollar limits on manager or executive sign off, all purchases require a signed purchase order, no verbal approvals)? Does the company have in place a formal cost reduction program? Does the firm understand its variable and fixed costs? Do they know what their break-even point is? Do they understand the impact of spending on their break-even point?
Working Capital – I’ve got three words for working capital: days, days and days. What are the company’s accounts receivable DSO (days sales outstanding)? Are they increasing or decreasing? What is the value in cash flow for every day of DSO? What are the company’s days on hand (DOH) of inventory? What is the breakdown of the inventory days by stage (raw material, work in process, finished goods)? What are the trends of each stage? Why is it trending the way it is (for example an increase in WIP days may indicate a throughput issue in manufacturing)? What are the firm’s days outstanding in accounts payable? Is the firm managing vendor payments to positively affect cash flow? Are trends in A/P days in alignment with trends in DSO and Inventory DOH? How much cash is tied up on the balance sheet because of negative trends in working capital?
Much of the above discussion has been focused on manufacturing concepts and examples. However, the principles can easily be applied to non-manufacturing environments as well. Turnarounds are never easy. There are no quick fixes. However, if you hone in on these five HOT SPOTS, you may get to root causes quicker. The sooner you get to root cause, the sooner you get to improvements and ultimately, recovery.