Performance Improvement

Overview

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All businesses have opportunities to improve performance. At MorrisAnderson we have the distinct advantage of working with multiple companies each year across a broad spectrum of industries. We provide dedicated short-term project resources to work on a specific problem or group of problems that need fixing.

Using MorrisAnderson offers several clear advantages over trying to do it in-house, and results in a demonstrable ROI (Return on Investment) to a client. The clear advantages are:

• Ability to dedicate a resource who can work full-time attacking a problem (as opposed to multiple people working on it part time)
• Utilization of experienced resources from a firm that has “been there and done that” which dramatically reduces the learning curve and opportunity cost in most situations
• Improved employee buy-in by working hands-on with affected employees
• MorrisAnderson’s overall speed will shorten the time to task completion and in turn, expedite the financial impact

MorrisAnderson has assisted clients with many other Performance Improvement projects including the following list by functional department:

• Financial
• Development of cost accounting data to measure profitability by SKU (stock keeping unit), product line and customer
• Development of a product costing system
• Development of an annual budgeting process
• Development of a proactive accounts receivable collection process
• Development of appropriate spending controls by type of expenditure and management title
• Product line rationalization to eliminate or re-price low margin products
• Pricing study to evaluate price increase opportunities
• Information Technology
• Evaluation of outsourcing the IT function and using cloud-based software
• New software implementation as Project Manager
• Operations
• Scrap reduction
• Warehouse redesign
• Direct Labor Incentive Plans
• Outsourcing production
• Re-sourcing both from/to low labor cost countries
• Fixing broken internal reporting processes
• Sales and Marketing
• Development of E-Commerce platform
• Sales personnel incentive programs
• Human Capital
• Assessing and reorganizing the reporting structures from a personnel perspective
• Assistance in the hiring process of permanent senior management positions

Profit Improvement

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Every company wants to improve profitability, especially companies with low or negative EBITDA. However, Profit Improvement can only occur via Cost Reduction or Sales Growth.

Cost Reduction opportunities exist across many categories, including but not limited to:

• People – staffing levels and pay rates
• Materials – purchasing costs and make vs. buy decisions
• Transportation – Freight in and out
• Facilities – number of facilities, lease rates and facility lay-out
• Utility Costs – gas, electric, water, telecommunications
• Spending Control – amount of discretionary spending
• Marketing – Advertising, trade shows, E-Commerce
• Professional Services – attorneys, accountants, consultants, etc.
• Employee Benefits – health insurance, workers compensation
• Operations Productivity – utilization, scrap, rework, etc.
• Company Acquisition Integration – identification of people, facilities and other costs that can be taken out post-acquisition
• Potential Capital Expenditures and Automation

When assessing where to improve profitability, MorrisAnderson reviews all large and material spending buckets specific for its client and tests that spend against industry benchmarks and common sense to come up with a list of spending categories that can likely be reduced. We then develop and execute on a plan to reduce spending in said categories.

Sales Growth is often more complicated than Cost Reduction. Sales Growth can be affected through two areas:

1. Pricing
2. Volume

MorrisAnderson is aggressive when it comes to pricing. For example, we have found that a great area to change pricing is in the service parts for a manufacturing business. You can almost always raise service part pricing by 10% to 15% immediately and lose little or no volume.

Our next area of attack is typically products and SKUs with negative or low gross margin. This one requires some investigation as to the customers impacted and other strategic factors. In general, over a reasonable time (say 3 to 6 months), all products should be able to meet some minimal gross margin target.

Finally, an evaluation of overall pricing should be done. We start with the largest customers by sales dollar and investigate that customer’s purchasing alternatives, how much pricing pressure has there been in the past, and when the last price increase was. Often you can determine how and when to selectively raise prices through this process.

Sales volume growth is usually a longer-term issue. However, it is worthwhile analyzing opportunities to grow sales thru promotions, discounting, and targeted marketing to specific potential customers. Finally, existing customers are often your best opportunity for sales growth. Simply ask the sales force what additional products and services you can sell to existing customers.

Liquidity Improvement

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When a company has very tight cash flow it must look to generate cash from the working capital portion of its balance sheet. In general, there are four main areas to investigate and potentially attack:

1. Accounts Receivable
2. Inventory
3. Accounts Payable
4. Cash Management

Accounts Receivable (AR) collections is always an area that must carefully be managed. Companies want customers to follow the agreed-upon payment terms, to resolve billing dispute issues in a timely fashion, and to not expose the company to credit risk beyond a company’s comfort level. AR issues typically revolve around slow paying accounts, disputing invoices, and uncollectible amounts.

AR collections is frequently a weak area with our clients. Management teams must realize that a sale is not truly “closed” until it is fully paid for. It is important to have at least one person at the company primarily responsible for AR collections. However, salespeople and senior management must be willing to pick up the phone to call customers to help resolve AR issues. We seek to assist our clients in accelerating the AR Collection cycle.

Inventory can easily grow and become excessive. Companies often convince themselves that old inventory, slow moving inventory, and odd-lot inventory has significant value when in fact it has much less value. Most often, we recommend selling these types of inventories immediately, even at a sizable loss, to generate cash as opposed to holding it for a rainy day.

Accounts Payable (AP) can often be stretched to improve liquidity. However, stretching AP needs to be done gradually and cautiously for two reasons. First, you only want to consider stretching AP if you have a reasonable belief that you will be able to eventually catch up your suppliers to where they were paid before. Second, you want to make sure to avoid creating a backlash with major suppliers by inadvertently alerting a creditor of your cash flow problems such that they tighten credit lines and reduce your liquidity.

Finally, the cash management process itself needs to be reviewed. Sometimes spreading cash over multiple bank accounts reduces liquidity. Furthermore, sometimes the company does not fully understand the dynamics of its Borrowing Base on an asset-based loan and inadvertently impairs its own liquidity.

Facility Consolidations

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It’s obvious that the more leased or owned space a company has, the more costs it incurs in terms of general facility and facility management costs. Facility consolidations are analyzed on a financial cost vs. benefit basis with clear consideration of the associated risks. This somewhat complicated analysis is best done by a MorrisAnderson professional who has consolidated facilities before.

There are numerous risks associated with facility closure involving employees, customers, suppliers, landlords, utilities, taxes, asset relocation, inventory banks, facility maintenance, security, environmental concerns and many more. Specific risks may include loss of customers, loss of key employee skills, losses during the transfer process to a new facility, employee severance, WARN Act implications, facility shutdown costs, equipment relocation risks, and work transfer costs.

To further complicate things, cost reduction savings associated with facility consolidations are often not realized until a year or more after starting the consolidations. It is critical that a senior manager or a MorrisAnderson consultant is the full-time project manager for this critical task. The project manager should have been involved in one or more successful facility consolidations previously.

Workforce Downsizing

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Distressed companies often have too many employees for the size of the business (in terms of sales volume). In this case a Workforce Downsizing or Reduction in Force (RIF) may be appropriate. Terminating employees, especially in large numbers via a RIF is a very difficult task for any management team.

RIFs need to be handled in a tops-down manner where you identify up-front how much payroll cost (including fringe benefits) you want to target to reduce annually. You then work with a small number of senior managers to figure out the specific details of who and how to get to that target.

Several words of advice on the topic of RIFs:

• Give each senior manager a savings target “upfront”
• Get each manager’s list of planned RIFs, discuss specific names, and challenge their choices
• Now is the best time to let go of your poor performers. Resist the urge to use seniority as the primary decision criteria
• Resist the urge to do the same percent RIF across each department. Use the pending RIF to re-allocate resources between departments if appropriate
• Make sure you measure against your current payroll and not against your budget. Unhired employees don’t count as reductions
• Once you develop your RIF list, bring in your Human Resources (HR) department manager to analyze it ensuring you haven’t unintentionally and disproportionately affected a legally protected class
• Have HR and your Counsel advise you on whether the RIF qualifies as a reportable action under either the federal or state (in states that have a specific state law) WARN Acts.

RIFs should be carefully coordinated and planned to occur across the company at one agreed time and date. Messaging is key during this process. Employees need to be contacted on the day of the RIF or the next morning explaining the RIF and giving them comfort and context that the RIF was designed to make the company stronger going forward. However, never make promises of continued and guaranteed employment to anyone.

Excess Asset Sales

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Companies may have excess and idle machinery, equipment, real estate, or other assets. Management sometimes likes to mothball assets for a rainy day. Except for real estate, asset values virtually always decline in value over time and rarely do companies ever put these idle assets back into service.

It costs money to retain these assets in the form of storage space, labor (if they need to be moved), personal property taxes (if applicable) and interest expense (because their cash value could reduce company loan balances).

Simply put, these assets need to be sold unless there is a very clear and legitimate reason to keep them. MorrisAnderson is experienced in this field and frequently assists clients disposing of excess assets, leveraging our connections in liquidation industry as necessary.