driving profitability through process proprietary and confidential ™ &© sustainability...

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.


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.


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.


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

Proprietary and ConfidentialExclusive Property of Brill Worldwide, Inc., “BWWI”.

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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


• Eliminate inefficiencies• Compress cycle time

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Measurement Of Processes


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


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: 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


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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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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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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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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driving profitability through process proprietary and confidential ™ &© sustainability...

Documents

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true sustainability

opti slide

loans slide

measure repeat slide

confidential sustainability

sustainability framework

sustainability definition