Summary
In a textbook example of Rho’s hands-on approach to helping companies improve their performance, the firm recently assisted a packaging machine manufacturer undergoing rapid declines in operational and financial performance. The company had been suffering a massive reduction in Sales compared to previous years. There was a significant cash crunch, resulting in even non-payment of salary thereby facing rising attrition and employee dissatisfaction. The company was also losing market share to competitors.
Rho’s dedicated turnaround and restructuring team partnered with the company to drive transformation through effective leadership under an interim Chief Restructuring Officer. Numerous initiatives and systems were implemented, which enabled the company not only to restore its business but embark on a new and sustained period of growth.
Client Situation
The client had just suffered a decline of 40% in Sales compared to the previous year. Salaries were not paid on time due to a cash crunch. Low morale among a discontent labor force and high attrition rates in the factory contributed to scheduling and operational issues.
Bank borrowings were not supported by adequate stock and debtors. With mounting concerns over operational performance – inventory had surged, past due orders were piling up, cost fluctuations were illogical, and customers were unhappy. Supply of Raw materials was erratic due to nonpayment of dues to creditors.
After-sales service was the biggest casualty with customers moving legally against the client due to unacceptable service levels and unresponsive customer care.
Logistics was a gray area with little to no clarity on what bucket costs were allocated. There were many irregularities such as duplicate trips, wrong destinations, and unneeded surcharges found in the billing process. It was also noted that many trucks were sent with unused capacity and in an unscheduled manner. This led to wasteful logistics cost and extra storage space requirement to store the products.
Efforts to reverse the situation after installing new leaders, including external experts in manufacturing, did not yield the desired results.
Rho’s Approach
Drawing on years of providing interim leadership solutions to companies, Rho worked hand in hand with the client and implemented numerous initiatives to address the issues at their roots.
Rho provided the immediate on-the-ground leadership gravitas that the company required, driving effective dialogues to gain trust with key stakeholders, primarily unhappy employees and suppliers by communicating the revival plan and making them feel as part of the journey while quickly taking control of the situation to restore effective daily management.
We worked with the client to define operational metrics, a measurement and data plan, and reporting processes that provided new visibility into cost-saving opportunities that could be implemented to improve enterprise performance.
Rho helped the management with supplier relationship management recommendations for raw material sourcing which helped create a win-win situation for both parties. Long-term contracts were made with main suppliers that helped reliable and cost-effective supply of raw materials.
The sales and after-sales team was completely revamped. Headcount rationalization was carried out in loss-making overseas destinations. Sales teams’ remuneration was revised with a Fixed + Variable Model. SOPs were set for the After sales team on customer interaction and service and training were organized to help them deal with customers in an empathetic manner. A plan was charted out to clear out all pending after-sales requests. A rewards and recognition program was initiated to keep the motivation high.
To bring down the logistics cost, quotations from multiple logistics providers were evaluated and the best rates for each route were identified based on Turnaround time, safety, and cost-effectiveness. Reorder time was computed and adhered to, to ensure products were not sent unnecessarily. The operations team was also instructed to track truck capacity utilization as an important data point to ensure resources are not wasted.
Once all the issues that required urgent attention were set in place, Rho’s costing team was assigned to analyze how costs were distributed across products. We collaborated with the management to set the standard costs of products and computed the actual costs and variance.
Material cost was found to be above acceptable standards. Efforts were made to reduce material cost by a) Evaluating multiple supplier options b) Long term contracts c) Stringent Quality checks to curb poor quality d) Safe and accessible storage of material
To compute labor costs, a time and motion study was conducted and the outcome revealed that a lot of unproductive labor force was found leading to underutilization. We established a performance-driven compensation structure that highlighted a pay-by-performance mentality and not pay by overtime.
Utilities such as electricity and fuel were rationalized. Quality Control which was a sequential activity was converted to a parallel activity which removed idle man hours and reduced lead time.
The Human Resources department was barely functional and our HR team brought in the required systems and also paid attention to employees’ grievances and brought in ways to make the employees feel engaged. A Scheduled training program covering all departments was implemented which helped us to get exact feedback in various areas from the employees through the trainers. This is turn was passed on to the HR department and management for appropriate steps.
Results
Under the management of Rho’s interim leadership team and the execution of the new transformation strategies, the company’s operational performance improved very rapidly.
The material cost which contributed to 70-80% of the total cost of the product was brought down to 65 – 70% on different products.
Three overseas locations that were cumulatively bleeding loss of 10 lakhs per month prior to intervention achieved breakeven and are poised to be profitable in the coming quarters. Also implemented proper control and measures for operations.
10% of the products from the clients’ portfolio were being sold at a loss, Price increase was undertaken to make them profitable. Through a focus on material and labor cost control, Gross profit shot up from 20% to 30%. Logistics cost was reduced to 2% from 3% with a further scope of reduction. Truck capacity utilization increased from 75% to 89%. Streamlining Quality Control along with the production process reduced lead time by 4%.
