This is a real situation but to protect the company, the name of the company won’t be revealed and some of the financial details have been adjusted.
This case study is designed to help the reader understand the process of a distressed company turnaround & can be applied to any industry or company size.
SOME BACKGROUND
25 year old Steel Manufacturing Company with $100M annual revenue & 300 employees operating all over the US
Company buys raw steel coils, had them painted & stamped into various shapes for installation in roofing and siding construction projects, both commercially and residentially
SOURCE OF DISTRESS
Very profitable until 2016 when company embarked on a national expansion strategy (all locations had been in a tight regional area)
Company added too much overhead during expansion strategy by making each location it’s own “mini mill” instead of having a tesla- like gigafactory structure. This also put strain on ERP system + length of supply chain.
They grew into low margin channels while making supply chain routes too long
Company went from ~$5M profit to ~$5M loss in period of just 2 years
Cash reserves dried up, AP went unpaid & steel suppliers started cutting off company inventory credit lines creating idled manufacturing plant, thus not producing any margin
Downwards spiral created cash flow crunch & caused Bank of America to send the loans to special assets for review
COO was unqualified to handle a much bigger, multi-network business
BANK’S REACTION TO DISTRESS
Loans, both term & working capital, got moved from commercial banking to special assets, who are able to make the decision to either 1) force a refinancing with higher coupon note 2) liquidation (whole or partial) 3) put loan under a forbearance agreement, giving company time to get the bank ratios back into compliance
Our firm, Newpoint Advisors, were engaged to help the bank decide which of the 3 above scenarios to proceed with —> #3 was chosen, the bank would issue a forbearance & give the company time to right the ship
We had 100 days (standard length of a forbearance) to convince the bank that we can make enough progress to get back to profitability
WHAT WE DID OVER THE NEXT 100 DAYS
We were engaged as Chief Restructuring Officer & reassured the greater staff that we were there to help and to expect us to be present at many meetings. (We always look for staff buy in so everyone is on the same page & internal gossip is at a minimum)
Established a very rigid meeting schedule with key performance indicators (KPI’s) in order to measure progress —> KPI’s included
OPERATIONS —> Production Downtime/ Order Fulfillment Turnaround
FINANCIAL —> Sales per Channel, Inventory Turnover, Current Ratio, Revenue per Employee
MARKETING —> Organic Website Traffic, Lead Conversion Rate, Customer Acquisition Cost
SUPPLY CHAIN —> Back Order Rates, Total Idle Hours, Log Violations
SALES —> # of Touch Points, # of Quotes, Open/Close Ratio
Build out 13 Week Cash Flow model (key communication tool for the bank) + 3 year budget. We went out that far just in case the bank wouldn’t extend the forbearance agreement & we needed new working capital lines from a “b lender”.
Moved from “mini mill” to “hub & spoke” manufacturing system. We consolidated all the equipment from 6 mills into 2 super centers. To ensure all the equipment fit & process flow was optimized, we did schematic designs of what the new placement would be & had the staff do a mock test on a Saturday to ensure it worked as planned.
Setup an employee accountability program to give staff, from all departments, metrics to measure their performance. This is often an issue from SMBs’ —> no well defined metrics of what success looks like for each role.
Refocus sales & online lead generation efforts back to the high margin residential market, where GM was 15-20% higher. All facebook & digital ads were quickly changed with bonus restructures realigned to have sales staff get more excited about selling smaller but higher margin tickets.
Assess the tech skills of the COO, who never properly established an ERP system to handle cross state inventory lines. It was determined he was unable to ever bridge the gap and was laid off.
Complete a pricing review to assess if the company was properly pricing for… a) strong brand name b) unique designs/ color c) best in class installation process. Their cost+ pricing strategy left a lot of money on the table and didn’t properly factor in all the intangibles of the business.
WHAT WERE THE RESULTS
Combination of manufacturing supercenters + pricing + residential channel focus added 25% gross margin to the middle of the P&L
A refocus of staff to higher margin items with KPI’s and more tech savvy operational leadership reduced the order turnaround time from 6 weeks to 2 weeks, allowing the company to improve it’s cash conversion cycle
The bank did extend the forbearance another 100 days to give these changes another more time to take root
After this process, the company is projected to make a profit in 2020 and can refocus from a turnaround situation back to expansion mode.
Hopefully you enjoyed this quick look at what it takes to turnaround a distressed company. If you have any questions, please don’t hesitate to reach out to me at myarmo@newpointadvisors.us.
Hey Michael, in Step 5 what were the KPIs you used to measure employee accountability?