Mackinac Partners

News & Insights

Insights: Improving Supply Chain Performance to Help Drive a Turnaround

August 1, 2017

Improving Supply Chain Performance to Help Drive a Turnaround

By Kevin P. Bruce, Senior Managing Director, Mackinac Partners

“The best supply chain leaders are great change agents. They are forced to play in everyone else’s traditional ‘sand boxes’ and stir things up.” 
– Richard H. Thompson, Senior Vice President, Schreiber Foods, Inc

Operational performance efficiency can often be a critical factor in determining the success of a company’s turnaround and restructuring plans. Often overlooked until much too late in a turnaround scenario is a company’s supply chain performance. Performing a “pulse check” upfront – a very focused, open, and honest review of a company’s supply chain partners, overall performance, and customer service metrics (KPIs) can pay big dividends by re-engaging skilled resources (both internal and external), extending the turnaround timeline while reducing costs which can help underperforming companies to head off or defer a much more difficult restructuring downstream.

Many underperforming companies facing capital structure woes, excessive leverage and cash flow issues also have an underperforming supply chain. Invariably these companies experience accompanying customer service challenges at exactly the moment when they can least afford them. These negative outcomes can result in increased operating costs, loss of revenue and impacts on customer service which produces a drag on EBITDA. Outside of the traditional costs drivers such as energy/fuel, freight and labor, some of the less obvious cost “killers” in an under-performing supply chain include:

  • Increased inventory costs resulting from inventory buildup – the dreaded “just-in-case” inventory
  • Increased freight costs from premium shipping – customer service recovery costs
  • Lost productivity resulting from manually intensive processes, multiple product handlings and insufficient technology/automation
  • Critical revenue decline driven by product shortages, order cancellations, increased “good guy” discounting, and returned goods/reverse logistics costs
  • Supply/partner impacts from business uncertainty, lack of mutual performance validation and tracking.

Conversely, there is a common theme among successful companies with enviable growth records who remain driven to perform at even higher levels. These companies, among other competencies, are very good at leveraging supply chain visibility, and actionable KPIs powerfully combined with a bias towards speed of action. They routinely demonstrate strong performance across key deliverables, including:

  • Inbound perfect orders – the percentage of orders received complete and on-time from suppliers
  • Outbound perfect orders – the percentage of orders delivered to customers complete, on-time, and invoiced properly
  • On-time, on budget self-manufactured make/buy components (if applicable)
  • Consistent reduction in total landed costs – the change in cost-per-unit shipped and delivered as measured YOY by either SKU group or a “market basket” of the top volume or critical items
  • Low out-of-stock frequency – measured as a percentage of out-of-stock inventory compared to average on-hand inventory change versus prior year. This metric uses both dollar change and critical SKUs to ensure high sensitivity to any changes.

Harnessing supply chain efficiencies in a turnaround may seem to be a complex demand on critical resources at a time when generating cash flow and increasing sales while reducing debt, fixed costs and SG&A/overhead costs are the top priorities. However, as evidenced by PolyOne Corp’s 2008-10 turnaround, when the company moved from the brink of declaring bankruptcy to generating $218 million of free cash flow in 2009 and reducing its net debt by $223 million – the converse can be true. The company’s turnaround was largely fueled by improvements to its supply chain operations.

(Source: “Improving supply chain management drives a turnaround in tumultuous times” – By Thomas J. Kedrowski)

 

Supply Chain Awareness:

As Richard H. Thompson, Senior Vice President, Schreiber Foods noted in Communicating the Value of Supply Chain Management to Your CEO (CSCMP), “The issue is not that CXOs don’t understand the importance of supply chain. The issue is whether they recognize all of what is involved in the supply chain and how to go about effecting it.”  (Emphasis added)

The chart below highlights the progression of supply chain awareness. Distressed companies tend to cluster around Stage 1 (Inactive) or Stage 2 (Reactive). Even well-run companies can struggle to move significantly past Stage 3 (Proactive), and achieve metrics-based process efficiency. Companies approaching Stage 5 (Synchronous Innovation) develop world-class supply chain and logistics systems and integrate fully with supply partners and customers, moving toward synchronous demand and supply control while driving product/service innovation based on actual customer usage and forward demand requirements. In essence these companies leverage their supply chain as a core and distinct competitive advantage in overall business performance.

Source: CSCMP Communicating the Value of Supply Chain Management to Your CEO

 

Understanding supply chain awareness and developing a comprehensive plan to achieving greater efficiency as part of a turnaround may seem counterintuitive when contrasted to the speed required in a restructuring or turnaround scenario. However it is often a key and necessary component. The challenge, as noted, is that other pressing matters may crowd out the need to quickly begin addressing the supply chain and to treat it as an additional conduit to free up much-needed capital and improve liquidity in a distressed situation. In other words, if you don’t know that your supply chain is a source of cash, then the fix will not be implemented and cash is wasted. This is where critical expertise and decisive action will make a positive and impactful difference.

During a recent Mackinac Partners restructuring engagement, a long tenured mid-sized manufacturing client was facing leverage and liquidity issues, lower rates of production and output, necessitating a bankruptcy filing and a plan of reorganization. The company’s supply chain performance had begun to decline as a result, impacting operations, sales, and export shipment schedules. Mackinac Partners, who were engaged as CRO and financial advisors, were asked to broaden their role to help address the company’s procurement and supply chain operations, and unlock additional performance and cash flow opportunities as part of the restructuring and turnaround business plan.

Through a focused set of streamlining steps, the team was able to reduce gross inventory investment by over $12M (about a 20% reduction) in less than 150 days, providing a significant source of cash (less inventory investment and more sales), and extending the recovery “runway” and DIP (Debtor-in-Possession) financing for the company. In conjunction with other efforts, this runway extension allowed the company to complete a plan of reorganization which was confirmed by the court, enabling the company to emerge from bankruptcy protection.

The difficulties of managing a company through a bankruptcy without interrupting its supply chain while attempting to further optimize efficiency and performance cannot be overstated. In this engagement, the effort required negotiating 250+ individual Trade Agreements with critical vendors while concurrently increasing the supply base with newly approved second-source suppliers. These efforts drove down unit buy-prices and increased availability of critical parts to fulfill customer contracts, meet export shipping schedules and allow for more robust make/buy manufacturing decisions.

So it is essential for a distressed company, especially those not in Chapter 11 but still underperforming, to place considerable focus on its supply chain partners and customer satisfaction metrics. A loss of confidence from supply chain partners leads to tighter payment terms, including the dreaded cash-in-advance mandate, loss of “first-in-line” prioritization for scarce goods, commodity cost escalation, and significant leadership time required to manage these competing challenges successfully.

The demand side of the supply chain is also of critical importance. This is the customer facing side of supply chain management. For this recent client the first steps (once past the triage stage) were to more fully understand which products would be required by which customers, and where and when they would be needed. As a result of this clearer understanding the company was able to better deploy scarce resources to satisfy customers requirements more quickly thereby improving the order-to-cash cycle. In this case the company improved its overall cash flow several millions of dollars by reducing inventory investment, speeding up larger cash collections and reducing certain bonding cash requirements.

During this particular restructuring, several key actions were deployed to extend the turnaround runway and to produce a much stronger financial foundation from which to launch this company once the plan of reorganization was confirmed:

  1. Triage (Going Concern): Since the company was in a liquidity crisis, the slide from participatory consensus building to directive decision making happened quickly and was necessary. Rapid and ongoing assessments of cash position (liquidity), borrowing availability (limited), and cash flow projections, including any required interest, fees, and principle payments were performed. This foundational work was the essential bedrock information that allowed for proper prioritization to take place, queueing up cash uses in a very specific order: 1) payroll 2) lease payments 3) vendor payments and then 4) bank fees (allows for debtor-in-possession financing or DIP). Without these bare essentials the “going concern” status was at risk. These tasks were performed up to and then following the Chapter 11 filing date in order to optimize cash availability.
  2. Vendor Management: Due to the likelihood of a Chapter 11 proceeding being initiated, significant care had to be exercised in pre-filing communication with vendors.  Immediately after a case is filed, there is often a torrent of frantic and, in many cases, emotional phone calls that ensue. A “war room” was established to handle this, and every Tier One, Two and Three vendor was called and spoken with (usually multiple times) before the end of the first week. Written communications were also sent out electronically upon filing, followed by hardcopy communications regarding forthcoming supplier partner processes and procedures during the bankruptcy period.
  3. Product Allocation: Certain contractual and export shipping requirements had to be balanced against cash flow needs. Damages for non-compliance with contractual requirement also played a role in both decisions and actions.
  4. Manufacturing Productivity & Quality Assurance: Quality and extraordinary engineering have always been a hallmark of this company’s products, a strategy that overrides being a lower cost/lower quality producer. However, one key deliverable that was accomplished which helped drive down costs and minimize product quality variations was to update and ensure that the most recent and approved drawings were used for all base models and their many variants. In times of distress, it is critical to stay carefully focused on delivering high quality output and to fight against the tendency to default to using shortcuts. Quality actually extends the limited resources by reducing product re-work, reverse logistics costs and costly customer dissatisfaction.
  5. Backlog Cleanup: Allocating scarce parts against the most profitable products in backlog while balancing against contract compliance for certain very sensitive export shipments was a major accomplishment that helped minimize non-compliance costs. This allocation process also allowed for a quicker positive impact to cash flow from certain other customer channels.
  6. Shipment Staging and Backlog: The company’s order backlog had grown to well over 16 months (on a dollar basis) across many product lines. The urgency to clear this backlog, satisfy customers, and produce cash was extreme. Careful review and prioritization of the backlog and renewed focus on production, critical parts availability and shipment staging drove significant improvement in the backlog status.

 

As a result of the focus on opportunities across the company’s supply chain and operations, in addition to traditional capital restructuring, cost control and revenue levers –  the team was able to provide additional runway leading up to and then past the filing.  A much stronger platform was created with more stability and growth potential for the company in their eventual emergence from Chapter 11. As was noted by the CEO, “Not only was the Mackinac team instrumental in guiding (us) through a complex Chapter 11 restructuring, they also led initiatives leading to substantial improvements in our day-to-day operations, including supply chain and manufacturing.”

A products-based company’s need to create additional runway leading up to and then following a Chapter 11 filing in order to properly prepare for the impacts to their supply chain partners and operations is absolutely critical and cannot be overstated. In Figure 1 below, the characteristics of a distressed company cluster around Supply Disruption Pressures #1 (Supplier/Carrier capacity did not meet demand) and #2 (Raw Materials costs and impacts).

If a bankruptcy proceeding is in play, then Disruption Pressure #1 moves closer to 100% on Day One of the filing unless careful planning precedes the filing and a trained “war room” team is engaged fully with each and every supplier/vendor that day, throughout the first week, and then ongoing – with careful follow-up and monitoring. The war room needs to be staffed accordingly with the appropriate trained skilled people, processes, and technology necessary to keep the “Critical Vendor” community as fully informed as possible while managing an uninterrupted flow of goods both inbound and outbound.

Source: Aberdeen Group, May 2012

 

Distressed Situations: Assessing how your supply chain operations can affect a turnaround

In distressed situations, it is important that company leaders understand the importance that their supply chain operations truly have in their overall turnaround success. Below are some key questions to ask in assessing the readiness to achieve the level of performance needed in special situation/distressed scenarios:

  • How can short-term logistics and supply chain initiatives unlock revenue and cash flow?
  • How do we keep our customers engaged and comfortable with our fulfillment and customer service capabilities?
  • Do teammates across functional areas understand the value and interrelatedness of logistics and cash flow?
  • Does the executive team and other key stakeholders understand how supply chain and logistics impact the P&L statements, cash flow projections, balance sheet, and revenue?
  • What role can logistics teams play in promoting coordinated strategies, forecasts, and game plans?
    • Do logistics managers understand the goals of the other parts of the organization?
    • In what ways can the company reduce sub-optimization throughout the company’s supply chain?
  • What are the company’s key metrics for logistics and supply chain? Are they institutionalized?
    • Are these metrics aligned with the overall turnaround strategy and plan?
    • How can logistics KPIs be restated to clearly explain performance to C-level executives, board members, and other stakeholders?
  • How well do current logistics KPIs reflect the impact they have on the organization in terms of:
    • Financial results, especially cash flow projections?
    • Service levels (on-time delivery, perfect order, etc.) and customer satisfaction?

Keeping this interrelatedness of core supply chain operations efficiency to overall business performance in focus is imperative, particularly in distressed scenarios. A representative quote from Jim Womack’s E-Letter: Mura, Muri, Muda? illustrates this concept and rationale:

 In most companies, we still see the mura (misalignment) of trying to ‘make the numbers’ at the end of reporting periods. This causes sales to write too many orders toward the end of the period and production managers to go too fast in trying to fill them, leaving undone the routine tasks necessary to sustain long-term performance. This wave of orders – causing equipment and employees to work too hard as the finish line approaches – creates the ‘overburden’ of muri (overburden). This in turn leads to downtime, mistakes, and backflows – the muda (waste) of waiting, correction, and conveyance. The inevitable result is that misaligned operations (mura) creates overburden (muri) that undercuts previous efforts to eliminate waste (muda).” (Emphasis original; parentheticals added)

It is clear that two companies can sell similar products and employ similar technologies in their go-to-market capabilities yet differ greatly in their overall business performance. The reasons why often reside in their respective cultures, leadership, business processes and human capital (talent/skills/innovation). While not uniquely so in the case of supply chain operations, it is still people who manage, monitor and improve supply chains, and who provide the customer and supply partner facing service experiences. Again it is people who push innovation and process excellence.

Successful companies excel in their use of human capital, processes and technology, innovatively orchestrating them to meet market needs and new opportunities. Turnaround or distressed business scenarios can be complex and intense but often times provide a unique urgent “burning platform” opportunity for companies to re-commit themselves to embracing these core values that focus upon people, process innovation and technology in order to create a foundation for future success.

 

_________________________________

About The Author:

Kevin P. Bruce is a Senior Managing Director at Mackinac Partners with extensive experience in restructuring and growth generation across consumer products, restaurant/food services, franchise, manufacturing and supply chain-based companies and operations. Kevin has served as a senior executive for a number of top companies including Dunkin’ Donuts NDCP, Strategic Equipment and Supply Corporation, United Site Services, LSG Lufthansa/Sky Chefs, Pulte Corporation and PepsiCo Food Systems Worldwide. He has been responsible for over forty M&A transactions (buy and sell), as well as numerous P&L performance improvement initiatives, financial and organizational restructurings, and supply chain and market optimization projects.

Kevin P. Bruce
Senior Managing Director
Mackinac Partners
200 Crescent Court, Suite 240
Dallas, TX 75201
O: (214) 754-9919
M: (214) 668-3081
E: kbruce@mackinacpartners.com

Edited by Stephen L. Weissenborn, Mackinac Partners

 

About Mackinac Partners:

Mackinac Partners is a prominent restructuring, turnaround management and financial advisory firm with offices in Boston, Dallas, Chicago, Michigan and LA. Mackinac Partners has significant experience in successfully completing complex turnarounds and restructurings, as well as helping clients to address and resolve financial and operational crises and pursue new growth opportunities. Mackinac Partners helps clients improve capital structures and financial performance, overcome liquidity challenges, improve operations, support litigation and investigations, improve profitability and brand performance, and achieve new growth and increased stakeholder value through an array of strategic and financial advisory services that include:

  • Turnaround Management & Financial Restructuring
  • CRO and Interim Management
  • Strategic, Operational and M&A Services
  • Business Intelligence, Corporate Security and Cyber Security

For additional information, please visit us at www.mackinacpartners.com. Or if you have a specific situation or inquiry you would like to discuss, please contact us at (248) 258-6900 or email us at: http://www.mackinacpartners.com/contact/.

This article is the property of Mackinac Partners LLC, and neither it nor its contents may be copied, used or distributed to any third party without the prior written consent of Mackinac Partners.  The opinions expressed are those of the author(s) and do not necessarily reflect the views of Mackinac Partners LLC, its affiliates, clients or other professionals.