Environmental sector company changes from loss making to profitable efficient business

By admin
In April 1, 2014
2516 Views

The challenge

Well known in its sector, the company is a manufacturer of moulded street furniture, waste recycling and agricultural products, as well as subcontract work for a variety of industries. The business had a turnover of circa $15m and employed 103 people. It operates in a variety of sectors selling to large retailers, distributors and local government.

The business had lost its way and was fixated on getting overhead recovery in the factory. The major problems in the business were:

  • The trade moulding business was 26% of sales but generated the lowest margins. The customers were demanding in terms of design, technical and manufacturing resource
  • A design department that had not produced any new products in the past year, it was continually doing unpaid design work for trade moulding customers
  • Failure to pass on rising resin prices
  • A badly performing sales force
  • A lack of understanding of where margins and costs were generated
  • Poor customer service and OTIF (On Time in Full) of 60%
  • High stock levels and high working capital
  • High overheads
  • Inefficient manufacturing and high levels of scrap
  • An annual hours program was introduced in the factory as we had a seasonal load
  • The leased warehouse was vacated following a ‘make to order’ strategy saving $168k in lease costs
  • The design resource was focused solely on our proprietary Street Furniture range
  • The situation with the poor performing sales team was addressed and two left
  • Full review of margins was carried out
  • Agricultural products had very high distribution costs (16%) so the pricing structure was changed to ex works
  • Consignment stock was negotiated from our major resin supplier
  • A marketing department was created and later a new website with the ability to buy on line
  • A new sales incentive scheme was introduced

Solution

The principal strategy was to focus efforts on the high-margin Street Furniture range, (a range where the intellectual property was owned) and to cease the low-margin trade moulding work. Also planned was to cease manufacture of wheelie bins, which had become a very low-margin commodity product. These changes involved downsizing the business in terms of sales by $2.7m (19%), removing $1.4m of overheads (22%),
increasing prices of all trade moulding products and implementing price increases of 7.5% in the Street Furniture range to restore margins.

Implementation

A new budget was developed. Overheads were cut back, redundancies made and price increases passed on to customers so that we could start the new year in a better position. This involved reducing indirects from 42 to 24 and directs from 58 to 43.

The following actions were also taken:

Achievements

There has been a fundamental change in the business. As planned, the low margin trade moulding businesses has dramatically reduced over the past two years, which hides the growth in the more profitable Street Furniture. The development of a host of new products has given rise to a 47% increase in sales of these products compared to the same period last year. Considerable cash has been released by stock reduction and better working capital control.

The business went from a loss of $179k to a profit of $1.5m during the last three years.