Crisis Drives an Automotive Supplier Down a Bumpy Road
Through the years, KGI has developed particular expertise based on the economic cycles and how shocks ripple through the system.
Our familiarity with the Automotive Business over the last several decades has come to light recently as this industry has felt those shocks. Members of our team have served as CEO's, executives and consultants within the industry. We've been in the trenches for daily operations, and we’ve developed strategic financial plans to restructure debt and equity relationships.
It is this kind of hands-on experience that enables our team to understand the business' details. From conceptual design to delivery, we know this industry and its suppliers and would like to share how we identified the following opportunities at a client recently:
We welcome your call if you are interested in learning more about this experience, or any of the other services we provide at KGI
Our client had reached a peak of $170MM in sales, but was currently struggling at $100MM and faced declining prospects. Our consulting team engaged the company at multiple levels and reviewed the company's capital structure, marketing plan, sales plan, cash flow projections, production schedule, engineering change list, production methods, inventory policies, purchasing relationships, assembly process, dealer network, service support department, and customer feedback.
The client's target market is closely aligned with consumer confidence, the housing market, and available credit. The prognosis for near-term improvement was not good with consumer confidence at historic lows, housing off by over 25%, and consumer credit constraints. It was a time to restructure, cut costs, realign, and survive in preparation for the eventual market rebound.
More specific to our client, a wide variety of departmental decisions were leading to high internal costs offsetting the company's strong sales efforts.
Streamlined the Product Offering. The company offered 16 different product variations that required unique production and inventory commitments. Analysis of the product line revealed that 80% of the sales were achieved by 7 product varieties, and consumer surveys indicated that simplification of the product line would have no impact on sales: the aggregate total sales would remain the same with fewer varieties. Acting upon this discovery the company was able to restructure production parts inventory to reduce working capital requirements from $27MM to $7.6MM.
Improved Quality and Rightsizing. The engineering of the product was not precise in the same manner that an automobile is precise. A production culture based upon pride in craftsmanship created a situation in which each unit was uniquely constructed. This contributed to an increase in the number of employees that would be nominally required if everything fit due to design precision rather than custom fitting within each unit. By following KGI's guidance, the engineering department redesigned the product connections so that the process was repeatable and precise. With this methodology, the production department identified 85 positions in assembly and 25 in quality that could be eliminated -- a savings of $3.8MM. In addition, the assembly time for units dropped by 25%.
De-Integrated the Supply Chain. The company attempted to reduce total cost by maintaining a vertically integrated manufacturing platform manufacturing many of its own parts. The concept was good, but only applied if the company was able to keep each of the departments under a full production load. The staffing for the various departments needed to be at or above a minimum level for the department to run at all. The result was that the vertical support departments tended to overproduce subassemblies and did not produce the "per part" savings that their design anticipated. By eliminating these departments and purchasing the parts or services from the outside would yield net savings of $2.4MM ($3.1MM in salaries and overhead less $0.7MM in increased component costs) plus an additional reduction of $0.8MM in inventory.
In all, the analysis identified $6.2MM in operating expenses and $8.4MM in inventory reductions that were available with some fairly simple changes. None of these changes negatively impacted the company’s ability to work within its chosen market segment.
Whether a Company is struggling financially or on the cusp of breakthrough growth, KGI can help. Our seasoned experts work alongside management to solve complex cash flow issues, operational challenges and other business crises. If liquidity or sale is needed, KGI provides a powerful combination of services and expertise to achieve outcomes that cannot be duplicated by other standalone consulting firms.