Improved financial board reporting for manufacturing company

Case StudyBackground

Having been highly successful both technically and financially for many years, this prestige manufacturer had received investment for a larger facility from their parent company. This investment had, as expected, enabled the business to deliver significant top line growth.

Unfortunately, this uplift was not being reflected in increased margins and profitability. The Group board were not seeing the expected return on investment.

Challenges

I was asked, whilst conducting a full financial appraisal and resolving some outstanding audit and HMRC matters, to find an explanation for this anomaly.

Initial indications were that each functional manager was working hard to deliver their individual KPIs – driving sales, sourcing components, shipping product. Somehow the overall position was not as positive as expected and this was causing conflict.

Each area understood their own functionality of the system but there was no understanding of the end to end transaction stream.

The business supported a huge number of individual products and offered additional product customisation. This wide product range was delivered to a full span of customers from huge multi-nationals to individual bespoke rebuilders.

Solutions

Experience shows that within a complex environment, problems are rarely solved by finding one “silver bullet”.  Improvements are generated by identifying several complimentary smaller “wins”. Solving this problem would require collaboration across the business, coordinated by the finance team providing clear and relevant analysis.

  • I set up a cross functional improvement team
  • I coached the finance team to prepare better analysis of product costs
  • Systems training and support was sourced. This was targeted at improving the understanding of the integrated functionality of the in-house ERP system. Team members learnt that poor inputs into the system which seemed insignificant to them generated larger issues down stream
  • Commercial and pricing arrangements were reviewed
  • Metrics and an action plan were devised, and progress tracked

Over a period of a couple of months it came to light that in all areas, measures taken to improve throughput combined with the stresses on the various teams of meeting those ramped up volumes were generating problems in other departments and driving additional cost.

  • The sales team were offering discounts for higher volumes, although individual product costs were not necessarily volume sensitive
  • Supply chain staff were paying premiums for fast supplier deliveries, and didn’t have time to chase compensation for poor quality components received
  • The link between “real” product costs and customer end price was broken
  • Material bookings were being missed and components lost which in addition to having cost implications was compounding pressure on manufacturing by interrupting production flows
  • Dispatch paperwork generated in haste was sometimes incorrect and agreed delivery schedules were being missed resulting in customer charge backs and delayed payments

I implemented a new suite of weekly exception based financial and margin reports which were compiled and shared with the operations team. This allowed practical solutions to be found. Additional administrative resource and targeted increases in component stock holdings reduced booking errors and pressure in the system. The exception-based margin reports allowed commercial colleagues to reconsider pricing and discount structures for existing customers. This improved their understanding of the profitability of product ranges and customer contracts.

Where previously the drop in margin had been a cause for conflict and finger pointing in management meetings, discussions were now fact and solutions based. There was a sense of shared achievement as performance began to improve.

Benefits

Having completed the other elements of my assignment and ready to move on, I was able to leave an empowered and well-respected finance team to continue the margin improvement drive.

There was a greater understanding of product costs and lead times across the business. This fed into the pricing and quotation models, allowing the sales team to offer achievable and profitable packages to customers.

The supply chain team were able to use the exception reporting to focus on driving relevant and desirable improvements in service from the suppliers.

For all areas of the business this improved transparency of operation, enabled confident forecasting and budgeting with a clear understanding of the likely outcomes of different scenarios for manning, materials and cashflows.

The group board were pleased with the achievements of local management in improving profitability and delivering against project timings.

EFM Expert: Linda Harvey