Consulting Chief Financial Officer Case Studies – Focusing on two manufacturing companies facing similar issues

Contact: Rich Musal – (v) 515-988-4664, or (e) Rich@karmaegi.com

A Consulting Chief Financial Officer was engaged to guide and help two different manufacturing clients (one with sales of $15 million, the second with sales of $35 million). Both were experiencing rapid growth – one from $15 to $25 million, the second from $35 to $75 million.

Typical of most manufacturing companies buying and implementing Enterprise Resource Planning (ERP) software, each Management Team treated the new ERP installation as a “software project” – installing the software and expecting accurate information and dependable management processes.

Indeed, the implementation, training, and use of the “software” was a vital part of a typical 18-month ERP project – but only a part of each company’s ERP project.

Each Company’s Team struggled with the need for effective training, correcting and maintaining accurate data, revising and adjusting Management processes, and tweaking procedures to effectively utilize the information from the new ERP software system for profitably managing the business.

Common characteristics among the two companies

1. Each company was a small to medium–sized business with sales of $15 to 35 million.

2. Each was in a rapid growth mode wanting to capitalize on new market opportunities.

3. One had about 125 employees and the other 230 with a sales force selling to brokers and distributors nationwide.

4. Each had 200 customers and about 1,500 inventory items including Raw Materials, Work-in-process and finished goods.

5. Both struggled with inventory shortages as well as old and obsolete inventory.

6. Both had an early version of an ERP system that was not effectively used to its full ability.

7. One had challenging debt relationships that included many covenants and reporting requirements while the other had just taken on a large debt package, including personal guarantees and other provisions they were concerned about.

Karma’s initial ‘Discovery phase’

Karma’s approach begins with “obtaining an understanding” of your company’s business processes, compliance requirements, existing capabilities, administrative processes, etc.

1. Understanding compliance requirements –

• Internal Requirements including legal, Board Restrictions, employment agreements, and shareholder agreements. Etc.

• External Agreements including Customer and vendor agreements, insurance coverages, Debt Agreements, etc.

• Governmental requirements, local and national.

2. Evaluate reporting capabilities –

• People and skills, Management processes and procedures, Support systems, Internal controls, Accuracy and timeliness

3. Evaluate company organizational structure and interdepartmental relationships –

• Executive, Administration, Operations, Marketing, Sales, Finance, Third-party support

Typical findings during the ‘Discovery Phase’

Like many small and medium manufacturing businesses, these two companies lacked basic management processes and disciplines to use the expected benefits of an ERP System.

1. In each of the two companies, typical weaknesses included:

• No written Project Plan

• Accounting and Financial processes were not documented or followed in all cases.

• ERP software system was underutilized resulting in inaccuracies, poor data collection,and untimely reporting.

• Product costing tools were either not used, or substantially underutilized.

• Production scheduling was not used or ineffectively maintained.

• Purchasing often needed to expedite raw materials on an emergency basis.

• Inventory usage was not being tracked for either buying or planning.

• Inventory locations were not utilized resulting in misplaced materials, waste, etc.

• Gross Profit by Part or Customer was not available.

2. For each of the two companies, we offered similar recommendations.

• Create a company Project Plan for integrating and implementing Management processes and ERP software.

• Create a process manual for Finance and all Operations with full use of NEW Management processes using the ERP Software

• Begin daily/weekly production planning and scheduling – managing an effective schedule change process – with information gained from full Implementation of ERP software.

• Create and implement a product costing system

• Audit or create the correct Bill of Materials for all in-process and finished goods

• Audit or create Item masters for all raw materials with cost and create bin locations for all raw materials and Work in Process items.

• Maintain Inventory accuracy piece part by location.

• Track usage and lead times for all raw materials and production supplies

• Utilize gross profit analysis of products and customers and cull or add as appropriate.

Common Outcomes

After implementing new Management processes and ERP software, both businesses experienced the following:

• More reliable data and information. A greater sense of teamwork and trust.

• A decrease in inventory carried and virtually cut production shortages,

• Production Planning developed a manufacturing schedule two weeks out and prioritizedhigh gross profit items.

• Marketing was able to evaluate new and existing customers to select methods to increase customer value and develop future pricing and marketing plans.

• Key Production Indicators were developed and tracked daily, weekly, and monthly.

• The Management Team sets goals and related strategies to focus on and achieve desired results.

• Gross profits and sales increased significantly. Cash flow increased significantly.

• Financial reports are distributed timely, Financial performance improved, and Third-party relationships strengthened.

• ERP Management processes and software are used, dependable, and relied upon – one set of numbers.