Posts

Challenges Facing Midsize Manufacturing Companies

This article originally appeared in Business Insider

As we review the landscape for small and midsize manufacturing companies, we see considerable challenges.  A review of some items in the February 2013 ISM Report on Business® is instructive (see report here).

Gross Margins

Gross Margins have been an issue that we have focused on extensively at ACM Partners.  The operating expenses of a company are certainly important, but in our experience understanding where gross margins might be headed and why is often a useful exercise in predicting pockets of distress in the broader economy.

The gross margin picture suggests that challenges lay ahead.  In February the index of prices paid by manufacturers increased by 5 percentage points.  As companies lose the ability to protect gross margins, management teams often panic and seek to address the problem by increasing sales.  The pursuit of higher sales at declining margins and with less discipline over the costs of servicing new clients is a long-established recipe for taking a company from mild under-performance to deep distress.

Inventories: Up at Producers, Down Among Customers

Among small and midsize industrial companies we anticipate demand shocks as customers, now comfortable with a historically low level of inventory, respond more quickly to changes in end-market demand.  The disconnect between customer inventories having been below 50 (the point at which they are considered too low) for nearly 4 years and producer inventories increasing suggests that producers are increasingly ill-equipped to address fluctuations in demand, and may be making the implicit choice to tie up cash in increased working capital rather than in capital expenditures.

These diverging trends in inventories present two serious challenges to small and midsize manufacturers:

1.      From a pricing standpoint the existence of slow-moving inventory will provide for some companies a temptation to sell at reduced prices, further eating into gross margins.

2.      From a financing standpoint this approach is a recipe for trouble, as asset based lenders will advance considerably less on inventory than on accounts receivable.  Additionally, for troubled small and midsize industrial companies there are fewer options to get any availability on inventory, further heightening the risk of this approach.  

Changing Power Dynamics

Power flows up and down the supply chain, depending on industry, quality of management, availability of financing and a multiplicity of other factors.  At the moment large national and multi-national customers control the fates of their suppliers, both the small and midsize manufacturers making the products, and the similarly sized distribution companies that store those products and handle order fulfillment.  As these dominant customers seek to maximize profitability and optimize their working capital, they are causing ripple effects throughout their supply chains.  The dominant strategy for the small and midsize industrial companies seeking to adjust is to become indispensable by occupying high value niches or gaining scale.  

Conclusion

Companies will continue to make and ship things, and so manufacturers and distributors will continue to have a role in the economy. But there is not guarantee that their role will be a profitable one.

 

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.

Becoming a Data-Driven Organization

This article originally appeared in the Loftis Consulting Blog

The unrelenting pace of 21st century commerce has resulted in a flood of data that threatens to overwhelm small businesses.  Every company generates a vast quantity of data on sales, marketing, production, ordering, and every aspect of operations.  Most companies are doing nothing with this data, and the failure to make use of it is expanding what is for many small businesses their biggest competitive disadvantage.

Today it is essential for companies to know themselves better than they ever have before.  Management should identify a limited number of key performance indicators (KPIs) that capture the performance of the company, and focus on rigorously tracking those KPIs.  This data-driven approach can initially seem onerous, but the superior insight it provides makes it well worth any initial inconvenience.

Our clients have reaped significant benefits from efforts to shift their organizations to a data-driven mode.  Those benefits include:

  • Early Warning Capability: Poor financial performance is often not the first but the last sign of a problem.  Regular reporting of KPIs can highlight trouble before it impacts the bottom line.
  • Opportunities: Nothing bolsters the case for growth opportunities like data.  Website traffic and keyword search data is valuable market intelligence and analysis of that information has helped our clients identify unvoiced client needs and allowed them to reap the sales benefits of meeting those needs.
  • Profitability: Analysis of raw sales data has permitted Gross margin analyses by customer, region and salesperson in order to identify unattractive customers, unprofitable regions and under-performing salespeople.

We are in a new world, a world driven by data.  With every aspect of a company’s operations producing data, the insights that can be gleaned from capturing, analyzing and acting on that data are increasingly becoming a valuable asset.  Conversely, failure to make use of the data your company generates will hinder profitability, inhibit your ability to react to changes as quickly as competitors and increase the likelihood that growth opportunities will be missed.

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.