Manufacturing Business Turnaround Plan: A Guide for Underperforming Manufacturing Businesses.

 

Abstract

Manufacturing Business Turnaround efforts aren’t always successful. After reading this article, you will learn how to assess a manufacturing business.

In this case, in preparation for a turnaround effort. I will share how to assess the critical aspects of the business. These include financial, human capital, operations, sales & marketing, and customer satisfaction.

I will share strategies for creating clear objectives to achieve alignment immediately. I will then discuss how to dig deep into the root causes of poor performance and how to prioritize your efforts.

Flawless execution is critical in a turnaround effort. I will share how to build clear expectations and high levels of accountability.

I will also share how to prepare for the unexpected. Enabling you to respond better in case favorable or unfavorable situations present themselves.

A manufacturing business turnaround carries a lot of pressure and urgency. With this said, time is of the essence. I will share how to build momentum early on, so your efforts start yielding results as fast as possible.

Finally, I will share strategies for the different focus areas of your efforts.

Success Mindsets

  • Gain trust, credibility, and respect with the team ASAP.
  • Make data-based decisions.
  • This is not a one-person task.
  • Engage your team to support the effort.
  • Assess before making changes.
  • Stabilize the business first.
  • Establish clear priorities and expectations.

Key Takeaways

DIMENSION TAKEAWAY
Assess the Business Avoid jumping into implementation without understanding the business’s current condition. Assess all aspects (financial, operational, human capital, sales and marketing, and customer satisfaction).
Setting Objectives Align efforts by establishing short-term and long-term objectives.
Root Cause Analysis Use RCA to uncover actionable reasons for the poor performance.
Prioritizing Efforts Rank efforts based on the impact and effort on your goals.
Building plans Establish clear structures that clarify expectations for owners, due dates, and a reporting structure.
Scenario Planning Plan for the unexpected. Explore and prepare for favorable and unfavorable scenarios.
Building Momentum Stabilize the business, remove unfit leaders, and make empower the team.
Recommended Strategies We cover sales & marketing, financial, operations, supply chain, and human capital.

In a previous article, I covered how to take a holistic look at your situation. Also, how to take steps to improve it following a rough start to the year. In this article, I will share how to take a deeper look at your manufacturing business and:

  • Determine the actions needed to turn its performance around.
  • How to put together a plan to execute with your team.

We see manufacturing business turnarounds for distressed or underperforming businesses when:

  • Private equity companies or family offices make an acquisition.
  • A new CEO is hired to take over from a previous leader.

I will provide a blueprint for a CEO. This will also help an operating partner offer guidance and support and ensure an effective process is followed.

Take our performance assessment for manufacturers to get benchmarks and understand where your largest gaps exist.

Take our performance assessment for manufacturers.

A successful manufacturing business turnaround is a team effort; make sure you identify the core team to lead the effort.

1. Assessing the Current State for a Manufacturing Business Turnaround.

The first step in any manufacturing business turnaround effort is to understand where things stand today. I’ve seen several executives skip this step. They jump into solution implementation without doing their homework. I can’t emphasize this step enough, stay disciplined in your approach, even when your team pushes back. I hear things like, “We already know what needs to be done,” or “We don’t need anyone to tell us what’s wrong.”

Warning – Do your homework before making changes; you may be doing more harm than good.

I’ve had clients admit to regretting not getting all the facts so they can make more informed decisions. An exception can be a crisis that needs an urgent and immediate decision.

Avoid working without a thorough understanding of all the problems.

 
Watch this video to learn more about how we uncover profit margin improvements for manufacturing businesses.

Let’s dive into the areas I recommend you complete a deep dive assessment in no set order:

1.1 Financial Assessment.

The financial assessment will help you understand the financial health of the business. You want to answer questions such as:

  • Is there enough cash flow to cover operating expenses and service short-term debt?
  • Do we have enough cash reserves to cover unexpected cash outflows?
  • Does the business have healthy margins to finance investments or growth opportunities?

You’ll find the answers to these questions by reviewing income statements, balance sheets, and cash flow statements. Ask your CFO or controller to pull these reports for you. They can even complete some ratio analysis for you for the previous 1-2 fiscal years. Make a note of any areas of concern.

 
Watch this video to learn more about the five manufacturing business scenarios and their opportunities and challenges.

1.2 Human Capital Assessment.

A human capital assessment should start as soon as you set foot in the business. Keep your eyes and ears open to indications of:

  • High vs low performers.
  • Engaged vs disengaged employees.
  • Talented vs incompetent employees.

Read this article to learn more about how to detect a poor fit leader within your team. 

In this area, you are looking to answer questions such as:

  • Do I have the Right People in the Right Seats?
  • Is there dysfunctional behavior between key members of the leadership team?
  • Are employees disgruntled?
  • Is the business staffed appropriately, or is a reduction in force (RIF) needed?
  • Do leaders have high levels of trust, credibility, and respect with the workforce?
  • Are there any immediate personnel changes needed due to incompetence or poor leadership skills?
  • Do we have challenges attracting or retaining talent?

“If you tolerate an incompetent jerk, you’ll eventually regret it. Guaranteed.”

Watch this webinar to learn more about how to overcome employee retention challenges. 

Watch this Webinar: How manufacturers overcome employee retention challenges.

Meet with your direct reports to understand their:

  • Perspective on the situation.
  • Capabilities and motivations.

Read this article to learn more about the signs of a declining culture.

This will help you determine how they fit into the future state of the business. Discuss and review the following metrics with your human resources leader:

  • Employee turnover for the last 1-2 fiscal years.
  • Employee retention for the last 1-2 fiscal years.
  • Staffing levels for the last 1-2 fiscal years.
  • Employee engagement surveys for the last 1-2 fiscal years.
  • Average hours/week per employee for the last twelve months.

Ask for candid feedback on the following:

  • High-potential team members or
  • Employees with a problematic work history.
  • Also, ask about his/her observations on:
  • The workforce’s morale.
  • Recent organizational changes, and
  • His/her perspective on how business performance declined.

Read this page to learn more about our approach to turning around manufacturing performance.

1.3 Operational Assessment.

The operational assessment will help you understand the execution level of the business. In other words, how effective are we in fulfilling customer orders? And how efficient are we in utilizing our resources? I recommend you review metrics such as:

  • Safety Metrics
    • OSHA recordable incident rates in the past two fiscal years.
    • Lost time injuries in the past two fiscal years.
  • Quality metrics:
    • Internal defects and rework costs in the past two fiscal years.
    • Warranty Costs in the past two fiscal years.
  • Delivery Metrics:
    • On-time deliveries in the past two fiscal years.
    • Cost metrics:
    • Overtime costs in the past two fiscal years.
    • Equipment lost hours in the past fiscal year.
  • Supply Chain:
    • Supplier performance in the past fiscal year.
    • Supply chain risk assessment.

Read this article to learn more about how manufacturers overcome supply chain challenges.

ARTICLE - HOW MANUFACTURERS OVERCOME SUPPLY CHAIN CHALLENGES.

ARTICLE – HOW MANUFACTURERS OVERCOME SUPPLY CHAIN CHALLENGES.

Gather this information with the help of your head of operations (COO, Vice President of Operations, Plant Manager, etc.). For all KPIs, look for gaps in performance against targets. Also, look for risks in your supply chain and underperforming suppliers.

Read this infographic to learn more about recommended operational KPIs for manufacturers.

1.4 Sales & Marketing Assessment.

The sales and marketing assessment will help you answer questions such as:

  • Are we generating enough leads and sales to sustain the business, respectively?
  • Is there an opportunity to increase sales?
  • Are we consistently attracting new leads to fill the pipeline?
  • Are we attracting the right kind of leads?
  • Is the business overly dependent on one client or industry?
  • Are we closing enough business?

Here are some of the metrics I recommend you review:

  • Open order book.
  • Active deals.
  • Total pipeline size.
  • Pipeline review (deals at each stage).
  • Sales closing ratio.
  • Sales per customer for the last two fiscal years.
  • Leads generated per channel.
  • Average lead quality scores.
  • Sales forecasts by customer.
  • Industry specific indicators.

Gather this information with the help of your head(s) of sales and marketing (CMO, CRO, Vice President, etc.). The critical items here are:

  • How much runway into the future does the open order book give you?
  • The health of the pipeline, and
  • The client diversification level to avoid risk.

1.5 Customer Assessment.

The customer assessment will help you understand:

  • The client base’s level of satisfaction and
  • The business’s perception in the marketplace.

The basic questions you are looking to answer here are:

  • How satisfied are our clients with our products and services? And
  • What is the perception of our brand in the marketplace?

Here are the metrics I recommend you review:

  • Customer complaints and/or returns for the past fiscal year.
  • Warranty costs for the past fiscal year.
  • Customer satisfaction surveys for the past fiscal year.

Work with your sales, quality, and customer service teams to gather this information. Identify the following:

  • Important accounts with low customer survey ratings and
  • Any product types with recurring customer complaints.

Proactively stay updated with industry trends that may affect customer perceptions and preferences.

2. Setting Clear Manufacturing Business Turnaround Objectives.

After completing the current state assessment, quickly set the objectives. These objectives need to be clear and measurable. Differentiate between short-term and long-term objectives to establish clear priorities.

  • Short-Term Objectives—Again, these are objectives that need to be met immediately because they are the most urgent (e.g., stabilizing cash flow, customer retention, cost reduction, etc.).
  • Long-Term Objectives—These objectives are less urgent. Mainly because they have less impact on stabilizing the business. They also focus on the sustainment and long-term success of the business (i.e., reducing dependency on large clients, investing in new technologies, etc.).

Clarify that these objectives take precedence over any other initiatives. Finally, these objectives must align with the broader business goals.

 
Watch this video to learn more about how to lead a manufacturing business turnaround.

3. Uncovering the Root Causes of Poor Performance.

The next step is to uncover the reasons for the performance gaps. Assemble the core team to evaluate metrics and identify actionable gaps. Here is how I recommend you do this:

3.1 Complete a SWOT analysis.

A SWOT (strengths, weaknesses, opportunities, and threats) analysis is an effective tool for manufacturers to evaluate internal capabilities and the external environment. The tool provides a business-level view of the organization and will help create strategies. Brainstorm with your team:

  • Strengths – Identify core competencies and/or unique selling propositions that can be leveraged for the business turnaround (i.e. processes, technologies, workforce capabilities, etc.).
  • Weaknesses – Identify the weaknesses that contributed to the poor start (i.e. operational capabilities, supplier performance, employee retention, etc.).
  • Opportunities – Identify market opportunities the business can leverage towards the turnaround effort (i.e. industry trends, unmet customer needs, or competitor gaps, etc.).
  • Threats – Identify external circumstances that can negatively affect the business (i.e. economic downturn, regulatory changes, geopolitical factors, etc.)

Read this infographic to learn more about a problem-solving methodology for manufacturers. 

3.2 Metric/Data Analysis.

Evaluate the metrics gathered during the assessment phase. Observe performance over time and look for the following:

  • Performance trends over time (up, down, or flat).
  • Seasonal patterns or fluctuations.
  • Size of the gap.
  • Any variable affecting the trends (shift, product, product line, equipment, customer, etc.)
  • Connections between gaps. (i.e. internal defects leading to late orders or supplier performance leading to customer complaints)

This analysis will help you break down the problem into smaller focus areas. In other words, you’ll start to see what, who, when, where, and how to attack the gaps.

3.3 Root Cause Analysis.

Now that you have identified the performance gaps, it is time to dig into the reasons behind them. Brainstorm each performance gap as a team; we recommend using the following tools:

  • Pareto Charts – Based on the 80/20 principle, 80% of your problems will come from 20% of the causes. This means that most of your challenges will be caused by a small number of issues. Use this tool to find where the biggest bang is for your buck.
  • Fishbone or Cause & Effect Diagram – This tool will help you identify the potential causes of the adverse effects on your performance.
  • 5-Why Analysis—Often, the Fishbone Diagram uncovers the surface-level reasons for issues. This means you’ll have to dig many layers to find the real and actionable reason that will make the problem go away completely. Use the 5-why analysis to find it.

After completing the root cause analysis, you’ll have several actionable reasons for the performance gaps.

4. Prioritizing Manufacturing Business Turnaround Efforts.

Having the causes of your issues is not enough to turn around performance. The team now needs to:

“Buy-in to improvement should never be optional. Period.”

Brainstorm and agree on the changes necessary to improve performance and eliminate the causes of the issues (e.g., reduce quality issues for product line X from A to B, reduce inventory from X to Y to relieve working capital and improve cash flow, etc.). These changes only provide direction. This means that the outcome can be created in various ways. Each initiative team can develop an action plan that delivers that result.

Rank each initiative using a three-level system:

  • Level 1 – Initiatives with the highest urgency. They are critical for the stabilization of the business.
  • Level 2—These initiatives have a medium urgency level. They are important but not critical for stabilizing the business.
  • Level 3 – These initiatives have the lowest urgency level. Execute these when they do not interfere with or delay initiatives in the first two levels.

Determine the types of initiatives:

  • Quick win.
  • Just-do-it.
  • Long-term project, etc.

Do this by evaluating:

  • Their impact on the turnaround results and
  • The amount of effort necessary (e.g., capital, resources, time, etc.) to complete it.
 
Watch this video to learn more about how manufacturing leaders get buy-in from their teams.

This will give you an idea of the resources that need to be allocated and where to focus.

Reconvene to share the action plans for each initiative. See below a sample impact/effort matrix for prioritizing projects.

5. Building the Manufacturing Business Turnaround Plans.

When putting the plans together, ensure each initiative includes:

  • Owners – The leaders accountable for each initiative. They should have the following expectations:
    • Strategic Focus – Be strategic in executing plans. Consider the interconnectedness of each initiative. Also, how to maximize the results in the shortest amount of time.
    • Preparation – Be always engaged and up to speed with their initiative. Know their numbers cold and be ready to explain every aspect of the initiative.
    • Proactiveness – Constantly measure and monitor results. Anticipate obstacles. Be ready to implement countermeasures to maintain the course or recover. Understand if the initiative is on pace to meet its due date.
    • Communication – Share any changes affecting the timeliness or effectiveness of initiatives. Avoid surprises.
    • Each task should also have an owner responsible for its completion.
  • Due dates—Every action should include a target completion date. agreed upon by the team and the responsible owner. This date should consider the priority level, resources allocated, and the owner’s bandwidth.
  • Reporting Structure – Each team will report on their initiatives as follows:
    • Results – Report on the results of the metric the initiative is trying to improve.
    • Progress – Report the status of each action item on the improvement plan.
    • Countermeasures – Share any countermeasures initiated or implemented to recover from a setback.
    • Support – Escalate situations to senior leaders (i.e., approvals and/or resources).
    • Format – Use a common format. This makes it easier to understand the status and effectiveness of each initiative.
    • Review Cadence – Determine the cadence of review meetings. We recommend between 1-2 times per week, depending on the urgency level.

 

Watch this video to learn more about the four stages to improve performance for a manufacturing business.

6. Manufacturing Business Turnaround Scenario Planning.

This is where you prepare for the unexpected. Anticipate potential future scenarios and prepare for them. This will help you respond better in case some of these scenarios materialize. Scenario planning involves creating hypothetical positive and negative scenarios and evaluating outcomes.

  • Best-Case Scenarios – Identify potential positive developments. Scenarios such as increased demand or new market opportunities. Develop strategies to capitalize on these scenarios while being realistic about potential challenges.
  • Worst-Case Scenarios – Anticipate potential challenges. Scenarios such as prolonged supply chain disruptions or economic downturns. Create contingency plans to mitigate risks. Finally, ensure the business can navigate these situations.

7. Getting the Manufacturing Business Turnaround Plan off the ground.

Manufacturing business turnaround situations are high-urgency. There is no time to waste, and you want to move fast.  Start building momentum quickly after you have developed your turnaround plan. Here are my recommendations to build momentum immediately:

Read this page to learn more about a successful manufacturing business turnaround we helped a client complete.

  • Crisis Stabilization—This is the number one priority. Focus on addressing the most pressing issues for the business’s financial stability. These will include:
    • Closely monitoring cash flow
    • Reducing unnecessary expenses, and
    • Optimizing budget allocations.

In a manufacturing business, operations carry most of the resources and expenses. Optimizing your operation will reduce costs and improve cash flow. The customer is arguably the most important stakeholder. You will set yourself up for success by:

    • Servicing customers well
    • Addressing issues fast, and
    • Building strong relationships with key accounts.
  • New Leadership – Execute personnel changes identified during your human capital assessment. Start with senior leadership positions. Promote or bring in new leaders as necessary. Pick leaders who will roll up their sleeves and mobilize the team towards common goals. This will send a signal to the organization that you are serious about change. Removing problem leaders will earn you trust, credibility, and respect.
  • Organizational Changes – Start creating a culture of empowerment in the team. Encourage employees to get involved and contribute. Help them take ownership of the turnaround effort. Lastly, evaluate the organizational structure and remove unnecessary layers of bureaucracy. This will help faster decision-making and communication. This will also reinforce your intention to empower employees. They will respond by acting decisive and taking ownership of their responsibilities.

8. Possible Focus Areas and Recommended Strategies for Manufacturing Business Turnarounds.

Every situation is unique. I cannot give you specific advice about yours. I wanted to share some strategies in case you are focusing on one or several of the areas below.

  • Financial Restructuring – Financial restructuring will ensure the company’s viability and solvency.
    • Debt Restructuring – Negotiate with lenders to renegotiate terms (i.e., interest rates, repayment schedules, etc.).
    • Capital Injection – Seek funding options through:
      • Equity investment
      • Venture capital, or
      • Government grants.
    • Debt Consolidation – Explore options to simplify financial obligations and reduce interest costs.
  • Operational Optimization— Identify waste elimination opportunities (i.e. value stream mapping). The result is an implementation plan to reach those objectives. This will improve margins and shorten the cash-to-cash cycle.
  • Supply Chain Resilience – There are two strategies I’ll recommend here:
    • Supply Chain Risk Assessment – Uncover vulnerabilities that can cause future disruptions.
    • Supplier Management – Identify opportunities to form stronger partnerships. Also, find diversification opportunities to reduce disruptions.
  • Marketing & Sales Strategies – Collaborate with your team on:
    • Customer retention strategies and
    • Generating repeat sales (i.e. incentives, special offers, discounts, etc.)
  • Human Capital Strategies – Focus on the following strategies:
    • Talent retention
    • Skills development, and
    • Creating a positive workplace culture.

Leading a manufacturing business turnaround is a challenge. We hope this article has provided you with enough ideas to successfully turnaround your manufacturing business. If you have any questions, please reach out.

 

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