Phase II: What is Driving the Costs and Profit Margins at this Troubled Company

Situation

In early 2005, Platinum was named COO of a troubled manufacturer that had been losing money despite growing revenues. An organizational restructuring established separate Profit Centers with support from one Service Center, which resulted in significantly reduced SG&A costs.The company was poised for 20 percent growth in 2006. Platinum’s next step was to maximize profit margins.

Challenges

• The company did not recognize that the product mix was driving labor activity, which in turn was driving costs and profit margins.
• Raw material costs were volatile due to events such as Hurricane Katrina.
• On time delivery was hampered due to material lead times and a reactive approach to customers.

Solution

Traditionally, the company calculated pricing based on material costs, standard labor plus overhead allocations. By applying the Theory of Constraints, Platinum helped the Profit Centers study the manufacturing process; identify the bottlenecks and excess handling.This extensive analysis resulted in changes to maximize profitability of each minute spent at the constraint. First, pricing was revised based on the mix of products by each customer’s contribution. Second, the company established a proactive, supply chain partnership with top customers by obtaining their production schedules and synchronizing orders to ensure raw materials availability and on-time delivery. Now, customer service representatives know the materials managers at key customers rather than waiting for a purchase order to begin the process.

Results

With the early restructuring and many new best practices in place, a culture change is in process that will result in consistently reaching revenue and profitability goals in 2006 and beyond.The proactive supply chain partnership with key customers led to a 98 percent on-time delivery rate, rave customer reviews and new business opportunities. Formal training and performance rewards increased on-time production and productivity. With this return to profitability and the development of a well-performing top management team, the Platinum COO position was eliminated and has returned to an advisory relationship.