Restructuring and Turnaround
KCP Advisory Helps Food Manufacturer turn a loss into Sustainable Profitability
(Note: A fictitious business name has been used for confidentiality)
Summary
A-Z Foods was in trouble due to years of sub-optimal practices, a natural disaster, and huge debt. They were incurring a $2.5 – $3 million annual loss. The KCP team was able to identify several key problem areas and propose viable solutions including restructuring management, improving production processes, making better use of labor, adjusting the product mix, and reworking the price structure. The end result was a $2.5 – $3 million annual net profit.
Business Background
A-Z Foods is a family-owned manufacturer of fine edible products for over 60 years. A-Z receives revenue from direct sales of their own recognized brand as well as contract manufacturing for other manufacturers. Although the business was surviving, it was not thriving. A-Z had incurred a loss due to flooding as a result of a natural disaster and was not able to fully recover from the setback. They had significant outstanding debt with a private lender and were losing $2.5 – $3 million per year. The lender had expressed concern over repayment several times. Each time, the company devised a plan to become profitable and accelerate repayment. After several unsuccessful attempts, the lender had lost confidence in the ability of the management to pull themselves out of the situation. The lender required the hiring of a turnaround company to create a plan and report back to them. KCP Advisory was selected.
KCP Advisory Steps In
The objectives were clear: understand how A-Z got into the current situation, identify potential paths to profitability and then create a plan for how to achieve that profitability.
Identifying key issues is a large part of the turnaround process since many problem areas are straightforward to resolve once they are exposed. It was KCP’s mission to challenge every aspect of the existing system to find the real issues. The team began with a comprehensive analysis of the business including revenue, expenses, operations, and sales. Activities included analysis of the financial records as well as in-person tours of the factory floor and conversations with key management personnel. The extensive experience of the team guided them to ask the right questions and hone in on potential areas of concern. Their intuition was spot on, and they uncovered several areas of unnecessary waste that could be adjusted to achieve greater profitability.
Hidden Problems. Straightforward Solutions
The real magic of the KCP team was digging in to reveal issues that had eluded company management for years. Here are a just a few of the issues that were discovered:
Revenue: An analysis of the product revenue showed that the branded product sales had significantly higher profit margins than contract manufacturing sales- and there was room for growth of sales in the branded product. Adjusting the product mix would mean an immediate increase in profitability.
Operations: When observing the factory floor, it was discovered that the first 45 minutes of the work day were less efficient because the equipment was not ready when workers arrived. This meant reduced worker productivity early in the day. The solution: a small number of staff members would arrive early to power up machinery.
Cost Management: An analysis of expenses showed that many expenses were not being calculated when setting prices. These included equipment downtime, realistic productivity of factory workers, and missed labor costs including benefit time, worker breaks, overtime pay, and taxes. Some contract manufacturing products were being sold below cost. The solution: overhaul the price structure to ensure that every product includes a reasonable profit margin.
Management: As a family-owned business, some of the management team did not hold positions that played to their strengths. Restructuring the management team allowed for better decision-making and execution.
Seasonality: The product lines had significantly higher demand during certain times of the year. This led to inefficiencies in usage of labor and equipment. The solution: identify items with a longer shelf life and boost their production during the “quiet” season.
Results
Several solutions were proposed, and most were implemented. A-Z is now thriving with a $2.5 – $3 million annual net profit.
If you are a lender concerned about the viability of a client, recommending KCP Advisory may be the best investment you can make to help your client and improve their repayment potential.