To Increase EBITDA, Recommit to MDI (Managing for Daily Improvement)

Managing for Daily Improvement (MDI) Is the Most Effective Tool Portfolio Companies Can Wield to Achieve their Value Creation Goals

Private equity-owned portfolio companies have a finite period of time to realize their value creation goals and optimize EBITDA. In this scenario, it’s important to pull all the major value creation levers—revenue growth, cost optimization, operational efficiency, and talent management/development—all at the same time to ensure maximum impact.

Of course, this is often much easier said than done for companies with limited resources and multiple challenges. The good news is, there is one discipline with the power to positively influence all these critical value creation levels simultaneously, and most manufacturing companies are already familiar with the concept. They simply need to renew their focus and discipline.

Drive both top-and bottom-line results with MDI

Managing for daily improvement (MDI) is a familiar idea. Fundamentally, manufacturing companies know what continuous improvement is, why it works, and how MDI helps to drive it. Nevertheless, the discipline can be challenging to implement and even more challenging to sustain long-term, especially as companies evolve, merge with or acquire other businesses, experience turnover, or get caught up in firefighting mode as new issues arise and compete for management’s attention.

Regardless of the challenges and growing pains  involved, prioritizing value creation and enhancing EBITDA impact is crucial for every portfolio company. The most effective route to achieving rapid and substantial improvements across the entire business lies in recommitting to MDI manufacturing processes that are proven to help your organization:

• Introduce new revenue opportunities by improving throughput and creating additional product volume to sell to existing or new markets.
• Increase profit by reducing waste in the process and reducing the cost of producing product.
• Improve job satisfaction by empowering people to be more engaged and successful in their work.
• Set the stage for a continuous improvement culture that will benefit the organization and drive value long after a sale.

Reboot your MDI processes

With so much to gain from MDI, and with the value creation clock always ticking, it is well worth taking a fresh look at current MDI processes to see where they may need to be recharged. When auditing and evaluating the current state of MDI, keep these questions in mind:

• What is the management mind set? MDI is a top-down initiative driven from the highest level in the organization. Executives and senior level managers that understand the company’s top-line objectives need to play a hands-on role in translating those goals into an annual improvement plan that can be implemented on the shop floor. Managers at all levels should be involved in proactively engaging and empowering the shop floor, and they need to stay committed to keeping teams on track and ensuring goals continue to be met over time. This takes a significant commitment of time and resources at every level of the organization. But the effort pays off by freeing up even more time and resources in the long run as all team members become better at problem solving and many recurring issues are permanently resolved.
• Are the goals ambitious enough? Usually, when a private equity firm is involved, the value creation goals are big, and the timeline is tight. Depending on where a portfolio company is in the holding cycle, it’s important to make sure that the KPIs are well defined and aligned with the goals. MDI helps companies develop the discipline to hit the KPIs. But the first step is ensuring the right KPIs are in place.
• Is there daily accountability to KPIs? Once the KPIs are defined, make sure the shop floor is hitting them consistently. If there are misses, are team members taking daily action to get back on track? While MDI requires top-down commitment, implementation is very much a bottom-up effort. If shop floor associates are not engaged in the process, the company needs to revisit its commitment to MDI and consider what it needs to do to get people on board. In some cases, frontline teams may not even have visibility into the KPIs or the KPIs may not be well defined. Other times, the shop floor needs to bring in outside resources to troubleshoot and correct issues contributing to KPI misses. A hallmark of a robust MDI manufacturing processes is a shop floor or frontline team that knows the goal, understands when to take action on its own, and knows when to escalate issues to a higher level.
• Are people being properly incentivized? People at all levels not only need to understand the MDI process and the expectations for their roles; they also need to know what’s in it for them. The winning continuous improvement culture that MDI helps to create can be a major motivator on its own and will contribute to higher levels of job satisfaction. But companies can help ensure strong and sustained commitment to MDI through additional measures such as regularly recognizing the wins with public praise, hosting workplace celebrations such a pizza party, or providing financial incentives or bonuses for employees.
• Are Gemba walks occurring on a regular basis? Gemba walks are another fundamental principle of MDI that needs to be in place to ensure maximum value creation. It is critical for frontline leaders and supervisors to be engaged on the floor with the people and equipment where the actual value creation work is being done every day. These Gemba walks are the ideal time to verify that processes are running optimally, that KPIs are being met, or that action plans are in place to address any KPI misses that might occur. The walks are also a good time to look for visual indicators of waste or problems with the process.
• Where is there more waste than there should be? Some signs of too much waste in the process include excessive amount of rework, too much inventory on hand, employees or machines waiting to be put to work, or talent that’s not being utilized. Also look for waste red flags such as excess motion, over production, over processing, and transportation inefficiencies such as long distances traveled between operations, unnecessary moves in and out of storage, or time spent moving other product out of the way. Any of these issues are key indicators that portfolio companies have significant room for improvements that can help drive EBITDA and that more robust MDI processes can help companies realize those gains.

Achieve investment goals faster with the right resources.

As beneficial and advantageous as MDI is, it can be difficult for companies to achieve best practices on their own. Using an experienced manufacturing consultancy, such as TBM, to help with MDI training and implementation can ensure that this important initiative gets the attention it deserves. Consultants can be instrumental in establishing the discipline quickly and generating results as soon as possible—a particularly important consideration for portfolio companies running up against the investment thesis clock. The sooner a company starts, the more time there is to realize full value creation potential, make a significant impact on EBITDA, and ultimately increase the company’s final sale price.

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