Grow Value – Not Open Orders
For many PE firms, it feels like Christmas has come early. Newly acquired portfolio companies are coming into the fold with unprecedented levels of demand and numerous open orders. According to Blue Ridge Partners, aggressive pursuit of revenue growth in year one is the key to optimizing value creation over the holding period. So, PE firms are in the perfect position to capitalize on sales volume that will be key to offsetting some of the downside of unprecedented high earnings multiples defining the PE landscape right now.
Yet, companies are not necessarily snapping up the opportunity. Like every other business, many portfolio companies are struggling with talent and material shortages standing in the way of taking immediate action on open orders. And more and more of those orders are slipping into the past due category. However, given the current situation and challenges, companies often believe their backlog is justified, and that they can draw it down over time. In short, they have become somewhat complacent and resigned to the status quo, believing demand will remain strong and they are meeting it as best they can.
In reality, much of the current increase in demand is situational. It’s driven in large part by global supply chain disruption; many companies are turning to local suppliers in a pinch. While it’s impossible to accurately predict what future demand will be, it’s likely to normalize at some point and companies could go back to their original suppliers. Further, customers’ tolerance of delays won’t last indefinitely. The grace period will eventually expire, and all those past dues will become opportunities missed.
PE firms and their portfolio companies must find ways to close open orders, resolve past dues, and grab market share while it’s available if they want to accelerate growth and outpace their peers long term.
4 Keys to Seizing the Opportunity While It’s Hot
- Understand the full scope of the opportunity.
- Change the mindset and get aggressive.
- Focus on the fundamentals of operational excellence.
- Overcommunicate with customers.
1. Understand the full scope of the opportunity.
When it comes to open orders and past dues, there’s a fine line between opportunity and risk. In other words, just because the business is on the books does not mean it’s in the bank. Assessing the company’s ability to turn demand into profit in a reasonable timeframe must be a key focus area for due diligence both pre- and post-close.
Specifically, it is important to be aware of the trajectory of open orders and past dues over time. How much and how quickly have these numbers escalated? And what has been the impact on customer sentiment and satisfaction? In companies that are stretching lead times too far without finding ways to proactively capitalize on the orders they have in the pipeline, the backlog may be more of a risk than an opportunity.
However, in companies that are taking a more proactive approach to the issue, the opportunity may be even bigger than it initially appears. The ability to move quickly, especially when peers are not, is the key to capturing additional market share for the long-term. Companies that that find ways to deliver today put themselves in a position to take business away permanently from their competitors that cannot or are not moving as quickly.
2. Change the mindset and get aggressive.
Clearly, companies that wish to win right now can’t afford to accept the status quo and simply wait out the talent and material shortages that are hamstringing productivity, even if those issues are somewhat outside of their direct control. Instead, solving the immediate challenges, finding ways to optimize the productivity of the resources that are available, and identifying workarounds for shortages is paramount.
Go after open orders and past dues with a detailed 100-day plan. Implementing this plan alongside the integration plan will help you make progress quickly. And it can start with broadly publicizing the extent of the backlog problem and the numbers for on-time orders, which some companies tend to brush under the rug when they aren’t positive. However, even if these metrics are dismal, it’s important for the team to be aware. When people know what’s happening, they can raise their hands to help resolve the problems and to share their input into where bottlenecks exist and how to speed up productivity.
3. Focus on the fundamentals of operational excellence.
Especially when you cannot control talent and labor shortages, shifting the focus to what you can control is an absolute must. Right now, when demand is high, it’s the perfect time to proactively invest in process improvements that are harder to justify when business is slower. Leveraging input from your team, including frontline staff, as well as data and analytics, can help you pinpoint any gaps in your process. Then, move quickly on opportunities to close them.
This may include investing in maintenance programs to optimize machine efficiency, especially in companies where maintenance practices may have been deprioritized or sidelined all together due to COVID-related constraints. Improving machine efficiency typically ushers in an immediate improvement of 10-20%. And, if you can increase OEE at a time when demand is also up, it will have a cumulative impact on your profit: 10% OEE + 30% additional demand results in 40% more profit.
TBM recently helped a manufacturer of high impact decorative labels reduce backlog from $198,000 to just $18,000 on a one-month period. The problem was in large part caused by severe production bottlenecks on critical machinery where OEE was at just 25%. Introducing Total Productive Maintenance (TPM) and developing operator autonomous maintenance processes and preventive maintenance for both operators and maintenance technicians were some of the keys to rapidly turning the problem around and getting production back on track.
Investments in automation can be another strategic move with rapid and significant results for a portfolio company, particularly when it’s used to automate non-value-added tasks in the process. We helped one lawn equipment manufacturer bring robots online to take over torque gun, screw and nut feeding, and palletizing tasks, which helped reduce labor requirements by 18% while improving productivity per hour by 11%.
Any time non-value-added tasks can be automated or technologies can be used to increase productivity, it frees up employees to move to other higher-value, revenue-generating work, helping you get even more product out the door more quickly. So, often times, the return on investment is faster and quicker than you may think.
4. Overcommunicate with suppliers and customers.
Right now, much of the backlog problem for manufacturing companies is being caused by shortages on specific parts or components. Opening up conversations with key suppliers for these parts can help, and not only to keep you on top of order status.
Consider engaging your suppliers to rethink and reengineer processes to work around shortages. For example, if you are waiting on a specific part, what can you do to be ready when that component eventually arrives? Can you alter production processes so that everything else is waiting for the final piece to come in, and then all that is left is to finish up production and move to shipping? Those organizations that find alternative ways to move faster and cut lead times will be the winners in an environment where every business needs goods as soon as they can get them.
Of course, keeping your customers appraised along the way is essential, too. Being transparent about delays, what’s causing them, and what you are doing to proactively address the problems gives customers reassurance that you are on top of the situation. And it provides information customers can use to plan accordingly and make better decisions for their own businesses.
Resolve open orders now, and capitalize on the snowball effect long-term.
As companies make the necessary changes in mindset, operations, and communications to proactively close open orders and resolve past dues, they will see the impact of the improvements compound on each other. Open orders and past dues will turn into top-line profit for the business while opening to door to fulfilling additional demand. Ultimately, PE companies can position their portcos to continuously operate at a higher volume, and more efficiently and profitably, for the long-term. But only if they seize the opportunity that’s so urgently knocking right now.
