Making Sense of it All – Planning for the Future

Background

The Case studies is about an organization involved in the manufacture of precision sheet metal products. With over 40 years of experience in the industry, the company has become a major supplier to customers in the Internal Furniture and Flow meter industries.
The company has two plants, an old one and a new plant that recently commenced operations. The new plant, spread over 44,000 square feet, has state of the art equipment with sufficient capacity to handle significant growth in revenue over the next few years. The plants, being new, have been designed keeping in mind optimum layout and convenience in mind.
The company is quite capable of expanding its revenue and profit base with minimum further investment in capital. The company is ISO 9001; ISO 14001 and 45001 certified and possesses a wide range of metal cutting and forming equipment, including CNC Turret machines, Power Presses, in-house welding machines, finishing machines & exterior surface processing capabilities which enable the company to provide end to end services to its customers.
The company has 125 employees, of which 25 are staff in functional roles like administration, marketing, production, planning, commercial design, maintenance, etc. The rest 100 are skilled and semi skilled workers involved in production lines

Key Business Challenges Faced

This was partly on account of lack of Marketing Focus in acquiring new customers, either in India or abroad

The company struggled with coming up with customized products and solutions to suit the specific customer requirements. They were dependent on the customer telling them exactly what they wanted and they produced the same as per order

The company was unable to get its management to work towards a common goal in a consistent manner, with clear communication to the levels below of what was expected of each person. Performance was not measured objectively and hence linking performance to an objective appraisal and pay out was not possible

Approaches towards the Challenges

Doing an exhaustive SWOT Analysis and matching their top Opportunities to the company’s key strengths

As a first step, the company evaluated all its possible opportunities and threats that emanated from the external environment. This was done using the PESTEL framework. One of the key elements of Threats was competition and this was further analyzed using the Porter’s Five Forces Model to distinguish possible competition from its regular existing competitors as well as customers or suppliers turning out to be competitors. This was followed by understanding what the key strengths and weaknesses of the company were. As a final step, the company thought through how it could use its biggest strengths to leverage its biggest opportunities and overcome its biggest threats. These were called S-O and S-T strategies and each strategy was then broken down into action plans to take forward. Each action plan was linked to a responsible individual along with a time frame and articulating resources required.

Drawing a Vision and Mission for the Company

It was necessary to sit down and draw up what the company would like to be in a certain time frame (Vision) and define sharply the purpose of the company (Mission). This was based on what the market would be like, what the capabilities of the company are, versus that of its competitors and what its own desire to grow would be, compared to other similar organizations in the industry. This also helped to sharpen the offerings of the company which in turn helped it define its possible markets clearly. Once this was done, possible segments such as the export markets, the vertical segment of its product lines were identified for action.

Analyzing the key sources of revenue and projecting possible revenue going forward

The company had data on the revenue from key customers over the last several years. This data was studied and then possible revenues from each customer was projected based on both past performance as well as current orders and inputs from customers. This flow of revenue was first broken down quarterly and then monthly. For each flow of revenue, the likely expenses relating to the three M’s namely Material, Manpower and Money was projected. This ensured that they all had a clear, common understanding of the company’s goals and were able to contribute to the planning process. Once this was all put down, the financial plans for the next three years were listed. The detailed month on month numbers for both revenues and expenses were put down.

This also gave the company an excellent opportunity to look at unit costs for each of these three M’s and how they could be reduced going forward. During this period, the entire top management worked as a team to identify possible areas of improvement.

Setting goals for all company staff and working together towards the goal

Once the monthly numbers of revenues were in the next three years on the enhanced finalized, this was broken down into possible revenue numbers for each function. Sales, Procurement, Production, Quality Control and Human Resources were then assigned goals against select Key Result Areas (KRAs). This made the goals very objective and quantifiable in nature.

Each employee was very clear on what was expected of them and this could then be linked to possible variable pay linked to performance in the future.

Measuring actual numbers against budget numbers and working on the variance

The actual numbers are recorded on a month on month basis. All variances were analyzed. Any revenue number beyond the planned number or any expense number below the budgeted number were positive and studied for what lessons could be gained. Any revenue numbers lower than the planned, as well as any expenses higher than the planned number were analyzed for possible corrective action. This was used for further performance improvement, feedback to employees and coaching for better performance.

Benefits Observed

The company was able to put a clear plan in place to double its revenue in the next three years. Possible sources of revenue were identified and the company looked to evolve action plans to try and get them

The company now has a plan to improve Profit Before Taxes (PAT) from 5% to 10% in the next three years on the enhanced revenue. This will be a considerable improvement in the return to shareholders

The company also identified possible customers and segments which would reduce the share of its top customer from 60% to less than 40%, without disrupting the existing relationship

The company was able to provide clear goals and expectations to all the key employees. This was very useful to help them focus on those activities which were key to the company. At a later point in time, this would be linked to the variable pay

The company could give a clear common growth expectation to all its employees. All employees were very clear what the company was planning to do and every employee was able to work towards a common purpose

The costs associated with each element such as raw materials, manpower, utilities, quality, rework related expenses were analyzed as a ratio of its revenue. This was then used to try and reduce costs, particularly where these costs were found to be unexpectedly high. This enabled the company to move towards profitability

The below illustration shows the progress made by the organization against key parameters for a Business Planning Process through the cluster journey.

The company was advised to follow the practice of a monthly management committee meeting. The performance of the company was analyzed against the budgeted performance up to that point. The variance both positive and negative needs to be carefully analyzed. Suitable actions needs to be taken along with a clear action plan to make up for the variance

The business planning approach can be used to recalibrate whenever the company would face a challenge in the future. If an eventuality were to confront the company, it could go back and redraw these future plans, both from a revenue and expense point of view and confront whatever is the challenge

It is recommended that the company moves to a part variable compensation model where for key employees and business heads, clear goals could be set and part of the compensation could be linked to achievement of those goals. This would ensure that good performance is rewarded handsomely and achievement of goals is encouraged

The company should also continue to measure each element of cost as a percentage of revenue as well as against production variables such as tonnage and number of units produced. The goal would be to try and reduce costs on a month on month basis and also work towards benchmarks for industry leader companies in this area.

The company can alsowork towards de- risking its business and revenues from its biggest customers. The goal is to reduce the dependence from the largest customer from 60% today to 40% over the next three years on a larger revenue base. This would encourage the company to explore new segments such as exports, new verticals as well as explore opportunities with the competitors of the company’s current customers and customers of the company’s current competitors

Subsequent to the company going through this program, the world has been hit by the Corona pandemic. The economy has ground to a halt for the near future and it is unclear when and how it would recover. However the framework provided by the program to carry out business planning, would enable organizations such as this to try and work on its future outcomes using a scenario analysis and a What-If approach. Possible Revenues could be analyzed, depending on different scenarios of economic recovery and all costs to be projected for a given scenario. This enables the company to implement well thought out proactive decisions to match costs to revenue flows and optimize their cash flows. When the going gets tough, Business Planning would enable the company to get going suitably. The necessity and impact of Business Planning would be felt even more now in the present circumstances.