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Driving Profitability Through Process Proprietary and Confidential ™ &© SUSTAINABILITY Presented by Ed Brill February, 2012 OPTI
My Sustainability Definition 8 core systems tied to MCP’s 5 – 7 sub – MCP’s Documented Trained Measured Managed 3 Connectivity affects a company’s resiliency through infrastructure dependency, effectiveness, and creation of long- term value ™ &© The Operational Integrity of A Company’s Systems/Mission Critical Processes
Agenda Current Sustainability Paradigm Move To True Sustainability How To Build Sustainability Financial Statements and Sustainability Framework To Fix Broken Companies Case Studies 4 ™ &©
Proprietary and Confidential Current Sustainability Paradigm
Sustainability Myths Accounting – Financials determine ongoing concern Banking – In loan covenants equal company health Venture Capital/Private Equity – Hitting ROI targets define growth potential Insurance – Financial-based risk models minimize issues ™ &©
Macro Economic Effects Difficult times ahead: Commodity prices going way up Fed easing created bank deleveraging National debt focus will cut services Unemployment to hit public sector Uncertainty in Mid-east to keep oil high 7 ™ &©
What Owners Will Tell You If I only had another $1.5 million……. The economy is wrecking my business…… It’s the Union……. I can’t find anyone who wants to work…… My customers won’t pay me on time….. Once we get the order we can’t deliver…… Why is my bank doing this to me? ™ &©
Owners Response: Death Spiral 9 Fire Marketing Department Let go of Sales Team Eliminate Senior Operators Quality fails rapidly Production clogs Your Banks call loans ™ &©
Proprietary and Confidential Move To True Sustainability
Let’s Start With The Basics Five questions you need to ask: Tells you how engaged ownership is in business Reveals how profitability is calculated Validates that there is a system to understand true costs of business Confirms if company has built sustainable infrastructure 13 ™ &©
15 What You need to askWhat You want to hear Walk me through how you calculate velocity of money? We calculate velocity of money by tracking the steps and how quickly $1 of investment is returned to us. This enables us to know exactly how long it takes to get our return on investment. If You HearIt Means What do you mean by velocity of money? They do not actively manage/measure key financial activities like creating an invoice, A/R collection duration. Typically they are using a line of credit as a lifeline that continually grows. Question 2 ™ &©
Question 3 16 What You need to askWhat You want to hear What is your cost to quote? How much does it cost you to prepare a quote? There is a fully cross-functional team; there is a template that all participants contribute to; prices updated monthly on all core buy items; targeted GM vs gross GM. If You HearIt Means What do you mean or we have a quote engineer who reviews? Suspect accountability at best; little traction/reporting on how quotes are developed and priced. ™ &©
Question 4 17 What You need to askWhat You want to hear What is the smallest order you'll entertain? Actual order numbers based on gross margin relationship to cost to prepare quotes. If You HearIt Means I don’t know what you mean?Company is packing dollar bills with each order. ™ &©
Question 5 18 What You need to askWhat You want to hear What is your WACC?We know exactly what our costs of equity and debt are. If You HearIt Means What is WACC? Or, my CFO calculates it only when we need to do a transaction! Business Owner and Stakeholders do not know the relationship between WACC and cap rate. If the company wants to sell ultimately, have no idea how to approach. ™ &©
Building Blocks Of Sustainability How do we build? 1.Start with the systems that make up a business 2.Move to the underlying processes that make up the systems 3.Determine KPIs/CSFs 20 Design Manage Measure Repeat… ™ &©
Tools Available Software products Process consultants Cost reduction experts In-house operators Subject matter experts – Including Six Sigma, TQM, Lean Flow etc. 21 ™ &©
A Good Sustainability System … Integrated 360 program Experienced turnaround owners implementing Full lifecycle –identification through implementation Integration without interruption Tools for continuous monitoring and improvement 22 Chief Restructuring Officer AssessmentValidationRetooling Drives Proprietary and Confidential ™ &©
Core Systems To MCPs 23 New Product Dev. ITOperations Human Resources Sales Finance & Accounting Marketing Customer Care Mission Vision Culture Alignment Mission Vision Culture Alignment Mission Critical Processes Material: define MRPS flow Material: ID initial notification of material purchase requirements Production: Validate human utilization Production: Validate capital utilization Training: Match skills with demand Eight Core Systems Proprietary and Confidential Exclusive Property of Brill Worldwide, Inc., “BWWI”. ™ &©
Process Management 24 Proprietary and Confidential Eliminate inefficiencies Compress cycle time ™ &©
Measurement Of Processes 25 Proprietary and Confidential CSFAction Plan 100%Finalize in next two weeks or fire supplier 25 daysAnalyze gaps, provide terms to holdouts 2.5 daysNo action plan, exceeded target 2 daysRe-review of process, clean up gaps and issues 98%Schedule server downtime, perform full maintenance ™ &©
Proprietary and Confidential Financial Statements & Sustainability
Financial Statement Use Financial statements are an end result – Fixing the statements does not fix core issue Owners often unfamiliar with key financial drivers – No ability or know how to track profitability Connected systems drive financial health – Mission Critical Process management promotes efficiencies – Efficiencies directly impact financial statements 27 Proprietary and Confidential Exclusive Property of Brill Worldwide, Inc., “BWWI”. ™ &©
Impacts Key Lending Ratios* 28 MetricStatus Sustaining Debt Coverage Ratios: - Times Interest Earned - Principal Coverage Earned.1x.5x 1x 2x 2.2x Leverage Ratios: - Debt/Tangible Net Worth - Debt/Total Capitalization - Utilization Ratio 2x to 3x 60% to 70% 20% to 30% 1x to 2 x 40% to 50% 45%.5x 33% 82% Capital Utilization Ratios: - Days Sales Outstanding - Days Payable Outstanding - Raw Material Inventory Turns 180 Days 365 Days 2 90 Days 180 Days 6 30 Days 90 Days Min. 12 Other Key Ratios: - Gross/Direct Margin (%) - EBITDA (%) 10% to 15% Directionally Negative 15% to 20% Drive to Break Even >20% Directionally Positive *Source: Average BBS Data Proprietary and Confidential ™ &©
Targeted Financial Ratios* 29 MetricStatus Sustaining Liquidity Ratios: - Quick Ratio - Current Ratio Upside Down Artificially High Neutrality Neutrality at Best 1.2 to 1 2 to 1 Capital Utilization Ratios: - Return on Assets - Return on Capital Employed - Velocity of Money Negative Not Measured No Idea 0 Measure for First time 12.5% 20% 3 to 5 Turns per Year Other Key Ratios: - WACC - Borrowing Base/Debt Capacity Way Too High No Clue Measure for First Time 33% *Source: Average BBS Data Proprietary and Confidential ™ &©
Proprietary and Confidential Framework to Fix Broken Companies
Framework To Fix 31 Proprietary and Confidential Quick Gap Identification Fast Financial Results EnablesFacilitates Sets Up Foundation for Growth CSF/ KPI Measures ™ &©
Quick Gap Identification 32 Proprietary and Confidential Exclusive Property of Brill Worldwide, Inc., “BWWI”. ™ &© MCPIdentified Gap MRPS Operations is not involved with any of the sales and marketing efforts MRPS Significant number of SKUs MRPS Too many real time schedule updates/changeovers MRPS Schedule is given at most a day in advance, many times less MRPS Significant amounts of product in storage MRPS No setup before first shift, creating downtime before production MRPS No checklists exist, particularly for set up and take down MRPS No formal system for addressing the scrap on the floor MRPS Short runs continually disrupt ongoing operations
Fast Financial Results: Identification 33 Proprietary and Confidential Exclusive Property of Brill Worldwide, Inc., “BWWI”. ™ &© Operational Leakage Factor BBS MCP Line ItemLost Cost Estimate Months Analysis2012 Quality ProcessTraining/Loading Inventory = less purchases (less money needed for purchases because get higher yield) Quality Control & Federal Inspection Returns (?) Labor Dir Labor/Indirect Labor Scrap $3.5 million - Cookdown Total: $2.1 Million Available 5% $100K (Very Well) 10% $200K (Superb) $ HR Rightsizing Utilization/Training Utilization/Training/Loading /MRPS MRPS/Loading Training Equipment Repairs & Maintenance Vehicle Repairs & Tires $2.5 million as a result of 60% productivity $1.0 million as a result of firing leasing 5 Ghosts 24K = $120K Eliminate 10 temps = $240k Delta on Henry = $30k Conversion = $600k $1million total available we'll do $500k $ One Additional Earned Hour Utilization/Training/Loading /MRPS Labor Dir Labor/Indirect Labor If get an extra hour, make $10.5 million, if get 10% of that = $1.1 million in revenue if costs are 30% then $330k $ Utility Costs Utilization/Training (Maintenance) Heat, light, power, & utilities currently $1.2 million, plus other utilities, assume $1.3 million Assume: $390 is 30% of 1.3 million, we'll get half of that about $200k $ Total $7.300
Fast Financial Results: Action 34 Finance & Accounting Operations Marketing A/R turns Expense Outlays A/R turns Expense Outlays Increase “Velocity of Money” Identify “Pain Points” and achieve quick impacts Drive to “Break-Even” Realize early team wins Inventory Costs Vendor Pricing Inventory Costs Vendor Pricing Margins Sales Mix Margins Sales Mix Proprietary and Confidential ™ &©
Foundation For Growth: Design 35 Proprietary and Confidential Processes mapped to activity detail ™ &©
Foundation For Growth: Manage 36 Proprietary and Confidential Exclusive Property of Brill Worldwide, Inc., “BWWI”. ™ &© Baseline diagrams translated into detailed tables ActivityOwnerMins. Salary (FL) Total Cost MRPS Long Term Production Plan ID Material Requirements Input six week/ future sales projections into Sales DatabaseJ. Doe10$50.00$8.33 Calibrate scheduled orders over six weeksJ. Doe90$50.00$75.00 Determine under utilization of MachinesW. Smith90$35.00$52.50 Access six week/future sales projectionsCFTeam45$250.00$ Calibrate six weeks sales projections with parts neededCFTeam45$250.00$ invite and Matrix to Company ManagementCFTeam3$250.00$12.50 TOTAL $536.33
Measurement Of Processes 37 Proprietary and Confidential ™ &©
Proprietary and Confidential Case Studies
Case Study 1: Electric Motor Company Revenue of approximately $80 million Three plants 400 employees Hemorrhaging cash Loss of market share Highly leveraged Severe quality issues Customer litigation drain 39 Proprietary and Confidential ™ &©
Case Study 1: Year 1 Results 40 Key Metrics Before the BBSKey Metrics After the BBS Operations: Productivity at minus 5% Massive product inefficiencies Operations: Got productivity above 3% (8% improvement) Increased product efficiency by average of 7% Finance: Bloated cost structure Highly leveraged cost structure Inefficient supplier network Finance: Drove $3 million from cost structure De-leveraged 100% in eight months Increased on time deliveries to 92% -- significant increase in “Velocity of Cash” Marketing: Abundant useless inventory Marketing: Drove inventory down by 64%; increased turns to 17 Customer Care: Delivered quality at 27,500 defective parts per million Customer Care: Drove delivered quality to 1,100 defective parts per million Received the John S. Smith Champion for Quality award Proprietary and Confidential ™ &©
Case Study 2: Power Conditioning Company Revenue of approximately $46 million Two initial plants 175 employees Severe quality issues 41 Proprietary and Confidential ™ &©
Case Study 2: Year 1 Results 42 Key Metrics Before the BBSKey Metrics After the BBS Operations: Bloated inventory Highly burdened overhead costs “Earned Hours” of four hours per day Operations: Reduced inventory by 40% Eliminated 37% of overhead costs Increased “Earned Hours” to over Seven Hours per Day Finance: 25% Decline in Revenue Inefficient supplier network – 47% On-Time deliveries Finance: Grew sales 12% from bottom On-Time deliveries increased to 82% Marketing: Loss of position in two vertical markets Marketing: Regained position in both markets and expanded into a third market Customer Care: Suffered from national recall of installed product base (Approx. $6 million) Customer Care: Completed change-outs to their satisfaction in less than 6 months Sold to industry competitor Proprietary and Confidential ™ &©
Case Study 3: Sheet Metal Fabricator Revenue decline from $4.8 million to $2.5 million Single plant with 51 employees Hemorrhaging cash/severe tax problems Highly leveraged/unable to purchase raw materials Loss of major customer One large customer accounted for 50% plus of sales 43 Proprietary and Confidential ™ &©
Case Study 3: Year 1 Results 44 Key Metrics Before the BBSKey Metrics After the BBS Operations: Inefficient production flow Routinely late deliveries Low “Inventory Turns” (Approx. 2X) Operations: Restructured and drove Lean/Six Sigma through entire operations Implemented an integrated CAD/CAM system to facilitate rapid and more accurate quoting Drove raw material turns to 22X Finance: Highly leveraged cost structure Negative shareholders net worth Finance: De-leveraged 75% in eighteen months Drove Balance Sheet to a positive book value Marketing: Highly concentrated in one customer Marketing: Re-negotiated with major customer to higher margin Identified and secured other high margin accounts in new verticals Sales: $2.5 million upon entry Sales: Drove sales to a record $5.8 million De-concentrated sales base where top 16 companies accounted for 76% of sales Proprietary and Confidential ™ &©
Case Study 4: Technology Product Manufacturer Revenue just over $2 million/negative net worth Single plant with 40 employees Aging products in commodity market Great industry reputation Production floor totally constipated Significant portion of sales through independent distributor 45 Proprietary and Confidential ™ &©
Case Study 4: Year 1 Results 46 Key Metrics Before the BBSKey Metrics After the BBS Operations: Inefficient operations Producing at less than 10% plant capacity Operations: Restructured the total plant and maxed internal capacity Implemented Lean and Six Sigma Outsourced to strategic vendors New Product Development: Existing product line tired and commoditized New Product Development: Took from concept to design and manufacture market- leading product Marketing: No marketing plan Minimal international presence Marketing: Developed and implemented a comprehensive strategic marketing plan Drove 30% of sales internationally Sales: Just over $2.0 million upon entry Sales: Drove sales over 5X the first year Developed and grew internal sales force Sold for significant multiple to strategic acquirer Proprietary and Confidential ™ &©
Contact Information 47 Ed Brill, Founder & CEO OPTI & BWWI (c) Morgan Baird, President OPTI (c) George Gordon, President BGOV (c) 6 Sentry Parkway Building 630, Suite 110A Blue Bell, PA Office Proprietary and Confidential Exclusive Property of Brill Worldwide, Inc., “BWWI”. ™ &©
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