Editor's note: This is the latest in a series of case studies about business turnarounds. The name and identifying details of the company used as the example have been changed.
Problem: No Profit Plan Leads to No Profits
The Trail Creek Trailer Co. in southern Arizona has gone from making more than $100 million in sales to less than $10 million in five years. Operating costs haven't come down in sync with dwindling sales. This company is running at such a huge loss that it's circling the drain.
Pete, the founder and sole proprietor for more than 30 years, made his living designing and manufacturing flatbeds, trailers (both boxed and refrigerated), and all sorts of cargo haulers used to carry goods across the country. Pete is a hardworking guy. He loves his business and has devoted his life to it. But the sagging economy has been taking its toll. With demand at an all-time low, fewer products are being shipped out and there's less need for transportation. Shipping companies—Pete's regular clients—are going bust all around him, and orders for new accessories and equipment for trucks disappearing along with them. The demand for carrying beds naturally slows when there's nothing to carry.
But problems in the business are also systemic. Pete doesn't have a plan in place that puts profits first. From the top down, there's no financial discipline. Departments are wasting money and starting production on orders before they are confirmed, only to find them cancelled by clients at the last minute. He no longer needs the same amount of manufacturing space or workers. He should have reduced costs substantially years ago, before his financials reached this point. Laser-sharp focus on his profits would have helped him zero in much sooner on where the cash leaks in the business are.
At first Pete thought his spiraling sales were a temporary snag he could work through. But as sales slump to the point that he is looking at bankruptcy, he has to face the fact that he needs to turn his business around. And quick.
Solution: Switch Gears Into Financial Discipline
It's time to embrace change. There is no way Pete can sustain the sales he had in 2001. Whoever isn't essential to the operation has to be let go. We've advised him to work out a deal with the head of his workers' union so the operating plant can be open four days a week instead of five. The union took it. As it turns out, the output is comparable to that of when the plant was open the full five. That proves an important point. Give people too much time and they'll use it. Expect the same results with less, and you'd be surprised how much more effective they are. The workers also appreciate the extra day off. Even if it means less income, it's better than being laid off.
Pete has been loyal to his workers. Unlike larger manufacturers who've opened plants in Canada and Mexico to save on the soaring costs of health-care benefits, Pete has kept all production in the U.S. He'll be able to continue to do so, but only if he's disciplined about reining in costs elsewhere. (Health care and taxes are always manageable when you practice comprehensive fiscal discipline.)
The owner is also renegotiating with components suppliers. If they aren't willing to lower their prices on items like axles and refrigeration equipment, Pete must threaten to go elsewhere. So far, they are complying.
Pete has to get just as tough on his customers. We're pushing him to routinely get release dates on when any new orders can be accepted so he doesn't suddenly find himself with an extra inventory of 10 box trailers because the shipper bailed. In addition, where possible, Pete is now demanding a 20% deposit on new contracts.
He also needs to generate more business. We drilled the cold hard fact into Pete that if a company owner doesn't have an ever-evolving plan for bringing in business, he might as well not show up for work. Using a flagging economy just becomes an excuse to stop trying. We told him to relish the challenge of making a profit and stealing more customers while the competition loses. Now he's getting creative, and finding more customers for his specialty trailers. Now he's getting orders for everything from dump trailers to horse haulers. He's also expanding his market to shippers based in states well beyond the Southwest.
Pete's a fighter. When he contacted us this past spring, all he wanted was to be able to stay alive until the next year. This is a man who saw everything burning to the ground in front of him, and said, "I am not sticking with this anymore."
He is surprising himself with how quickly the business is turning a real profit. Now he's doing $30 million in sales, and we predict he'll exceed $40 million next year. But these sales are tied to a specific profit target, and every department head is being held accountable, including himself, so no one misses any cash leaks. Pete's on track to net 5%, making him an industry leader.
The sales may be less than half of what they were at their peak, but he's actually making a bigger profit than he was five years ago. He put his employees on pay for performance and set clear budgets and sales targets. Everyone knows what they have to do. Now his expenses are a fraction of what they were when running at full throttle. The cuts have been painful, but it sure beats shutting the company down.
Pete is someone who wanted to listen to us and learn. That's the difference between this business owner and thousands of others who either give up or live in denial, refusing to do the hard work of culture change.
Pete put his whole heart into it. He was ready and willing to make a drastic overhaul. Now he's hauling his business back onto the road of pure profits.
—with Samantha Marshall