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Editor's note: This is one in a biweekly series of case studies about business turnarounds. The name and identifying details of the company used as the example have been changed.
Problem: Seat-of-Pants Management Style Kills Cash Flow
Lunch Box Inc. is a Georgia-based food manufacturer that produces frozen meals for schools, hospitals, and the military. These institutional customers placed the kind of large orders you would expect to guarantee income for any business lucky enough to become a supplier, and at its peak Lunch Box was doing well, bringing in $11 million a year with a 12 percent profit margin in 2007. But that was three years ago. Since then, revenue has dropped to $9 million and profit is nonexistent. Sheila and Dan, the husband-and-wife team who own the company, have maxed out their line of credit at the bank and they are struggling to make payroll for their 24 workers. Debt has mushroomed, and the owners are looking for a miracle.
Part of the problem is that their business is seasonal and there isn't a lot of consistency in the orders they get. In fact, sales gyrate wildly. Their factory sits idle for months at a time and they get no business from the schools during the summer. And when the orders do come in, it happens all at once and they are overwhelmed.
They keep their workers on full-time in anticipation of these busy periods, wasting hundreds of man-hours on a fully staffed factory floor even when there is nothing to do. They are ordering packaging and food supplies that go to waste when the orders don't come in. That's hundreds of thousands of dollars in operating costs down the drain. The only way out of this mess is a total overhaul of the owners' management style. It's going to take hard work, planning, discipline, and follow-through.
Solution: Think (and Plan) Ahead
Sure, the military orders are unpredictable. But Sheila and Dan always know when the school orders are going to come. The school year never changes. So there's no excuse to be caught off guard. They have to do a better job of communicating with their customers and anticipating what is going to happen. Dan and Sheila, and the sales staff who take orders, should not just be sitting around waiting for the phone to ring.
We recently made them sit down with each of their customers, to pin them down and chart them on a three-month order window. Previously they were making product 120 days ahead, whether they had a firm order or not. Instead of their manufacturing 100 percent of the prepared meals on hope, we're having them do 50 percent on everyone's best guesstimate, so they don't get caught short, or long for that matter. From now on, Lunch Box is manufacturing to ship against orders. Imagine that!
We've also persuaded the owners to do something they've resisted for far too long: put workers on furlough. Several days a month, every month, people are staying home in accordance with production levels at the factory. In the first month they've already seen savings of 20 percent on payroll, or $25,000. Dan and Sheila don't need to worry about losing good workers as long as the shifts are well-managed. In our experience, most people would rather work four days a week than none at all. We spoke to staff members ourselves, and they're fine with the decision. They know they'll be working full time soon enough, when orders pick up. In today's economy, furloughs are a fact of life we all have to accept.
Now that they are starting to implement these changes and see results, we've been able to present their new business plan to Lunch Box's lenders and creditors. They were impressed. Instead of clamoring for payment and exacting cash on demand for any new orders, they all backed down and agreed to give us an additional six months to get cash flowing again. They had faith in Lunch Box's new direction. That extra breathing space, the more continuous flow of orders and production, and the savings from payroll will bring the company back to profits even if sales aren't what they used to be. But we aren't finished yet.
For the past three years, this nice couple have been paying a chief executive $200,000 a year. Looking back, it was hard for them to identify any contribution this guy made to running their ship. If anything, his arrival coincided with a fall in business and the company's roller-coaster production schedule. He contributed nothing to sales, and planning manufacturing against orders should have been his first move when he took the job.
They certainly don't need him now. Dan and Sheila have a plan, and it doesn't include him. They just added another $200,000 a year to their bottom line. This is about taking control. It's your business. Don't count on the unpredictable orders of a handful of customers to survive. Know what's coming and think ahead.