A U.S. business unit that manufactured cleaning equipment, owned by a larger European publicly held corporation, was losing money despite modest sales growth and a competitive market position. The business had been profitable when acquired by the corporate owner several years ago. The entrepreneur/owner was no longer running the company, and day to day decisions that impacted profitability were being made by employees who often did not understand the impact of their decisions. The business unit had recently transitioned to a new ERP system that was not yet completely implemented, so there was a lack of usable data for understanding the situation.
An experienced executive, who is now a E78 partner, was engaged as the interim president and general manager. His first step was to quickly develop interim reporting on product line profitability and price trends. After analyzing the situation with the help of the existing management team using these interim reports, three solutions were identified that had the highest potential to reduce costs and improve profitability:
- Implement a quality improvement and testing program to reduce warranty costs,
- Restructure pricing and rebate programs in the distribution channel, and
- Divest a small, unprofitable product line.
- The quality improvement and testing effort revealed that several key components were not being built to the original specifications by a supplier. Once that was corrected, warranty costs were reduced by 50 percent within 90 days.
- By negotiating with distributors and eliminating certain rebates and price discounts, net realized prices per unit increased by 5 percent.
- With approval from the parent corporation, the unprofitable product line was phased out over a several month period, and the organization was able to eliminate the associated overhead.
- Overall gross margins improved to pre-acquisition levels of 35 percent, and the business unit was able to consistently generate a positive pre-tax profit within six months.