This simple insight comes from a range of restructuring and turnaround projects in companies in crisis. The causes of financial difficulty usually take hold long before they become acutely visible. What matters is not the size of the company but the complexity of its products and services, and of its customer and supplier relationships. Even a larger craft business can shine through good planning or ruin itself through bad.
Two short examples illustrate how this works.
Example 1 · Challenges in material planning and what they lead to
In a dynamic market environment, a company runs into significant difficulty with its material planning. Although raw materials are commodities with good availability and flexible suppliers, procurement is based exclusively on average past consumption. That approach proves problematic when unexpectedly rising customer demand meets a rigid, backward-looking procurement strategy. Disrupted supply chains make matters worse, because they make short-term procurement considerably harder.
Special effects push demand up further, driving procurement costs with it. The material ratio rises by several percentage points, with considerable consequences for the cost structure. Despite the increases in purchasing, the company hesitates to pass the price rise on to its customers. That decision leads to a noticeable fall in liquidity.
The situation ends in a restructuring concept with extensive measures. For the owning family it means liquidating assets in order to refinance the company. A modern procurement and stocking strategy would have avoided all of it.
Example 2 · Complexity & risk when adapting to customer requests
In our second example a company accommodates a large number of special customer requests, and as a result struggles to meet its revenue plan. The customer focus means many parts have to be redesigned – which is not only a significant factor in time but also a challenge for the product design itself.
Clarifying what the customer needs takes a long time and remains partly incomplete, because the customer’s language is not that of the design engineers. In an effort to start manufacturing and procurement as quickly as possible, production orders are often released prematurely, even when the material needed is still in transit. Departing from the standard product means taking the second step before the first.
This leads to a chaotic production process in which it frequently turns out that, to save time, bills of materials were taken from templates in other projects and are then incomplete or wrong. Special procurement measures become necessary, which cause not only delays but also re-prioritisation and occasional interruption of production orders. The errors only surface in final assembly.
Reorganising the assembly sequence and the extra assembly effort cause further complications. The IT system is readily bent out of shape just to get the order through production and assembly at all. Delivery dates cannot be met, which damages customer satisfaction and the company’s reputation. On top of that, a considerable share of liquidity is tied up in work in progress, putting further strain on the financial position. The situation ends in an acute liquidity crisis that makes comprehensive restructuring necessary.
What was missing here, among other things, was modern variant management and an order fulfilment process adapted to it.
The causes
Both examples show that the causes of the restructuring that becomes necessary reach back much further than first assumed. It is a widespread excuse that companies get into difficulty overnight. Many businesses absorb years of mismanagement before the delicate balance is disturbed. External shocks such as market changes are frequently only the trigger, not the deeper cause.
The core principle of management looks simple: set objectives, then plan and steer their achievement. You might think the challenge lies in reaching over-ambitious targets. Far from it. The crux lies in planning and delivery. Why is that?
Planning and control processes are frequently underdeveloped. Garbage in, garbage out is not the only issue. If process and data structures were not set up properly, no amount of effort will produce good results. “Chasing chickens instead of mending fences” was how one plant manager put it, faced with the fact that his production planners and schedulers spent around 80 per cent of their time chasing dates and only 20 per cent on their actual planning work.
A central problem is the lack of transparency. Information is often hard to access, overwhelming, contradictory or slanted. Add to that inadequate data structures and poor quality in the data obtained. Key figures, rules of thumb and even rough estimates have to be right. The master data behind planning has to be current and maintained.
The wrong planning and control methods – a push instead of a pull strategy, for instance – make the problem worse. So do missing or misleading feedback and systemic errors, for example when preferences for particular product or customer groups lead to inappropriate use of resources or to excessive complexity.
These factors lead to a chain of complications: opaque costing, misallocated costs, uncertainty about stock and material availability, and a distorted assessment of customer orders. The consequences can be severe – long delivery times, poor on-time performance caused by wide variation in lead times, high inventories and frequent missing parts. The effects frequently amplify one another. In the worst case they lead to a liquidity crisis or even insolvency.
It is essential to counter these pitfalls with transparent information flows, adequate data structures and realistic planning and control. Only then can the effectiveness and efficiency of the company be secured in the long term.
An economic cycle usually consists of a downturn, a stable but weak phase, a subsequent upturn and so on. Ideally, key figures signal the shift from one phase to the next early. That gives you the chance to plan an appropriate response instead of being overrun by events. Your company’s key figures should therefore deliver high-quality statements for every phase.
How to keep your business on course for the long run
Where do key figures come from, and how do I get them?
They come from your own company, or from its data warehouse. At best they are generated automatically and as a time series – how they are presented is then a matter of taste. What matters is combining them with the company’s sticking points: bottleneck equipment, logistics components, resources with limited availability, or resources with lead times long enough to put the order date itself at risk.
When things are not going the way you would like
In a dynamic environment, the future has to be anticipated faster
Outdated indicators, rules of thumb and back-of-the-envelope solutions are often not enough. Years of experience based on old figures – twelve-month averages and the like – have to be treated as critical if they are not checked regularly for whether they still hold.
Corporate planning is part of a whole system – the entire business process. Using it in a modern, flexible and realistic way requires regular feedback from every part of the company. The more precisely feedback and expectations are formulated, the better you can work with them. Only then can a whole-system planning process be set in motion that supports every area, from first customer contact to delivery of the product, through transparency. This is where the lean idea comes into play, because bad planning really is the greatest waste of resources. Positive examples show how a whole-system approach can shorten delivery times drastically and increase variant flexibility in a manageable way.
