Welcome to the July edition of Manex ViewPoint, our quarterly e-newsletter.  Each issue provides a wealth of information on innovative solutions to maximize your business performance.

In This Issue:

We invite you to read our previous issues on our website at the following link.

San Joaquin County Manufacturing Summit, Tuesday July 22^nd

The Summit is complimentary and is designed to provide an invigorating forum on ways you can maximize your manufacturing performance.

• Breaking News on Enterprise Zone Incentives
  • Mike Locke, San Joaquin Partnership
• R&D Tax Credits to Offset Your Costs
  • Bob O'Connor, Moss Adams
• Solutions for Revenue Growth and Process Optimization
  • Steve Alman & Bill Browne, Manex
• ISO Certification (and others) to Streamline Operations
  • Phil Friedman, Perry Johnson Registrars
• Business Networking and Knowledge Exchange

Please register early as seating is limited.  A complimentary continental breakfast will be served and you will have an opportunity to win a manufacturing assessment.

Location & Time
Moss Adams Offices
3121 West March Lane Suite 100
Stockton, CA 95219
7:30 AM - 11:30 AM
*Continental Breakfast Included

Automation Controls, Bosch, and Manex to Host Lean Manufacturing Workshop, Wednesday July 9^th

Manex, Automation Controls, and Bosch Rexroth invite you and your colleagues to attend our Lean Manufacturing Workshop. We have limited seating so this will be on a first come, first serve basis!

You will learn the 9 principles of Lean:

• Continuous Flow
• Lean Machines Simplicity
• Workplace Organization
• Parts Presentation
• Reconfigurability
• Product Quality
• Maintainability
• Ease of Access
• Ergonomics

Lessons in Driving Manufacturing Prosperity in a Slowing Economy

At the beginning of the millennium, a California winery was experiencing these significant performance challenges compounded by the effects of the “dot com” bust, 9/11, and a waning corporate culture that had not progressed in 30 years.  The company’s imperative to address this crisis was to establish a new culture, eliminate surplus trade inventory, and ultimately grow the business by double digits over the next 5 years.

Practical Steps in its Turn Around
It is very easy to stop financial hemorrhaging by cutting marketing funds, laying off non-essential employees, and implementing the fire sale of inventories; however in most cases these practices can undermine growth and prosperity.  As this winery learned, a more effective strategy to reap short-term and long-term benefits is to understand customer needs, product profitability, and the cost of manufacturing to not only survive the hardships of a weak economy, but thrive and grow.

With a renewed culture, clear corporate objectives and aligned strategies, this winery dramatically improved overall sales on average by 20%, increased revenues by 75%, and boosted profits to the low 8 digits ($200M to $19MM).
The company began its recovery by undertaking the following steps in their newly developed long term sales and operations strategy.

• Customer- Focus:
  • With 50% of wine sales in California, in-state customers were asked how they promoted products and what programs could be designed to meet and exceed their profit targets.
  • New channels were developed that included selling branded and non-competing house-branded wines.  These house-branded wines provided better margins and lowered the WIP inventory of aged product.
  • A box store’s volume was increased by creating a manufactured on-line tray-pack type package. As an added value, extra work of cutting down boxes at the store-level was eliminated resulting in cost savings to the end consumer.
  • New luxurious wine labels were created which in turn provided competitive differentiation.
  • The tasting and experience of touring the winery was transformed with a focus on promoting the profitable Club business and selling full margin cases.  With a new focus on the customer, this existing opportunity was easily revealed in the analysis of core competencies.

• Operational Efficiencies:
  • Excess inventories of bulk wine were sold which helped to eliminate carrying costs of storage and free up cash.
  • Rigorous quality standards were established for the application of dry materials and the organization of shelves. The strict adherence to these standards resulted in the reduction of wasted dry materials and need to repair labeled bottles.
  • A “Total Preventive Maintenance Program” was initiated to eliminate a reactive response to unpredicted down time. This was done through the establishment of a scheduled maintenance program, focused on reducing downtime, and monitoring of equipment while running.
  • Productivity tracking was established by measuring output in units per hour and effort hour. This information was useful in measuring the degree of perfection as it related to quality and to the increase in uptime of the production lines.
  • A comprehensive supplier selection criterion was implemented based on the supplier’s ability to provide high quality products.  This in turn reduced downtime and the volume of in-house quality inspections of dry materials.  Surprisingly, instead of supply costs rising, they decreased with suppliers improving their productivity through process efficiencies, technological advances and the elimination of waste.
  •  A comprehensive perpetual inventory control system linking ERP and MRP requirements was implemented by which daily waste and monthly shrinkage could be measured. The loss of finished goods per year outside of breakage was lowered by over 1500 cases per year to less than 10. The loss of dry materials as measured in total dollars spent was reduced to less than .7%.

Lessons Learned to Drive Prosperity

• Customer Focus: Strategically, understanding your customer mix and customer buying process can greatly enhance your bottom line by revealing how different channels promote, sell and ultimately profit from your products.   Understanding how your channels use marketing funds can greatly improve your chances of becoming a featured item. Some customers may want to promote your most profitable SKU if unique packaging can be provided at little or no increase in the cost of goods. A customer may be able to sell a house brand of your manufactured product, allowing for the same margins as if it were sold through a distributor. Lastly, it may also be important to redesign the packaging appearance to allow for more product differentiation from your competition.
• Operational Efficiencies: Within the area of operational efficiencies, it is very important to understand how the efficient sourcing of materials affects the bottom line through supplier performance regarding on time delivery, quality of materials, innovation, and willingness to share in productivity gains. Production efficiencies should be measured based on value added metrics that address the areas of quality, productivity, maintenance, and safety. Distribution can be measured through customer service levels, inventory valuation and levels, productivity, and outgoing freight costs.  Reductions in cost can help to lower the price of your product, provide funding to trade and marketing plans, and ultimately lead to higher revenues.

100% Inventory Financing Available for You

Purchase Order financing involves the acquisition of 100% of the inventory required to satisfy outstanding purchase orders.  This type of accommodation enables an importer or distributor to expand its borrowing capacity, without the disruption of existing loan relationships, while increasing sales and earnings to a level otherwise not possible.

Purchase order financing can play an important role in a variety of situations, from start-ups, to turnarounds, acquisitions, and the financing of seasonal needs.  As U.S. and Canadian companies continue to look overseas or in North America for product, Purchase Order Financing becomes an important solution to a company’s financial problems. 

Manex has relationships with a variety of banking and funding professionals who provide purchase order financing to satisfy your company’s inventory requirements, along with other value added services to help you achieve your business objectives.

For more information on how Manex can help manage distributor relationships, contact Jonathan Lee, jlee@manexconsulting.com.

Crafting a Successful Request for Bank Financing

“The wise man bridges the gap by laying out the path by means of which he can get from where he is to where he wants to go.” (JP Morgan)

Bridging the information gap will help keep your request for bank credit moving forward.  When a new business opportunity presents itself, and bank financing is an important step to achieve that opportunity, how do you talk with your banker? How can you turn what would otherwise be a casual appeal for more debt into a successful, well-thought-out presentation?

When having discussions with your bank for expanding manufacturing capacity, or entering a new business line, have well-thought-out responses to the following key issues:

• Provide a clearly defined transaction addressing the amount of debt required (often including contingency amounts) and the term required to repay the obligation.
• Outline identifiable and demonstrable sources of repayment that match the type of loan required (term business loan in contrast to a revolving credit line).
• How will the loan be repaid if unforeseen credit risks weaken the primary source of repayment?

The bank’s analytical process will be centered on identifying and mitigating risks by addressing the following major factors:

• The reliability of the first source of repayment.
• Whether the loan is properly structured.
• The viability of a secondary source of repayment and its lack of dependence on the first source of repayment. (Deteriorating cash flow may suggest underlying problems with the quality of receivables, inventory or manufacturing equipment). 

It is crucial to the success of a loan request to clearly state and support your position in a way that the bank will value. A lender will seek to be repaid in accordance with the terms of the negotiated credit agreement and the lender expects to understand in advance what the secondary source of repayment is, if the first source of repayment fails to materialize. The back-up sources of repayment are central to suppliers of debt capital, as they are not being compensated for taking on equity risk.

An important trait of a traditional bank term loan is that, while total return may be substantial for an enterprise owner, the lender’s rate of return is limited to a spread over its cost of funds. With a new businesses venture, or expansion of an established business, this risk and reward trade-off is at times overlooked by the business owner, and yet is critically important from the lender’s perspective. The ultimate risk, however, is often the same for both lender and equity holder – the loss of part or all of one’s investment.

After receiving a loan package request from a prospective borrower, the bank’s credit analysts will consider, among other items, the following risk factors:

Economic Risk

• General economic environment and its trickle-down impact on the industry and borrower.
• Foreign trade issues (including exchange rates and tariff policies, international trade barriers, etc.) and their impact on exports and imports for the manufacturing enterprise.
• Interest rate trends and how sensitive the firm’s capital structure is to rising rates.

Enterprise Risk

• Quality, tenure and depth of management including management succession planning.
• Diversity of the firm’s product and customer base
• Susceptibility to product obsolescence, new product pipeline and product substitution.

Financial Risk 

• Stability and sustainability of cash flow after maintenance capital expenditures (free cash flow).
• Evaluation of current and future liquidity to support an unexpected contraction in cash flow from declining revenue or delayed receipt of receivables.
• A well-balanced capital structure, free of over-reliance on debt capital to support ongoing operations and future plant expansion.
• Quality of financial reporting and asset valuation.
• Sensible multi-year projections with detailed supporting assumptions that will also provide a foundation for creating bank-generated “stress case” scenarios.
• The level of off–balance sheet financing (primarily long-term operating leases) that will be capitalized from a lender’s perspective when evaluating leverage.

As prospective borrowers make a case to the bank for a line of credit, it is important to put the business’ history in perspective – help the lender understand the organization’s background. When was it founded? What is the purpose of the business, and what investment in time and money has already been put into the organization?

An insightful review of the firm’s historical capital structure will help the bank understand:

• The mindset of the business owners and the level of risk they are willing to accept relative to the creditors
• The firm’s vulnerability to rising interest rates.
• The business’ ability to absorb unforeseen financial stress.

The bank’s credit analysis process is aimed at:

• Drawing sound conclusions from understanding the market risk and firm specific risk associated.
• Its desire to reasonably mitigate the uncertainty of adverse events that may arise within the time horizon of the contemplated repayment schedule.

Market risk, from a lender’s perspective, is characterized by factors impacting the entire economy and all market participants. Firm-specific risk is attached solely to the unique business enterprise. A bank will look for a strong level of comfort by accepting low firm-specific risk to largely offset the inherent uncertainty of market risk, which cannot be controlled.

Because a closely-held business cannot easily access outside equity capital the way a publicly traded corporation can, a bank will look to off-balance sheet capital available from the business owner. This capital is typically accumulated through the distribution of previously-earned business income, whether by salary or other disbursements of income.  

As free cash flow and a prudent capital structure allow, income distributions can be made so that liquid and non-correlated investments can be made outside the business enterprise. This provides off-balance sheet support to the manufacturing enterprise during times of business contractions.  An important consideration for a business owner is to avoid the lure, despite following your business’ industry day to day, to be overly concentrated in that industry sector. Separate the risk of your personal investment portfolio with investments that are not interdependent with your business.

An essential success factor when raising bank debt is to better understand the systematic process that a bank uses to analyze, quantify and mitigate credit risk. Using a well-thought-out approach to objectively present the credit request and supporting information pays a dividend back to the business owner. Successful business owners take the time to know the needs and requirements of their best suppliers and customers. As a supplier of debt capital, this approach can be applied to your bank relationship, too, as the first step toward expanding your business.

Manex has relationships with a variety of banking and funding professionals who offer and provide financing to help you achieve your business objectives.

For more information contact Jonathan Lee, jlee@manexconsulting.com.

Shipping: Six Steps to Achieving Manufacturing's Holy Green Grail

*Through its content partnership with IndustryWeek (IW), Manex is pleased to provide an excerpt from this IW article directly to you.  More IW columns and articles can be found on Manex’s website.

Manufacturers who incorporate environmentally conscious shipping choices will reduce the costs of bringing a product to market while gaining significant competitive advantage.

The urgency to "go green" has permeated the manufacturing industry from shipping to packaging. For instance, Tesco is already working with manufacturers on carbon labeling to record the amount of carbon dioxide emitted during the production, transport and consumption of the 70,000 products it sells.

Still, manufacturing’s elusive Holy Green Grail remains shipping. The idea of manufacturers offering green shipping options may seem to be anathema to the traditional view of customer service. And it may even scare the wits out of inventory and transportation managers who have to make it happen.

The full article can be found at the following link

Diamond Bullnosing Drives Transformation Change to Impact their Bottom Line

With the rapid decline in the housing market, Diamond Bullnosing Company (DBC), a fabricator and installer of natural stone countertops and surfaces, experienced a dramatic decrease in orders and net income.  To recalibrate their business and thrive in this downturn, the owners of DBC realized they needed outside expertise to help pinpoint the most effective path to identifying new areas of revenue potential and improving their productivity and profitability. The owners turned to Manex to help them drive transformational changes within their organization.

Working with DBC, Manex conducted a comprehensive assessment of the company’s customer, financial, and operational data. Then they jointly developed a central business intelligence system consisting of 12 key metrics to help the company consistently make better business decisions. The Manex team provided a thorough analysis of profitability and costing by product family and customer segment, as well as an analysis of fabrication processes.  As a result, the Manex team identified short-term actions DBC could take to improve their bottom line through the implementation of operational improvements and the pursuit of more profitable customer segments.

DBC moved forward with Manex on key initiatives to increase the operating efficiencies and profitability at its Concord, CA facilities.  Workforce development was a critical component in developing and sustaining efficient operational processes “from customer inquiry through fulfillment”. Training enabled the employees to adopt and continue the new processes, and advanced their overall skill sets.

Manex used a proven methodology to implement these initiatives in a phased approach:

• Operational Assessment: Conducted a comprehensive operational Value Stream Map (VSM), assessing the current “inbound of materials through outbound of finished goods” processes and operating environment, and identifying immediate and long-term opportunities for improvement. 
• Visual Management and 5S Events: Based on the outcome of Phase 1, the DBC teams performed full-cycle, high impact 5S events on more than 10 work areas identified in the Value Stream Map as areas of improvement.  The Manex team facilitated these events to ensured effectiveness and consistency of these improvements across the operations, including administrative processes.
• Material & Product Flow: Utilized the findings from the operational assessment to improve throughput and first pass yield, reduce lead times, improve quality and reduce variance to lessen scrap and rework. 
• Sales & Administrative Process Optimization – Analyzed the findings from the operational assessment to reduce administrative lead times and increase capacity for customer-facing efforts and revenue generating processes. 

“We pride ourselves on customer service, but needed new ways to provide value to our customers and improve our margins in this housing crisis.  Manex has been instrumental in working with us to assess or current operations, implement process improvements, and train our people to sustain these new ways of doing business.  They provided a fresh perspective and clear methodology to help us eliminate inefficiencies and improve our profitability.”  – Domenick Vaticano, Owner, Diamond Bullnosing Company

“Diamond Bullnosing was always the highest quality fabricator in its space; the goal was to ensure the shortest lead times possible (without sacrificing quality) and to segment its customers to properly allocate marketing spend. Now Diamond Bullnosing will be the highest quality fabricator and the most efficient.”  – Jonathan Lee, Vice President, Manex

For more information on how Manex can help you transform your organization, please see our complete list of services for small- and mid-sized companies at the following link.

Wilkinson Manufacturing's New Facility Optimizes Flow and Improves Productivity

With current production levels pushing operations to their limits and more growth anticipated, Wilkinson Manufacturing planned to move to a significantly larger facility.  The new facility would have more than 50% more space to handle future growth and provide the company with an opportunity to portray a more professional image to their expanding base of customers.  The challenge for the management team was how to create an effective layout to optimize production flows in the new facility.

The stakes were high.  An inadequate layout can be highly detrimental to productivity and consequently profitability.  Symptoms include great travel distances in the flow of materials, bottlenecks in resources, excessive handling of materials, deficient information circulation and low utilization.

The Wilkinson Manufacturing management team engaged Manex to assist in reaching their objectives for this new facility and to avoid the pitfalls of a poor design.  Using a phased, systematic approach, Manex worked with the Wilkinson team to optimize flow and work cell layout for the new facility.  The entire manufacturing team was trained in 5S techniques to improve and sustain workplace organization.  A practical implementation of the techniques was completed in key workstations and departments, including Sort, Set in Order, Shine, Standardize and Sustain.  Continuous, efficient flow patterns of materials, personnel and information were implemented using consistent and repeatable processes.

Initial results show significant improvements in productivity.  Throughput improved by 30%; labor costs reduced by 20%; and collaboration and communication have been enhanced throughout the organization.  Manex continues to work with Wilkinson Manufacturing to assist in the move and implement an optimized layout for the new facility.

“The Manex team worked together with us to develop a system for the move, using many 5-S principles. Thanks to Manex’s help, we’ve been able to become more productive by instilling a new discipline to optimize our layout and processes. It was a great effort, and we expect it to pay off for many years to come.” – Doug Greene, President, Wilkinson Manufacturing

For more information on how Manex can help your organization optimize process flows, please contact Jonathan Lee, jlee@manexconsulting.com.