The Challenge: This $30M distribution business was in a down cycle and having production capacity issues and profitability problems in different segments of their business operations.

The Fix: A segmented financial analysis, using activity-based costing concepts, was performed to identify business segment profitability. A subsequent marketing study provided additional information, which lead to a market and product rationalization decision. One unique business segment, with about one third of the total sales, was sold. A new company of similar size was purchased that had much better operational and marketing synergy with the other two segments of the existing business. A targeted price increase program was developed and implemented and purchasing actions were identified to reduce material costs. In addition, a quality improvement program was implemented to eliminate the quoting errors that also created low product margins and rework costs of about $400K annually.

The Results: Within two months the purchasing group delivered annualized cost savings of $300K. The net margins of the new business segment were double that of the old business while only requiring one-half of the working capital. In spite of substantial reductions in sales volume due to the market slowdown, these combined changes still increased the bottom line margins of the business by over $600K that year with an annualized gain of $1.0M.