Domestic Auto Parts (MAP), a $1 billion subsidiary of a U.S. auto parts manufacturing company, manufactured and marketed original and after-market parts for automobile producers in the U.S. It distributed products directly to original equipment automakers as well as to large retail chains. DAP was currently number four in market share in the U.S. out of nine direct competitors. Its 9% return on capital was respectable but less than that of its leading competitors.
DAP’s current product line was solid, but it had not introduced new products to the market over the last three years. This had caused its projected revenues to decline and its industry position to slip. As recently as two years ago, DAP was number two in the industry, but competitors Western Auto and Just In time Automotive had passed it, pushing DAP to number four. Western Auto had introduced higher-value products to the market with the use of technology both to manufacture products and in the parts themselves. Western’s customers paid a premium price for the improved performance of the company’s products.
DAP, on the other hand, had protected margins during its revenue decline by aggressively attacking costs. It succeeded in maintaining its gross and operating margin levels but at the cost of limiting plant investment and technology upgrades in manufacturing plants. It was beginning to lacked the flexible manufacturing capabilities of competitors, it had to produce to stock rather than to order, causing inventory costs to rise to noncompetitive levels. Company management now recognized that the recent cost cutting had maintained margins in the short term but many have severely affected DAP’s ability to compete in the longer term.
To help turn the company around, the parent company had recently hired a new CEO, Ellen Bright. Her job was clearly set out for her – either turn the subsidiary around in two years or close the business. The minimum requirements for continued operations were to achieve 12% return-on-capital-employed (ROCE) and a growth rate faster than the industry’s so that it could regain its number one or two position among competitors.
With this directive in hand, Bright held a meeting with her executive team to explain the situation and get their input. She started the meeting by stating:
The only way we can achieve our goal is for each of you and your departments to cooperate to improve our return on capital. Product quality has set us apart in the past. We must regain our high-quality position and grow our revenues and our contribution to the parent company.
My review of the economics and the competitive situation at DAP suggests that we must do three things: we need to grow; we must be customer intimate and we must be operationally excellent. And we must do all three things at once to be successful.
Joe [the new chief financial officer brought in by Bright]. You and I have been working on the economics required to achieve our financial goals. Why don’t you share our initial findings with the group?
Joe Nathan described the financial goals for the turnaround:
Basically, I designed a simple economic model to pinpoint the critical economic drivers needed to reach our goal of a 12% ROCE. We must increase our top line revenue by 50% through innovation and customer relationships, we need to better utilize our capital assets, (both current and new) – currently we are operating at 65% on old assets-and we must get to 90% utilization on an upgraded asset base. Finally, we must minimize our total cost structure-today we are operating above the average cost in our competitor group. We need to get to the lowest-cost quartile to compete. These are the key drivers needed to get to the financial results expected by the parent company. We must balance them - one against the other - to achieve our overall goal of 12% ROCE. The question is how are we going to do this? What must we do - what objectives must we set and achieve?
Ellen Bright interjected, “We are going to build a strategy to achieve each of these thrusts. I need your commitment and active contribution.” She asked Michael Milton, Vice President of Manufacturing, for his perspective. Milton said:
I’ll admit that we certainly need to get more creative and bring to market new and improved products. But we need to do a lot of our processes better. Supplier management and manufacturing as well as product delivery have to be better coordinated, so we can effectively and efficiently get new products to the customer. We need to be on time and on specs just to get the opportunity to sell new products. Key in my mind is managing the supplier pipeline, the raw materials - there is a lot of money to be saved there.
We also need to balance our intense focus on cost cutting with the need to make investments in process improvements and new and upgraded equipment. Unscheduled downtime and the inability to make product switchovers on the manufacturing floor are killing us. Upgraded capital will both reduce our costs and help deliver consistently on about it. This could save us big time in terms of costs and effectiveness. If we don’t do these operational things we will have trouble convincing customers to pay a premium price for our products.
David Dillon, Head of Distribution, described the problems he faced:
At the moment, I don’t have the infrastructure tools to create a first-class network of wholesalers and distributors. We need to streamline our distribution process and position ourselves as a strong business partner to attract and retain profitable customers. There are a lot of people out there with great experience and good ideas about how to achieve this, but the department is large and geographically dispersed, and there is no formal way of sharing best practices and best thinking. These steps will help us achieve our grow-revenue goal by getting products to market at a reasonable price in a reasonable time.
Mary Stewart, Vice President of Marketing and Sales, added:
Improving our distribution will be a major factor in our new customer intimacy thrust by providing the opportunity for win-win relationships with our distributor customers and enhancing our reputation for efficiency and organization.
In addition, we must position ourselves in the market - with the right customers - to be viable. We have recently studied our customer base and found an important segment of the current customer base that is profitable in both the direct and wholesale segments. In fact, 69% of our customers produce 90% of our profit. We went on to determine what these key customers want and will pay for. Both key segments, direct and wholesale, want essentially the same things. They expect us to deliver products on time and on spec. This, however, is expected from everyone in the industry. It’s a hurdle that must be passed just to be considered a viable vendor. The differentiator is for a supplier to understand their needs and translate that by continuous communication and productive dialogue. They want a long-term, mutually beneficial relationship with their suppliers. They want superior, technology-sophisticated products from a supplier with a superior reputation and image in the industry. Such a supplier makes their buying decisions less risky.
Rita Richardson, Vice president of Research and Development, responded to the challenge to produce state-of-the-art technologically sophisticated products:
Well, we have some talented people in our R&D group who can produce the kind of products our customers need. But all the products in the world will not be bought without a good marketing communication effort. We need to be able to tell people what we have and how it can benefit them. We need a marketing effort that positions us as an innovator with new and enhanced products to offer. I think it might help to have some of our marketing staff spend time in the R&D department to get a feel for what’s going on. Sure some re-skilling may be needed to achieve our innovation goals but I think we have a solid base of R&D professionals.
Bright interjected at this point, “I think you have hit on something there, Rita. I think we all need to be more business focused and less functionally focused. The company seems to be suffering because employees know only what goes on inside their own area. This team needs to lead this cross-functional view by example – in what we say and what we do”.
She closed the meeting by challenging the group even further:
None of our objectives can be accomplished without a major commitment from all of us to build a world-class workforce. To operate as an innovator we must change the way we think in this organization. Our employees must value change not resist it. We must reskill large parts - not some - of the organization. This will require training. Training involves both time and money. To support the new workforce we will also need to provide tools to work smarter and harder. We can do this and align the organization through the use of just-in-time (JIT) technology. This commitment to people and organization is necessary to do the things we need to do to deliver customer benefits and ultimately financial returns.
From the meeting of senior DAP executives, develop a strategy map of objectives, as well as potential Balanced Scorecard measures, for DAP. You can be guided by the following questions:
1) Who are the shareholders, and what do they want?
2) What are the shareholders’ expectations in the following areas?
(a) Revenue growth
(b) Asset utilization
(c) Cost improvement
1. Who are the customers?
2. What do the customers want? How does DAP create value for them?
1. What processes are most important for creating value for DAP’s shareholders and customers?
2. What are the objectives and measures for each process identified here?
Learning and Growth
1. What specific skills and capabilities do DAP’s people need in order to excel at the critical processes that you identified in the process perspective?
2. What other objectives can you identify to improve the human, information, and organization capital of DAP if it is to succeed with its strategy?
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This question was asked on May 14, 2010 and answered on May 14, 2010.
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