Restructure Consistently and Holistically: If Not Now, When?

In recent months, many small and medium-sized enterprises (SMEs) have faced existential crises due to challenging economic conditions, the unique structural situation in Germany, and the lasting effects of the COVID-19 pandemic. The situation has been further exacerbated by sharply rising capital costs, increased risk aversion among financiers, and repayment obligations from the pandemic period. According to enomyc author Dr. Stefan Frings, these multiple crises present the perfect opportunity for decisive and consistent action. Often, it takes significant pressure before stakeholders are willing to confront harsh realities and, with careful consideration, bring an end to long-standing but unsustainable practices.

What is particularly striking about the current crisis is the widespread impact across entire industry clusters. Examples include brick-and-mortar retail, segments of e-commerce, the automotive sector, the building materials industry, and the furniture sector, encompassing manufacturers, suppliers, and retailers. Companies that have missed the chance for preventive restructuring, thereby failing to position themselves to weather crises during more stable times, are hit the hardest. These businesses often cling too long to existing strategies, locations, decision-making structures, products, processes, or development projects. When strategic decisions are made more for prestige than based on sound investment reasoning, adapting to changing market conditions or competitive dynamics becomes especially difficult—a capability that is now more crucial than ever.

In our projects, we consistently find that underperforming products, inefficient processes, and cumbersome decision-making structures are among the most common issues. While these problems may be manageable during economic booms, they can quickly become existential threats in a crisis. Companies that can view a crisis as an opportunity, anticipate necessary changes, and implement them swiftly are at a clear advantage. It is essential to "grab the bull by the horns" and embark on a holistic restructuring.

Challenging economic times should be used to "slay sacred cows" and make critical decisions that position the company for the next upturn faster than the competition. Difficult measures are often easier to justify and implement during a crisis. The necessary actions must be taken proactively, swiftly, and thoroughly, before liquidity constraints push the company further into a defensive position.

At its core, restructuring means improving effectiveness, increasing efficiency, launching growth initiatives, and enhancing liquidity. The first essential step for successful implementation is an unflinching assessment of the company's situation, considering all strengths, weaknesses, opportunities, and risks. In the field of "Restructuring & Growth," enomyc has been a specialist for over 20 years. Our tools and methods reflect the expertise gained from numerous projects. In our restructuring and growth projects, we take a holistic approach tailored to the specific starting conditions, decision-making situations, and frameworks of our SME clients. The four key elements—strategy, operations, structure, and financing—are always integrated.

Strategic Restructuring: Top-Down Realignment

Due to a lack of transparency regarding the actual contribution margins and results of products and business areas in many companies, strategic restructuring always includes a review, evaluation, and adjustment of the product portfolio and business model. The primary focus is on assessing and optimizing investments, business areas, products, and services. This also involves questioning customer and location structures.

The first step is to establish profitability accounting at the product and business area level, as this forms the basis for informed business decisions. Subsequently, strategies can be derived through portfolio positioning, using criteria such as "profitability" and "strategic potential." For products, investments, or business areas with low strategic potential and significant negative profitability, divestment is recommended. In cases of negative profitability but high strategic potential, comprehensive and holistic restructuring is required. For investments or business areas with high profitability but low strategic potential, a sale should be considered to generate additional liquidity. Core business areas with high profitability and high strategic potential should be strengthened. The strategic restructuring ultimately aims to right-size the portfolio by clearly focusing on the core business.

Operational Restructuring:

Reducing Costs, Increasing Margins

The goal of operational restructuring is to enhance productivity in processes, redesign structures, and optimize both the cost and revenue sides. Additionally, liquidity-related topics such as working capital management, portfolio optimization, investments, and real estate are on the agenda.

Revenue Optimization Measures

Building on the outcomes of strategic restructuring, revenue optimization aims to drive new growth through attractive products and business areas. Product-related measures must be translated into customer-focused activities. To identify which customers have potential and which are loss-makers, product-related contribution margins must first be determined. Based on this, customer-specific action plans are developed in collaboration with responsible key account managers to increase margins through a better product mix. Suitable activities include:

• Eliminating products and variants with negative contribution margins.
• Shifting the product mix for individual customers towards higher-margin products.
• Eliminating B- and C-customers with negative contribution margins.
• Enhancing the product mix with trade goods, particularly to avoid investments in new machinery.
• Strengthening cross-selling approaches.

Revenue growth can be achieved through the redesign of pricing and conditions systems, optimizing base prices, or increasing sales-active time in the sales force. Specific goals should be agreed upon with each sales representative and key account manager. Additional revenue growth potential often lies in new markets, not only geographically but also in targeting new customer groups and industries. Another lever is the introduction of new products. Many companies have deficits in innovation management, so it's crucial to anticipate customer needs and proactively develop ideas rather than waiting for customer demands.

Crises are also an opportune time to reassess your innovation strategy. Typical shortcomings include delayed product launches with associated costs in the launch phase, which can negatively impact profitability. To avoid "margin killers" and achieve high contribution margins for innovative products, optimal "time to market" strategies are essential. However, in many SMEs, product launch timelines are driven more by technical factors than market considerations. Timely introduction of new products requires a stringent and market-driven innovation process that equally considers marketing, sales, quality, and production aspects. Optimizing innovation processes can thus be seen as an "enabler." Experience shows that companies able to continue working on product innovations during crises can build competitive advantages, as innovative products and systems are in demand even in challenging times.

Cost Reduction in Procurement, Materials, and Personnel

One of the primary tasks in any restructuring effort is to implement cost reductions that take effect as quickly as possible. There are three main levers for this: procurement, material costs, and personnel.

Material costs, often accounting for over 50% of manufacturing costs in production companies, require comprehensive analysis of procurement volumes, strategies, processes, and structures. Other cost-influencing areas, such as development and design, should also be considered. A key lever for short-term cost reduction is negotiating better purchase prices with suppliers. Alternatively, conditions can be improved through bonuses, extended payment terms, or the introduction of consignment stocks.

Long-term material cost reduction measures include standardization of components and value engineering. Sourcing from low-cost countries also offers significant potential, though supply chain security must not be overlooked. Recent developments have highlighted the importance of stable supply chains. Identifying and monitoring bottleneck materials is crucial, and the use of business intelligence tools can quickly provide transparency and help identify relevant levers.

Material costs often hold substantial potential for cost reduction.

When all levers are utilized, material costs can be reduced by up to 20% from the baseline. Sustained improvements can be secured by professionalizing procurement through consistent category management and integrating procurement into development projects. Indirect costs can be reduced by securing more favorable procurement terms and reducing consumption. Lowering the "comfort level," such as in business travel or office furnishings, is a simple and effective way to cut operating expenses. These measures are easy to implement and have an immediate impact on results and liquidity. Additionally, they can raise employee awareness that belts need to be tightened in tough economic times.

Effective "housekeeping" measures for quickly reducing operating costs include:

• Introducing approval requirements for all expenditures above a minor threshold by management
• Drastically reducing business travel
• Halting orders for company cars
• Reducing trade show visits and representation expenses
• Suspending training programs
• Savings in facility management, insurance, IT, and telecommunications.

Sustainable reduction of operating costs requires not only consistent implementation and disciplinary action against violations but also a comprehensive review of operating budgets at the cost center and cost category levels. Targets are usually set top-down based on benchmarks and best practices.

The third and often largest lever is personnel costs. Given the current situation, reducing personnel costs must be a top priority.

Enhancing Competitiveness Through Improved Core Processes

Restructuring measures are typically linked to the optimization of core processes, focusing not only on cost reduction but also on increasing flexibility, improving delivery reliability and quality, and shortening lead times. Superior delivery performance compared to competitors often represents a difficult-to-imitate and thus sustainable competitive advantage. Targeted weakness analysis and a clear orientation towards best practices help identify levers for increasing process productivity.

The key parameters for optimization are efficiency and effectiveness. Efficiency focuses on how a service is delivered, with IT and AI providing critical points of leverage. Effectiveness involves value analysis and assessing whether a service can be procured more cheaply or provided more cost-effectively at another location. Establishing shared service centers for financial and administrative functions in "best cost countries" enables sustainable cost adjustments, potentially achieving double-digit savings in administrative costs.

Short-term relief can be achieved through hiring freezes, reducing temporary work, cutting overtime, not renewing temporary contracts, and introducing short-time work. Mid-term adjustments can be made by leveraging natural attrition or early retirement schemes. Further staff reductions can be realized through redundancies after reaching an agreement on a social plan. Given that crises often involve capacity reductions, extensive process and structural optimizations, site consolidations, and relocations of production and functions, redundancies are often unavoidable. A key success factor for all cost adjustments is to initiate and implement the necessary steps quickly and decisively. Hesitation or postponement leads to uncertainty and disorientation, making successful restructuring more difficult.

Becoming Liquid Again Through Cash Optimization

Currently, financial conditions are becoming increasingly challenging. For many companies, securing short-term external capital is extremely difficult. A targeted approach to existing and potential financiers, with tailored information, can at least create an opportunity to raise the necessary liquid funds. Additionally, the introduction of factoring should be considered.

Optimizing working capital is crucial for generating free liquidity. Working capital is the difference between operational current assets and operational liabilities.

Despite having solid equity positions, many companies must tap into new financing sources to ensure the pre-financing of production, even as liquidity becomes increasingly scarce. Learning from successful companies means adopting systematic management of working capital—utilizing the capital tied up within the company to finance operations. Through skillful management of inventory, receivables, and payables, the best companies generate liquidity from operations to ensure short-term solvency and, subsequently, to fund investments and growth.

The cash conversion cycle (CCC) has proven to be a simple yet effective tool for managing cash flow from operations. The CCC measures the duration of capital tied up (in days). The goal is to minimize the cash conversion cycle depending on the industry and business model, ideally achieving a negative value. Effective working capital management focuses on the straightforward economic principle of "collect early—pay late," considering inventory turnover. A comprehensive program to reduce working capital addresses three key levers: inventory, receivables, and payables. Optimization opportunities exist along the entire value chain—from procurement (payables) through production and logistics (inventory) to sales (receivables).

Business Planning: Navigating the Crisis Without Surprises

The current crisis highlights that previous planning calculations and scenarios are no longer sufficient. Companies must continuously update their plans to reflect changes in costs and revenues, translating them into actionable scenarios. The impact on liquidity and profitability must be immediately apparent to facilitate timely decision-making.

It is surprising how significant the planning deficits are in many companies. Unrealistic sales forecasts often persist throughout the year. Materials are ordered, paid for, and stocked, draining liquidity, while targets are missed month after month without corrective action. Excuses and blame-shifting are common. A rolling forecast, from customer demand to the supply chain, can help. Experience shows that approximately 80% of business is predictable and can be planned based on historical data. The effort is manageable, but the benefits for the supply chain and the entire company are substantial.

Restructuring: Seven Tips for Successful Implementation

Several key success factors have emerged for implementing restructuring initiatives.

First, ruthless transparency in the numbers is essential to understand the starting situation and respond quickly to changing conditions. Second, strong stakeholder management is crucial, particularly proactively informing and involving financiers early on. Third, a clear commitment is vital; in a crisis, business leaders must rely on the loyalty and unwavering reform commitment of management. Moreover, a holistic approach is key. Successful restructurings always align with the four elements of strategy, operations, structure, and financing—isolated optimizations rarely achieve the desired outcomes.

Fifth, recognized necessary and appropriate measures should be implemented swiftly and decisively, as delays typically lead to diluted results. A clear project organization and a challenging but realistic timeline—based on professional implementation management and potential monitoring—ensure that goals are met and prevent "flying blind" during execution. Lastly, restructuring requires open and fair communication, which identifies resistance early and positively supports the process.

A restructuring planned and implemented in this manner will achieve its set goals and, beyond that, prepare the company for the next upswing.