The Corona pandemic and its consequences, including disruption of important supply chains and shortages of materials, have plunged many companies into a crisis that threatens their very existence. Small and medium-sized companies in particular are having to contend with double-digit falls in sales and earnings. Companies that failed to prepare for the crisis in good times have been hit particularly hard. So it's high time to tackle the issue of preventive restructuring now.
In particular, products with an insufficient contribution to earnings, inefficient processes and cumbersome decision-making structures often lead to problems: While they can still be compensated for in good economic times, they can quickly become a threat to the company's existence in a crisis.
In this situation, companies that see the crisis as an opportunity to anticipate necessary changes and implement them quickly have a clear advantage. The goal is to improve effectiveness, increase efficiency, launch growth initiatives and increase liquidity. The necessary measures should be taken proactively, quickly and thoroughly before liquidity bottlenecks force the company even further into the defensive. The first essential prerequisite to get back on the road to success is an unsparing look at the actual situation of the company with all its strengths, weaknesses, opportunities and risks.
Strategic restructuring: realignment top down
To that end, the first step should be to establish a profit and loss statement at product and business unit level. This is the basis for well-founded business decisions, for example with regard to adjusting the product portfolio and business model or optimizing investments.
In a second step, strategies can be derived with the help of portfolio positioning. The positioning is based on the criteria "return" and "strategic potential". For products, investments or business areas with low strategic potential and strongly negative returns, divestment is recommended. In the case of negative returns and high strategic potential, a comprehensive and holistic restructuring should be sought. In the case of shareholdings or business areas with high returns but low strategic potential, a sale should be considered to generate additional liquidity. Core businesses with high returns and high strategic potential should be strengthened. In essence, strategic restructuring aims to downsize the portfolio by clearly focusing on the core business.
Operational restructuring: Cost reduction on all fronts
The aim of operational restructuring is to increase productivity in processes, redesign structures and sustainably optimize costs and revenues. Building on the results of strategic restructuring, revenue optimization is aimed at initiating growth offensives for attractive products and business areas. Product-related measures must first be converted into customer-related activities. This means that the product-related contribution margins must be determined for each top customer in order to identify potential customers and subsidy customers. Suitable activities include the elimination of products and variants with negative contribution margins, a shift in the product mix in favor of products with high contribution margins, or the elimination of B and C customers with negative contribution margins.
There is potential for increasing sales by redesigning the pricing and conditions system, adjusting base prices to optimize revenue, or increasing the time spent actively selling. Further potential for increasing sales often lies in new markets and products. It is important not to wait for customer requirements, but to anticipate needs and proactively develop ideas. Particularly in small and medium-sized companies, product launch dates are determined more strongly by technical than market factors.
The three most important levers for cost reduction
One of the main tasks of any restructuring project is to implement cost-cutting measures that are as effective as possible in the short term. Purchasing, material costs and personnel are the three central starting points. It is not uncommon for material costs to account for more than 50 percent of manufacturing costs in manufacturing companies. For this reason, procurement volumes, strategies, processes and structures must be analyzed comprehensively. Long-term measures to reduce material costs can be achieved through standardization of assemblies and value engineering. The above measures can reduce material costs by an order of magnitude of 20 percent relative to the initial value.
Once achieved, the sustainable safeguarding of improvements requires consistent professionalization of purchasing, for example through consistent material group management and involvement in development projects. Measures to reduce the "comfort level", for example in business trips or office equipment, are a simple and effective instrument for reducing material costs. The measures are easy to implement and have an immediate effect, improving both earnings and liquidity. As a side effect, they lead to cost awareness among employees.
The third and often largest lever is personnel costs. Cost reductions in this area must be given high priority due to the current situation. Significant cost savings can be achieved quickly by stopping recruitment, reducing temporary work, cutting overtime, not extending temporary contracts and introducing short-time working.
Optimizing net working capital is the most important factor in generating free liquidity. Net working capital is the difference between operating current assets and operating liabilities. Effective working capital management is established on the simple principle of economic activity: "Collect early - pay late”. A holistic program to reduce working capital is based equally on the three levers of inventories, receivables and payables. Starting points can be found along the entire value chain – from purchasing (payables) through production and logistics (inventories) to sales (receivables).
Planning is half the battle: Navigating the crisis without surprises
Capital market-oriented companies generally have standardized earnings reporting, not least because of their disclosure obligations. Medium-sized companies, on the other hand, often have massive deficits with regard to planning processes and reporting. Experience shows that standardized and timely reporting is often only rudimentary and that planning and budget discipline is weak. Family businesses in particular should therefore take advantage of the current economic environment to optimize internal processes and reporting. The goal is not to be particularly modern in the areas of reporting and controlling, but rather to find a company- and addressee-specific approach or to optimize existing approaches. It is crucial to be informed promptly on a monthly basis about the current earnings and liquidity development of each legal entity in order to be able to take countermeasures at an early stage if necessary. It is also important to introduce a rolling planning process. The planning effort is limited – but the benefit for the supply chain, and ultimately for the company, is high.
