Blog

A couple of weeks ago I wrote about “Looking under the hood”. Here is a great example of what I mean. At Insider Pro, we see the pattern time and time again - long-term, legacy contracts that were initially great value for the customer but, over time, the supplier has managed to push through incremental price increases, or adjusted clauses that are not in the customers' favour.

Almost every route to higher revenues depends on a reliable and predictable supply chain. Whether you are the CEO, CFO or the Supply Chain Director, knowing that your supply chain weaknesses could suddenly derail this quarter’s numbers, is probably keeping you awake at night! Managing long-term risk, sustainability considerations and the financial impact of an inefficient supply chain can make the difference between business success or failure.  Conversely, there are plenty of revenue growth opportunities lurking in your supply chain or operations, hidden by poor data or a resistance to change.  Now is the time to expose them and reveal how to scale operations, improve deals with suppliers, leverage overhead and drive out inefficiencies.

In times of high inflation, changes to product specification may identify a great opportunity for cost reduction - a reduction in size, a change to the packaging, a modification of the materials used, or the scope of service provided.  All of these (and many more) offer good ways to explore cost reduction and may well reveal acceptable and sensible changes to the design or presentation of an item.

Insider Pro recently conducted some original research into the pre-pandemic manufacturing sector. We accessed Companies House data for the last 5 years pre-pandemic, for 1500 small and medium sized manufacturing businesses in the UK. The findings show the stark reality about cash and working capital trends, relevant to almost all sectors and organisations, small and large. The insight and learnings can be applied to any business and demonstrate the importance of mapping your supply chain and understanding your key dependencies. Aligning the team around key financial objectives, and making sure they understand how critical it is to manage cash and working capital well will help to build the enterprise value of a healthy, successful business.

Remember, almost every route to higher revenues depends on a reliable and predictable supply chain.

Plan! When forecasting sales, be sure your supply chain can deliver. Big companies have sales and operations planning functions. Smaller ones should bring in some outside help to make sure they are not underestimating the value they can generate from their supply chain.

Source as close to home as you can. Sourcing from low-cost countries may be cheaper but it is often not enough to overcome supply-chain disadvantages, Cost is important but it is not everything.

Make versus Buy – don’t make a component you can source cheaply and reliably. Focus on where you can add value and review service contracts regularly so you are sure you are getting the best price.

Balance where the cash is in the supply chain – don’t pay for goods you’ve not yet received and understand whether your supplier can easily afford to extend credit or not. If a supplier’s cost of capital is higher than yours, you will pay an unnecessary premium for additional credit terms.

Understand your customer. If the cost of capital is very high, the customer will be more motivated to attempt to delay payment.

In conclusion, make sure you pay attention to all these metrics and dials on your metaphorical dashboard. If everything is balanced, revenues will grow but so will profits and cash flow.

Read more about how we came to these conclusions in the UK Manufacturing Barometer – download now at www.insiderpro.co.uk

Companies aspire to grow for many reasons. To survive, for their employees, for future sale valuation, for an IPO, the incentives are many and varied.

Definitions also vary but at Insider Pro we define Enterprise Value as EBITDA x the MULTIPLE applied.

There are 3 main levers to focus attention on; 

• increase revenues,
• reduce costs, and
• improve the multiple to be applied.

Most importantly, you need clarity around how your supply chain and operations will impact these metrics and ultimately your enterprise value.

Revenues – can you set higher prices, increase volumes, improve throughput optimisation and availability, alter your product mix to impact sales?

Costs – through disruptive procurement and working with strategic suppliers, can you reduce cost per X, lower volumes, how can you do things differently and re-engineer the supply chain to reduce the cost of goods and costs of running the business?

Multiple – can you demonstrate consistent execution and stability, and show clear risk management activity? Can you overcome barriers to entry and predict how your competitors will behave? All these will push up the multiple investors are willing to pay.

Why does all this matter? Because if your supply chain and operations teams do not understand the impact of their decisions and actions, they can seriously affect your overall enterprise value. Managing the supply chain is hard and it is critical that all teams, whether Sales, Operations or Procurement are aligned in their understanding and around the company objectives for short, medium and long-term success.

For more real examples of how to impact your supply chain and your enterprise value, download the UK Manufacturing Barometer from www.insiderpro.co.uk now and help to improve understanding of these key metrics.

There are two routes to growing the value of your business. You can use brute force – just keep cranking up production, run your sales force hot and hope the rest follows, or you can take steps to increase the multiple of profits the business will attract when you come to sell. It’s pretty hard to rely on growth alone. Insider Pro’s Manufacturing Barometer shows that UK manufacturers managed to increase sales by a fifth between 2015 and 2020 before the pandemic – that’s great. But unfortunately, profits haven’t budged. An extra £38bn on the top line hasn’t delivered any additional operating profit. Companies, especially smaller manufacturers, endured a steady margin squeeze that left them less resilient when Covid-19 struck. Higher revenues alone are not enough to build enterprise value.

Of course, the last twelve months have caused a painful hit to industry. Manufacturing has certainly fared better than some parts of the economy like high street retail and hospitality, but even so sales are down around 10% across a broad spread of manufacturing sectors, while profits have approximately halved. Manufacturers are also having to face the messy complications caused by Brexit.

Huge upheaval like this feels awful but it also provides a golden opportunity for a rethink. If you can work both routes at the same time – growing the business and expanding the multiple – then you can really transform the value of your company. There are lots of dials on your metaphorical dashboard that can help you drive higher sales and do so profitably by controlling your costs. If you can grow your profitability 10% but you don’t increase your multiple, then your business is worth 10% more. Not bad. But if you can also get the multiple of profits a buyer would be prepared to pay from 5x EBITDA (operating profit with depreciation added back) to 6x, you’ve just added another 20% right there. Suddenly your business is worth a third more!

Getting your supply chain right goes to the very heart of the issue. These months of crisis have exposed some structural weaknesses in how manufacturers manage their supply chains. A moment of such dislocation makes it easier to reform long-established practices that no longer serve the business well. In any recovery, manufacturers all need to start thinking like growth companies as they come off the back off a ‘low volumes’ year. Scaling up always means stress-testing your supply chain, rather than simply expecting it to grow with you. If your suppliers don’t have capacity, don’t blame them if they can’t keep up, so keep them close and keep an eye on them. Minor problems can quickly balloon as you get bigger.

For example, through the pandemic we have seen how shipping costs can spiral unexpectedly and the availability of product can disappear altogether – supply chains can simply break. Accidents happen too. Indeed, the hullabaloo in the Suez Canal completely severed Asian supply routes in March this year creating all sorts of ripples that took weeks to smooth out. Put simply, a cheap listing price for a component or raw material is irrelevant if getting it to your factory gets pricier, or if you simply can’t get it there at all.

Cash is one of the biggest obstacles for growth, so companies must prioritise cash generation over profit. At Insider Pro we help businesses embed a cash-first culture from boardroom to shop floor. Just adding cash monitoring to weekly reporting can make a surprising difference. Don’t just buffer your business with loads of inventory if you are anxious about disruption to supplies or fulfilment, or because you lack visibility about demand for your products. That’s a cash black hole, right there.

Better forecasting certainly helps, but crucially sourcing supplies closer to home makes a huge difference. For example, China’s low prices are tempting but if you are growing your sales rapidly, such a long supply chain makes the business less resilient and will tie up mountains of working capital. So rather than only aiming for the lowest unit price for a component, the real win may come from sourcing products closer to home and the payoff is more rapid sales growth with less environmental impact and a lower cash-funding requirement.

It might cost a little bit more, but a simpler, shorter supply chain will help you maximise product availability and that means you can take market share from less agile competitors. Show the value of being close to your customer if your competitors are on the other side of the world. That’s a valuable barrier to entry against newcomers.

Similarly, when you innovate you are thinking about adding to the growth side of the enterprise value equation. That’s great. But make sure your engineers have thought about where they will source components. If there is only one supplier and that supplier is far away, you’ve just introduced a major vulnerability into your business and that knocks a chunk off the multiple side of the equation.

Supply chains have consistently dominated the headlines during the last few months. Post-Brexit food shortages in Northern Ireland, pandemic panic-buying, vaccine programmes, disruption of global shipping – the list goes on. Weak supply chains mean risk.

Potential investors pay less for vulnerable businesses. They pay more for those that can execute consistently, are more resilient than their competitors and generate lots of cash in the process. In our experience finance directors underestimate by half the efficiencies they can extract. That’s a big lever to pull in terms of increasing your enterprise value and is especially important in limiting the amount of cash burnt each month.

Over the next couple of years, we are going to see a dramatic rebound in manufacturing that will push sales and profits higher. If companies reengineer their supply chains and source closer to home as part of the recovery then positive multiplier effects can reverberate around the British economy too. Growing sales, expanding margins, building resilience, and doing all this with the most efficient use of scarce capital possible, are the perennial objectives of businesses everywhere that wish to grow their enterprise value. You don’t have to choose route A or route B. You can travel both roads to a higher valuation for your business.

Download the UK Manufacturing Barometer for more insight, using the link below.