When corporate profits are plummeting, people often say, “They’re having financial problems.” In reality, however, the numbers are the symptom and not the disease. The underlying disease—almost always—is mismanagement of the people, processes and systems through which a company provides its products and services. For that reason, operational restructuring, in tandem with financial restructuring, can produce significantly better bottom-line results than those created by financial restructuring alone.

What is the difference between “financial” and “operational” restructuring?

Although there is some overlap, examples of changes that are primarily financial and not operational include:

• Accelerating receivables collections
• Closing locations
• Eliminating unnecessary expenses
• Increasing or decreasing product pricing
• Improving inventory accuracy
• Reducing employee compensation
• Reducing headcount
• Renegotiating contracts of all types
• Shedding unprofitable customers

Examples of changes that are primarily operational include:

• Involving employees in detailed business planning to enhance team commitment and outcomes
• Improving systems and processes
• Reexamining websites and functions throughout the organization to make the activities of all stakeholders—customers, vendors, employees—easier, more efficient and more effective
• Fixing product and service quality problems
• Providing employee training
• Reconfiguring organization chart, duties, job descriptions
• Rebuilding the management team when necessary
• Enhancing corporate culture

Case study 1: How a commercial printer rapidly reversed declining revenues by improving deliveries from 50% on time to 98% on time within just 5 months

Why were deliveries so late?

When the sales team was asked, “What can we do to increase revenues?” the replies were unanimous: “FIRE THE VP OF MANUFACTURING! How can we get sales, accept orders and contact potential new customers when we know deliveries will be only 50% on time?”

An examination of company operations, however, revealed that the delays were occurring before customer orders reached manufacturing’s purview. Estimating often took 2 weeks or more to respond to requests for quote. Once a customer sent proofs, they went into the dark hole known as Prepress (where proofs and plates were produced) never to be seen again until or unless the customer or customer service rep called to check on progress. Once Prepress had done its job and printing plates finally reached manufacturing? Manufacturing produced the orders promptly and flawlessly.

What actions caused the improvement?

Operational restructuring saved the day! Specific, written departmental procedures were implemented with appropriate personnel being held accountable.

• Quotes had to be provided in not more than two working days from request date, and a scheduling system and timeline were defined for Prepress. These requirements were monitored daily.
• As a result, when Customer Service provided the quote, they were able to establish mutual expectations with customers both orally and in writing. In brief, “Customer, if you can provide your artwork to us by this date and respond to proofs by that date, we will deliver your job to you as you want it and when you want it.” Revenues began to rebound almost immediately.

Case study 2:  How a multi-national medical diagnostics company decreased freight expenses from 6.1% of revenues to 1.6% of revenues within twelve months illustrates the benefit of utilizing both financial and operational restructuring.

Why were freight costs so high?

Frequent stock outs of raw materials and finished goods caused the company to incur the high costs of emergency shipments, both incoming to its manufacturing and distribution centers and outgoing to meet customers’ delivery dates.

In addition, too often the company’s medical diagnostics products were contaminated when they reached medical labs. As a result, the company incurred sky-high emergency freight costs in order to replace contaminated products quickly.

What actions created the improvement?

Financial restructuring, including renegotiating both raw material and freight contracts and implementing improved inventory management, contributed to the improvement, but sweeping operational changes were the primary drivers of the dramatic cost reduction.

These operational improvements included:

• Involving top management company-wide to solicit ideas, prepare action plans
• Redesigning production processes to eliminate product contamination, reduce waste and effectively address other quality issues
• Replacing managers of Distribution, Procurement and Quality Assurance with highly competent managers
• Creating an effective management accountability system

The lesson:  Operational restructuring, used in tandem with financial restructuring, can produce significantly better bottom-line results than those created by financial restructuring alone.