What would happen if you were suddenly not able to be a part of your businesses day-to-day operations? The question is often asked, “What would happen if you were hit by a bus today?” What follows is a real example where the owner was suddenly and unexpectedly gone from the business, and why the company continued to thrive in his absence.
The business is a second-generation, family-owned petroleum distribution company in the Midwest. They enjoy strong sales and have grown from a small home heating oil company of three trucks to a full-service, petroleum distribution company with tank wagons, semi-tractor transports, and a host of other supporting vehicles. They had grown to a point where they were able to secure non-interruption agreements with their largest wholesale suppliers of fuel.
They service just about anyone who needs fuel from small farms to large businesses and construction sites with multiple pieces of equipment requiring daily replenishment as well as several local gas stations. As part of their full-service offering, they provide specialty race fuels and attend various races around the state, promoting their name. They also have a large assortment of packaged petroleum products and bulk oils. They can blend products to make custom items. They are indeed a full-service petroleum distribution company.
The business had grown, but the profitability had not kept up with the amount of revenue they enjoyed. Knowing in his heart they needed help, but not knowing where to go or how to get started, the owner accepted an invitation for an assessment and a follow-on consulting engagement.
Our relationship started like so many; the owner was fearful of the unknown and grateful to have some help. The complexity of product offerings combined with the company’s strong growth had overwhelmed the systems and tools in place that were once sufficient when they were a tiny home heating oil supplier but were no longer capable for the size of the business to which they had grown. Processes were lacking, and everyone was working very hard and doing what they thought was best for the company, but could not make any headway.
Over ten weeks, we delved into every aspect of the business and had to create reporting metrics on each. These Key Performance Indicators (KPIs) became instrumental in separating the critical few from the trivial many. New processes were developed and formalized for just about every aspect of the business. The implementation of new metrics and processes required training so the individuals would know how to work differently to be more productive and to interpret the information they were seeing.
The very first thing we did was train the owner and key individuals some fundamental financial concepts such as understanding and calculating Break-Even, profit versus mark up, and how to review and understand financial statements. The charts of accounts were reorganized to reflect an accurate picture of the Cost of Goods sold versus Indirect costs. We streamlined the information received so the business could be reviewed entirely with just a few key reports.
The initial two reports were a one-page financial summary showing Cash on Hand, Receivables, Payables, and a review of the last 12 weekly deposits. The weekly sum of deposits became critical because it provided us an accurate estimate of revenues we could expect to come in each week. The other financial tool was the 12-week Cash Management report, which is a forward-looking cash projection. The Cash management report provides the business owner the opportunity to look forward and address potential issues before they become a crisis.
Once the basic Financial reporting was up and running, we were able to see some significantly old receivables needing to be collected. The owner took a personal interest in this activity, and past due payments started coming in.
The next activity was to find a way to measure the fifteen Tank wagons and four transport vehicles. We discovered, in the system, they already owned and used an imbedded tracking tool. This provided the raw data needed, which was easily exported into Excel, to create simplified reports showing a profit (or loss) by the driver as well as miles, fuel consumption, and other critically important information. Combined with the financial statements, we could now view the entire business on three sheets of paper.
THEN WE DISCOVERED ANOTHER MAJOR ISSUE:
One huge issue we found was the sheer number and value of bulk oils and Packaged goods inventories. Between the two, we conservatively estimated there was an excess inventory of $350,000. These initial findings were met with quite a bit of suspicion. A week later, the individual responsible for the inventories told me he had conducted his own research and thought the $350,000 of excess inventory was probably too conservative, and the actual amount was much higher. We now had a champion for this cause.
THE SOLUTION FOR THE NEW-FOUND ISSUE:
We decided to start with the Bulk products as they were fewer in number, fifteen, as opposed to over 300 for the packaged goods. The bulk items were also consolidated in a single location and were easily inventoried. While training the individuals, we found the individual responsible for the bulk goods inventory would purchase three times the minimums required to satisfy the demand to save on trips. He was well-intentioned, but he did not understand the cash impact of purchases as much as $2,500 of excess inventory on a single product to save a $60 trip. In some products, they had over 26 weeks of the amount of product to meet demand, even though this commodity was readily available. Showing the individual this number was a huge eye-opener, and he became a disciple in working with us to reduce the inventories while ensuring customer demand was met. This activity started us on a path of establishing reorder points to be purchased and maximum inventory to have at any one time. The concept was executed by reviewing the highest single sales within a replenishment cycle of the product, then only ordering that amount. This reduced inventory while providing an adequate product to cover customers’ demands.
Over the weeks that followed, inventories of these bulk items started coming down until they were brought into the ranges of reordering and maximums. Now every week, they monitor the number of items and their value products that exceed the maximums. This provides targeted items for further reduction. They now have tools so they can see their inventory in a much simpler way and manage hundreds of items by managing the few that are the exceptions.
Typical, the initial weeks of the engagement were putting these tools and processes in place with the last few weeks being training and coaching the team how to use the tools properly. This was accomplished through a weekly meeting of the key leaders of the company. Early meetings were carefully choreographed to cover the key elements of the business with any issues being raised to be solved outside this meeting.
The engagement came to its natural conclusion, with all the team having full knowledge of their expectations and the reporting tools to manage the business. It was like a symphony with the owner now conducting the team, and they were making some excellent music with just a few off-key notes now and again.
Three days after the engagement concluded, the owner was involved in a severe vehicle accident and was lucky to survive the ordeal. The result of the accident was the owner was now suddenly and entirely out of the business; no one knew for how long or even if he would be able to return.
The Operations Director stepped in and became the de facto conductor. The team rallied behind him, and they stayed on the path they had been shown and continued using the tools they had learned. They kept their weekly meetings, reviewed the metrics, and stayed true to the processes that they helped develop.
The company not only thrived but weathered another major adverse event when their major supplier had a disruption at the refinery, causing a severe shortage of refined petroleum products.
While the owner continued to recuperate, the team carried on. I made my weekly calls to check in with them and was extremely pleased with how they carried on in spite of the difficulties they faced.
One month after the owner’s ordeal, the company set a record for the amount of fuel delivered and the profits earned. They had redeployed some idle assets turning them into profitable resources.
During one call, I was delighted when the Operations Director commented on how lucky they were that the accident happened after they had gone through our work together. He said, “we don’t know how we would have weathered this without the guidance you provided and the tools you put in place.”
The real take away from this experience is; it is critically important for a business to have formalized processes and metrics. The structure we put in place allowed this business to not only survive but thrive during a time of catastrophe.
Their success continues to this day.