NAPA - SRAP Case Full Story

A NAPA Auto Parts Distributor used Integral Operations Finance (IOF) as a core engagement and participation mechanism for generating self-managing leadership – creating an entire team with applied business acumen that has now met monthly for over 5 years.

The key factor in the change was engaging a team of non-financial leaders and associates in becoming co-architects of the financial outcomes with the CFO and the CEO. The monthly Performance Management Group huddles have continued for the last several years under their own steam, with no further outside support after initial launch.

PMI, working with the CFO and CEO, used its Operations Finance Toolkit to provide the capacity for converting the numbers into a coherent whole, both mathematically and visually, providing the ‘whole picture’. This enabled non-financial folks to be able to see, understand, and work with the common sense behind financial information, so they could connect that to their daily actions and decisions.

The Situation: After a decade and a half of steady contraction, going from well over 100 people to under 70, the pressure from national chain competition had not abated. The company had been continuously experiencing swings of profit and cash flow in the tens to hundreds of thousands of dollars a month. In any given month, profit could be up and cash down, cash up and profit down, or both up or both down. They never knew what profit or operating cash flow was going to be until the period closed and they got the statements.

During the PMI Discovery Process, the Performance Management Group (PMG) unearthed 4 pages of system disconnects (over 40) in the company’s value chain. Although they did find 5 key system Key Performance Indicators (KPI) candidates, the PMG consensus after discussion was that two parts of one of them were actually costing more than all the rest combined. By focusing on the Inventory overages and underages, plus the other three KPIs identified, they were able to make remarkable improvements.

In less than 4 total days over a two-month period, a selected senior leadership group was able to pinpoint pivotal issues, and begin to create immediate and significant positive changes in financial performance by doing spot inventory counts of high volume and cost items.

The IOF methodology provided the CEO and CFO with the means to show leadership and their whole team how to solve any business problem together. By zeroing in on key behaviors that affect profit and cash, everyone can prioritize on the core drivers and focus their teams on leveraging those drivers to deliver results. The IOF approach also allows scaling to be done more easily as new management is brought on, because the senior leaders’ acumen has gone from informal personal wisdom to a formal business resource. 

Result: In the 2nd year after launching its PMG, the company was able to go into acquisition mode to build its top line and create internal synergies. Because of the loss and shrinkage of so many locally owned companies, the local newspaper business section did a cover story with the CEO about their new growth after 15 years of lowering revenues.

In the dollar trends over the previous year, when viewed by month, the patterns were primarily characterized by large swings that created what the CEO called ‘peaks and valleys’. Wild swings of both profit and operating cash flow, with no discernable relationship between profit, cash and the revenue patterns were the norm

The CFO, Ken Thengval, shares his perspective:

The thing that intrigued me the most at a meeting with our banker was a comment by one of the bank’s clients who was presenting about how he was getting people to change their behavior based on the results presented to them through the PMI Scoreboard and Dashboard. That is something we had been trying to do for 15 or 20 years.

In the first six months of dollar trends above, if you compared the first half of year on the left, and the first six months with the IOF Huddles on the right, the ‘peaks and valleys’ reduction is stark.

The 66 to 75 % reduction in the peaks and valleys shows what can happen when the people doing the work can collaborate with the C Suite folks to achieve mutually created goals.

Result: “When I printed out the monthly dollar trends graph from the Financial Scoreboard – our ‘tachometer’ - for our 6th huddle, I was amazed to see that the impacts of our operations finance practices were already significant. Although we had only begun this in November, we had already seen enough results to return our investment in the discovery process. Now that we were beginning to benchmark the key indicators, I was confident we could create the multiples that PMI said we could expect, and I was understandably gratified they actually occurred so much faster than we expected.” 

“It just blew me away that they (our Performance Mgmt. Group members) were grasping that - Hey, we can set our own course here!” ~ Ken Thengval

We had tried any number of pay-for-performance approaches over the years. Any time we got to the point where our success could be highly rewarding to our employees, we’d have a few that would really see how they could work the system, and they would have a windfall, but they rest never would catch on. So we’d pay out to the people who figured it out, but the company didn’t improve enough to warrant even the bonuses that were paid out.

It had been a few years since we had cash flow on a monthly basis, and even when we had it, it was the Indirect Method. It was always so confusing. The description off to the left was Accounts Receivable, then the increase was bracketed, and decrease was open. 

“People wouldn’t be able to make any sense out of the Cash Statement with Income Statement and Balance Sheet. Even I got confused sometimes, wondering – what does that really mean?” ~ Ken Thengval

Plugging our numbers into the Financial Scoreboard, right off the bat you could see a Cash Statement with Collections on it, and we could look across and see, we had Sales of x, but only collected y. It immediately answers the question for anybody about what’s going on with cash. In the past, everybody would be focused on Sales, and “Yeah!” we hit our target! But, wait a minute, we fell six figures short on Cash. Then following it on down through, we have really come to grips with the fact that there is a lot more to this whole operation than making a sale. We’ve got to get the money in. We’ve got to watch what we’re putting on the shelf, so we don’t over-replace our inventory. 

The purchasing manager got all excited about the possibility of having some concrete parameters given to her, instead of just going by her gut. Instead, she could be told, “Here is what we expect to have in Sales, and this is how much we can afford to stock.” If we are doing better, then we can decide to open the gates a little bit more.

Our Performance Management Group is a cross-section of the whole company. Among them we have the General Manager, three branch managers, our person in charge of central purchasing, accounts receivable, and our HR person.

When we began, our AR person was under the gun because the week before she had gone on vacation and put a bunch of customers on credit hold without telling anyone. This was an example of the opportunity to create an alert, telling us we needed to communicate,

because what she felt was a bad customer, the manager might have felt was one of the best customers. Another thing that came out was the relationship to inventory, and the drive of a lot of managers to want more and more and more on their shelf, but we couldn’t afford everything they wanted.

“How do we get our financial and non-financial people excited about their individual role, and how that role can have an impact on the profitability and cashflow of the company?”  ~ Ken Thengval

The thing that I really like about the Financial Scoreboard, that I have never seen in other software, is the ability to track your Operating Cash Flow to make sure that what you’re doing isn’t just digging a bigger hole as far as debt is concerned. It shows how to maintain the growth of the company without running out of cash. It’s a very effective tool. It also makes the ‘lights go on’ in the minds of our people who have not had much, if any, formal financial education.

The Performance Management Group launch event seemed like an insurmountable task, especially because of knowing the 10 people that were going to be in the room, had so little, or no, experience with financials. I was extremely impressed with the continuity and the flow. I don’t think anybody got left behind. A lot of these people had never seen our financial statements before or any financial data ever, for some of them. Putting the numbers into the Scoreboard was quite an exercise, but people definitely started seeing the common sense, and how inter-related it all was.

“We started to see the ‘lights go on’ in people’s heads." ~ Ken Thengval

This map above shows the value throughput map for their primarily retail operation, with customer contacts in light blue on the top, and back office functions in dark blue. 

The driving equation is:

         – Greater friction between hand-offs = (equals) both lower margins and operating cashflow. 

The entire discovery process also opened up lots of talking about the different procedures throughout the organization, and especially about the disconnects, specifically in the hand-offs between key customer value and support functions, as shown above. At that point where one person is handing off a task to someone else to finish off, a lot of things can go wrong. 

Lots of good conversation was generated, and everyone left amazed that they had just spent 4 ½ hours. It seemed to go a lot faster than that. That morning really stretched them. They also went out with very full heads.”

“After trying to solve every issue at once, we finally had clarity on which one to focus on first to get the most impact, and then where to go next.” ~ Purchasing Manager

The Performance Measures Assessment above is a benchmark for SRAP prior to IOF practices. In the left column is shown the 3 Bottom Lines, with their key elements, and the most useful and generally unused financial driver – Operating Cashflow (OCF) over Sales (how many dollars of OCF go into the bank account forevery dollar of sales). In the right column are more of the 12 key drivers, and the 5-6 most crucial KPIs (Key Performance Indicators) that are either in place or being considered as measurements for the whole system

An Integral Operations Finance Approach

1st Step - A Reality Check: Ken and Rick, as the decision team, went through a whole system reality check to surface all their key insights regarding the entire organization. That became the basis for designing the Performance Management Group launch, where the group went through a similar process in two half-day Kaizens (a ‘lean manufacturing’ term for rapid  problem-solving event), in which both Rick and Ken stayed quiet, to let the team have its own discovery journey.

A step-by-step process, the IOF self-auditing methodology works initially with both the CEO/GM, and then with the CFO/Controller, to surface disconnects between the accounting and operations management. Then a senior leadership group representing the whole system is developed with the capacity to solve any problem collaboratively.

During the discovery process, the Performance Management Group (PMG) unearthed several pages of system disconnects (of around 20) in the company’s value chain. Although they did find 5 key system KPI (Key Performance Indicators) candidates, the PMG consensus after discussion was that two of them were actually costing more than all the rest combined. By focusing on the Inventory overages and underages, plus the other three KPIs identified, they were able to make remarkable improvements.

Driving Company Value:

“We have a 4 – 5 year outlook to get the company marketable. Just recently, our CEO was reading from a distribution management trade publication. There were probably 8 or 10 items on the list for enhancing business value, and I would say at least 6 of them are in the PMI Scoreboard approach. 

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