Tag Archives: Volume

How Do You Scale Up a Product That Is Taking off! Four Points

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Situation: Demand for a product produced by a company has increased dramatically. The CEO realizes that they need to scale up production quickly to meet this unexpected demand. The company is small and the CEO wants advice as to how his company can accomplish this without killing the product. How do you scale up a product that is taking off?
Advice from the CEOs:
• This represents a major change of both mentality and culture. Essentially, the company needs to move from a “handmade” process to a commodity volume process. This may also mean moving from low volume/high margin production to high volume/lower margin production. This shift will significantly change the company.
• If there is high confidence that the company will land a contract for long-term production consider establishing high volume production at a new site. Rent or lease another facility. Alongside this hire a set of experienced people who understand the challenges of scaling up rapidly. Consider giving this facility a new name to suit the new team. This will help to establish a new culture suitable to the new opportunity.
• While negotiating a lease, ask for an option for additional space to be included in the lease. If things don’t pan out, look at this new space as the eventual location for your existing team.
• Two other options to consider: (1) Outsourcing to a 3rd party manufacturer. This is an option unless the company is an OEM outsourced producer itself. However, be careful – you could be telling your customer that they could go directly to your OEM source at a lower price. (2) Establishing an overseas production capability – one where you own the facility and manage quality control. This will be a challenge if the customer wants to specify “Made in US”, or where quality concerns are essential.

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How Do You Fund Growth Strategically? Five Approaches

Situation: A CEO is looking at a significant investment in capital equipment. Being considered are not just the cost of the investment, but the opportunity cost of not making the investment and the impact that this will have on the business. An additional consideration is the business mix of the company and whether to shift focus from low volume/high margin to low margin/high volume products. What tools have others used to assess these trade-offs? How do you fund growth strategically?

Advice from the CEOs:

  • Review the company’s approach to contracts. It may be desirable to revise the approach in light of the new objective. The switch from low volume/high margin to low margin/high volume products impacts not only production but also marketing, sales, finance and accounting.
  • Price some early new contracts below market to finance the additional equipment expenditures, as well as to test market response to the new offering. This will help to identify additional adjustments that are needed for the new approach and offering to succeed.
  • Structure the financing options for equipment purchases creatively, for example by allowing for participation by customers and investors.
  • Watch changes in working capital at all times and keep it under control. Working capital is a commitment of resources just as is buying equipment or facilities.
  • Consider all resource commitments as investments, regardless of the way the accountants deal with them as in expensing vs. capitalizing these investments on the balance sheet. For example, a marketing program is an investment even though it will show up as an operating expense. Make sure that this can be justified in terms of future cash flows expected.

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How Do You Best Use Cash Flow Statements? Five Points

Situation: A CEO is familiar with and regularly uses income statements and balance sheets in financial discussions and planning. However, cash flow statements present more challenges, particularly when comparing cash flow over time. A second question is whether cash flow statements are more important to C versus S corporations. How do you best use cash flow statements?

Advice from the CEOs:

  • Most companies use the P&L and Balance Sheet to “stay on top” of the business on a short-term basis. However, these statements do not provide detailed insight into where cash is coming from and where it goes.
  • The cash flow statement represents a tracking tool to highlight trends and make projections about important changes in financial flows. All three financial statements are used to plan and monitor performance against the company’s financial targets. However, the cash flow statement is the most meaningful of the three, regardless of business size.
  • If 1/3 of a company’s expenditures is fixed cost how does this impact planning?
    • Carefully watch changes in volume over time and the impact on cash flow before deciding to expand.
    • When deciding whether to commit new resources it may be wiser to allow finances to be stretched for a while or even to turn down some marginal business opportunities before committing to a new layer of expenses.
  • The cash flow statement is not really affected by the corporate structure, since its three areas of focus – operations, investment, and financing – are common to all three.
  • Business is getting more complex. It really pays to understand the key elements that drive the business, and their impact on cash.

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How Do You Best Exploit a New Opportunity? Three Observations

Situation: A service company has developed the capacity to produce and sell a product. The CEO is considering two options for this new opportunity: create a separate entity for the new business or run the businesses in parallel under the current umbrella. How do you best exploit a new opportunity?

Advice from the CEOs:

  • Option 1: Create separate entity for the new business while the existing business continues in parallel.
    • How big is the potential win? The current company competes successfully for about 10% of the market. The new capability would allow the company to potentially compete for 100% of a larger market.
    • How different are the two opportunities? The current business requires specialized talent – it is a low volume, high margin business. The new opportunity is the reverse – high potential volume but lower margin. It is a more generic market with fewer specialized needs.
    • The separate entity option provides the most flexibility. The current model already functions well. A spin-off provides an additional option without losing what already exists.
    • Bring in another individual to develop and run the new entity. It’s a different game and requires a different focus. However, it will be a great opportunity for the right person.
    • The spin-off model will be more sustainable under separate management than under the current company.
  • Option 2: Operate both businesses under a single entity.
    • This option looks like a double compromise – it alters both the company’s current strengths and the fundamental business model.
  • A long-term alternative is to look for a financial acquisition for the current company. It produces good net margins, has good cash flow, a and spins off cash. This can be valuable to a financial buyer.

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How Do You Generate Scalable Manufacturing? Four Suggestions

Situation: A company has built a strong prototype line capable of handling projected volume for the near-term as they scale up production. Their long-term plan is a fabless model through manufacturing partners. They have solid IP counsel and protection. What are the most critical elements of scale-up? How do you generate scalable manufacturing?

Advice from the CEOs:

  • The answer will depend on the product strategy, if the near-term focus is on quick tactical wins.
  • The most critical elements of the scale-up will be:
    • The planned speed of the scale-up. A tactical approach, which will make limited demands on production near-term supports a prudent scale-up plan.
    • Having the right business development talent to generate quick wins with smaller volume opportunities to feed the scale-up.
    • When you are ready for larger volume – and your scale-up capacity can support this – hire an experienced sales professional who is known in the industry and who can bring you some relatively quick higher volume contracts.
  • Que near-term contracts according to the sales cycle.
    • Design cycle – build awareness of your capacity among significant market players and focus on quick turn-around to respond to their demand.
    • Qualification cycle will be longer, perhaps 6 months. As your brand awareness builds push for qualification orders which will be larger, but still within near-term capacity.
  • Focus business development efforts on building strong awareness across your target companies. Some companies tend to limit early knowledge of vendor capabilities between their divisions until they have confidence in the vendor’s ability to deliver. Optimize customer awareness by:
    • Cultivating business partners who can facilitate a high-level approach within your target customer companies.
    • Start creating a small forum of industry savvy individuals who can become your champions. Leverage this forum to spread your message and bring you opportunities.

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