Profitability is often an issue in heavy industry, where high fixed costs and price cycles regularly make attainment of break-even profit levels a challenge. Implementation of profit improvement programs with the assistance of external experts is often therefore used to improve bottom line performance. This short article discusses how a profit improvement program can be implemented in a typical iron and steelworks.
At its simplest a profit improvement program or PIP is a short to medium term plan for improving steel company profitability – both through revenue improvements and through cost reduction measures. It is a plan that is usually prepared by a team of experts who have a combination of skills. These skills include metal-sector market and technical expertise in the main, but also business and industry understanding so that, working with management, we can convert ideas into improved bottom line performance.
Usually, the profit improvement program is a short written plan – it can be 10 pages or less. It is normally a plan that is jointly worked on – by external consultants and local management alike. And although every steel company is different, the typical PIP will typically address matters such as:
- revenue improvements: these will normally be identified as arising from improved product mix (that’s emphasis on more value added), from more efficient distribution, from better product pricing (including new surcharges, sometimes) and quite often, from improved customer selection;
- cost reduction: these are normally established through better yield performance, from improved productivity, through changes in purchasing practices and behaviors, from adoption of new technology, and from better utilities consumption, better use of know how, better commercial understanding etc…
In the typical PIP, each of the revenue and cost opportunities listed above is assessed, described, quantified and where possible, built into the company business plan with allocation of targets and implementation responsibilities.
Why Implement a PIP?
One question that often arises is – why would a company normally want to run such a program? Different companies typically implement their profit improvement programs for different reasons. Sometimes these reasons can involve the need for a fast business turnaround – from loss to profit – as part of a major corporate restructuring. Quite often, management will be new and may wish to demonstrate some ‘quick wins’. Often also, an existing management may remain in place, but may feel the need for a better understanding of foreign markets, or of international best practice at operational level… and thus wish hear the opinions of international management consultants.
Sometimes however, a PIP is undertaken less for management purposes, and more for the benefit of other stakeholders. These stakeholders can include bankers, who may wish to ensure that every profit opportunity is identified and then grasped in order to maximize a return on investment. Other stakeholders can also include bodies such as national or regional governments (e.g. the European Commission) who may require emphasis on improved profitability as part of a National Steel Restructuring Program or who can require an independent consulting assessment of future business viability as part of a State-Aid related investigation or undertaking.
Where to start?
So how does one actually go about putting together a steel company profit improvement program? Well, one approach is to follow a simple, four step process.
- Step 1: this normally involves the preparation of a short questionnaire for management and then also involves assessments of plant performance based on management responses to the questionnaire
- Step 2: this also involves Consultant familiarization with the business, with the consulting team looking through company documents such as market studies and existing business plans
- Step 3: this usually involves a field visit, and is typically focused on discussions with management and on plant visits. Such a field visit generally involves two or three expert consultants visiting for 2-3 days, depending on the size and complexity of the steel making plant;
- Step 4: this involves the preparation of a short PIP report – the profit improvement program itself – including calculations about the likely magnitude of any profit uplifts and deliberations on management priorities and overall implementation responsibilities.
From start to finish, the whole process can last as little as two weeks. The process can also however be ongoing – so that the Consultants return after 6 or 12 months to appraise the progress made and perhaps to ‘unblock’ or ‘refocus’ the original efforts. Quite often, our ownfirm Metals Consulting International assists with a re-write of an original profit improvement plans 1, 2 or sometimes 3 years after the original formulation of the PIP.