Working capital improvement was also one of the main benefits of a drastic change in the accounting process. At the time Richard came to Pavestone, the books were being closed an average of 23 days after the end of a month. By mapping out the entire process through a Six Sigma approach and cutting out wasted effort, Pavestone managers have reduced that time-frame to seven days. “Having the results earlier means we can make decisions faster and understand the run rate so we can adjust inventory levels and minimize working capital,” he says.
But the biggest impact on working capital came from implementing a material-requirement-planning system like ones commonly used at bigger manufacturing companies. By using the system, executives can more easily project what the company will sell in the next 12 months and what materials it will need, and when, to enable that. Before Richard’s arrival, 18 general managers around the country determined what inventory levels to carry. “They could order as much as they wanted and just load up the yard with inventory, which is the age-old way to make sure you don’t short-ship a customer,” he says.
The first year the MRP system was in place, money tied up in inventory fell from a peak of $100 million to about $75 million. That has made a big difference in banks’ leverage tests for the company, according to Richard.
The Big Picture
More recent changes are driving even bigger bottom-line improvements for 2009. One was a 20% reduction in the company’s workforce to 1,300 employees, mostly implemented in 2008.
The positions won’t have to be added back when the business improves, Richard notes. Most of the cuts were of fat; for instance, the fact that forklift drivers only drove forklifts, and inventory managers only managed inventory, created inefficiencies. Cross-training such employees has been a big component of a $12 million decrease in SG&A expense for this year.
Another large chunk of savings, as much as $8 million, is coming from something not much in Pavestone’s control: the drop in the prices of oil and diesel fuel over the past year. Because its materials are very dense and heavy, the company routinely maxes out truck weights, making transportation the most expensive component of its business.
All of the savings are helping drive forward the strategic plan Richard pushed into being, which largely involves making acquisitions and expanding product lines. Overall, Richards appreciates the heavy exposure he’s gotten at the smaller company to areas — like treasury and tax, in addition to M&A work — that Tyco had huge, separate departments to handle. “You talk about on-the-ground, on-the-job experience. Now I have that,” he says. “It’s definitely good for the career.”