It became clear to the owners of a US tier-one automotive manufacturer that to reduce costs and improve quality, management had to consolidate production from an older plant located on the eastern seaboard of the US to a newer plant in Mexico.
The OEM’s (original equipment manufacturer) customer gave the auto parts manufacturer a tight production ramp-up deadline and a mandate to significantly improve quality. Management prepared a plan of action and shared it with its lender, an ABL (asset-based lender).
The lender was not convinced that management could simultaneously maintain production levels while improving quality on its beleaguered current lines; and, manage the plant closing and relocation, along with the required upgrades to the Mexican operation for the ramp-up. The lender was not confident that the client had a robust relocation plan as well as clarity on the actual costs including the investment required for a move of this magnitude.
The covenant of an ABL revolving credit facility allows the lender to monitor collateral―the assets in the plants, inventory, and accounts receivable. In this case, there was a particular sensitivity as the assets were to be moved to a foreign country.
The lender wanted an objective third-party assessment of the risks of the move and the capital required as a precondition to fund the project. Only with a supportive lender could the manufacturer finalize negotiations with the OEM to make the move.
The lender asserted that a team from Farber Financial Group should be brought in to review and validate management’s plan. At first, management—both at the executive level and at the plant level—were reluctant to retain Farber, requiring an approach that was sensitive to and balanced the needs of the various stakeholders.
Farber’s Performance Improvement team quickly identified significant risks, constraints, and gaps in management’s plan. Management’s conceptual two-step plan focused on stockpiling inventory in the US plant to maintain supply for customers, followed by moving assets to Mexico.
Farber proposed an alternate solution where both plants could run simultaneously while the Mexican plant ramped up to 100% production capacity. Thereafter, the US plant would scale back operations until its inventory was depleted. Farber’s plan created a balance between the funding requirements― both for the move and capital equipment, speed of execution, and the need for a secure, continuous supply to the OEM.
As Farber’s plan took shape, management quickly saw the value of its performance improvement consultants. Plant management was overwhelmed with their day-to-day commitments and they neither had the experience to execute a move of that scale nor the internal resources to think through all the complexities involved. Working with Farber’s team, plant management could focus on delivering current orders, instead of being distracted by the requirements of the move. Both plant management and the executive were onside and sent the plan to the OEM.
The OEM and their team of automotive engineers and consultants reviewed Farber’s plan and the costs of the move, and believed it to be accurate to within 0.5% of their own calculations. This gave the lender confidence to support the company, ensuring they would have funding to embark on the relocation.
Adam W. Silver is the Managing Director of the Performance Improvement group and a key member of Farber’s Interim Management and Executive Search practices. The Performance Improvement practice helps executives and boards overcome operational and strategic challenges to uncover potential and unleash performance. Adam can be reached at 416.496.3734 and firstname.lastname@example.org.