LONG IS THE JOURNEY n. 2 Fall 2015

A family enterprise case history by Francesco Messina (2015)

Employees: 12 - Turnover: 6 million - Sector: Sales

 

At the beginning of the consulting engagement, the enterprise exhibits the following characteristics:

  • the owner’s children have been working in the firm for 10 years without being regularized;
  • the employees work an average of 11 hours a day and are not paid for overtime;
  • the employees are granted one week of leave a year.

We observe that

  • productivity is low;
  • the enterprise is unable to assess the profit per client.

After one year of consultation:

  • the owner’s children have been regularly employed;
  • two new employees have been hired;
  • the employees work an average of 8 hours a day;
  • the employees are granted two weeks of leave a year;
  • the inventory is computerized;
  • the clientele has been categorized according to turnover and promptness in payment, and annual incentives for model clients have been introduced;
  • wastages due to reordering and due to the average inventory period have been resolved;
  • damage to the stock has been drastically reduced;
  • the average number of client orders per month has increased;
  • interest costs have been reduced;
  • the inventory has been enlarged and picking has been optimized with an increase of about 80% in hourly productivity and a 10% increase in turnover.

All these innovations have generated a surplus, part of which has been distributed among the employees.

 

How this was possible

The second generation wanted to find ways to push the company out of old inherited operating methods, but did not possess the tools to do so. The father was inclined to acquiesce only if he could understand the advantages of the alternative methods.
This was not merely a monetary cost-benefit calculation, because the decision not made on a purely rational level but hinged on the need for establishing a single accounting system aimed at performance management and the liberation of mental resources that had been distracted from strategic planning.

 

Conclusions

The case study presented here is a fairly common example that, to various extents, we have encountered at dozens of companies. Businesses are often unable to pinpoint solutions that can ensure greater productivity, eliminate internal inefficiencies and generate greater value by identifying new market niches.
Their difficulty is reinforced by certain elements:

  1. the absence of reliable data, since the management of two parallel accounting systems makes it impossible to generate analytical accounts in order to understand profit margins:
  2. the absence of internal managerial skills;
  3. the engagement of external professionals who promote or suggest unsuitable practices or behaviors;
  4. the strong internal culture of and deftness in adopting evasive and elusive practices and paths, endorsed by feedback and by the local culture;

With regard to this last point, it must be noted that in certain sectors, the local B2B market requires these practices and favors suppliers who can deliver goods without producing the necessary invoice, or who indicate lower quantities and prices different from the real ones. Therefore, businesses that want to determine their average selling price, the quantity sold to a single client or the profit margin of a product or business unit have to resort to complicated calculations in Excel, which are often incorrect.
Even when the local market wishes to perpetuate such behaviors, the above points remain valid. In particular, the absence of managerial skills in the identification of new distribution channels and in supply chain management can oblige an enterprise to remain irregular. In fact, we have observed that enterprises which have opened their business to international markets opt for regularization and draw from it significant informational advantages. Entrepreneurs perceive that the status quo constrains development because it drains mental energy that could be used to refine strategy and the understanding of the internal and external environment.

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