Operationally-oriented CFOs capable of genuine value creation across multiple functions have ousted the reclusive finance chief of yesteryear.
For companies dealing in physical products, the ability to effectively “walk the floor” is a vital trait for CFOs.
“Sponsors want a white-collar brain but a blue-collar style of engagement. They want CFOs who are not afraid to get their hands dirty and who actually seek out opportunities to do so,” says Falcon’s Rob Huxtable. “CFOs need an insatiable curiosity in order to develop full command of a portfolio company’s operations and to intimately understand opportunities for margin improvement.”
“Walking the floor” is a concept rooted in LEAN management. The term originates from the Japanese word “gemba” or “genba” meaning “the actual or real place.” A Gemba walk represents a proactive effort from management to spend more time among their company’s frontline workers. Though the concept can be applied anywhere from retail aisles to sales bullpens, the most traditional application sees management establish a consistent physical presence on the shop, factory or warehouse floor.
Companies targeted for private equity acquisition often possess substantial room for waste reduction or process improvement. When leveraged effectively, Gemba walks help CFOs identify extraordinary opportunities for value creation. Sponsors who deploy portfolio company CFOs with this skillset often capture millions of dollars in margin expansion that might otherwise escape them.
For instance, a Gemba walk led the CFO of a middle-market ready-to-eat popcorn company to the discovery that the holes in their sorting screens were too large. Instead of only filtering out un-popped kernels from the finished product, large amounts of good popcorn were being thrown out from every batch. Addressing the issue reduced scrap by 45% and helped the executive deliver on a $25 million annual savings plan.
These type of savings would not be immediately evident if a CFO were to solely view the Gemba through the lens of a spreadsheet.
A prime example is the CFO/COO at a large national cabinet manufacturer who noticed suspiciously large fume clouds being produced by the company’s traditional coating process. The executive inquired about the machine’s transfer efficiency and discovered the company’s frontline workers had never been taught the concept. Further investigation revealed that the coatings gun was fitted with an over-sized barrel that vaporized a significant amount of material on each application. The company saved $3.6 million in annual coating costs once the barrel size was corrected.
“It sounds so simple, but this stuff exists everywhere,” says the CFO/COO.
“The P&L can point you in the right direction for some of these things, but if you are a spreadsheet jockey, you will never identify most of them. Be out on the floor. That’s where the savings are. Talk to employees and get a mental model of what they’re saying and what you see. Then go back to the P&L and see if it matches up.”
Tracing process execution in person can also reveal more subtle behaviors that may ultimately impair EBITDA. On one of his regular Gemba walks, an executive at a major adhesive manufacturer discovered that factory employees were rarely allowing a certain glue to fully drain from a large vessel before they initiated the next stage of production. The company saved $1.2 million a year simply by standardizing a wait time that allowed for proper drainage.
Masters of the Gemba walk find trust is an essential ingredient in creating value. Walking the floor is not the time to make superficial comments or attempt to implement on-the-spot changes. Rather, managers adept in the art focus on watching, learning and listening. PE-backed CFOs often inherit cultures where Gemba employees may be hesitant to point out production or safety issues for fear of reprimand. Building the trust needed to create a true culture of continuous improvement takes time.
“When I walked the floor during my first couple months here, there wasn’t a single person in the plant who would look me in the eye,” says the aforementioned CFO/COO. “Depending on where the culture is when you come in, it takes time to create credibility.”
Private equity-backed CFOs should make it a point to walk the floor from day one of their tenure. In a McKinsey & Company survey, 55% of CFOs said “understanding what drives the business” is the most critical activity of the first hundred days. Executives who fail to venture beyond the traditional finance function often fail this crucial objective.
The executive who connects with frontline employees on a regular basis builds trust, increases company-wide buy-in on critical initiatives, and better understands the ideas and concerns of those closest to the business’s most crucial processes.
Falcon provides C-suite talent solutions for middle-market private equity firms across North America. Follow us on LinkedIn.