Case Study 3 - Using Driver Tree Analysis to support small manufacturing business

The Business

Small manufacturing business servicing the local food industry.

The Problem

The business owner had a number of options for expanding or enhancing the business.  He needed to conduct a thorough cost-benefit analysis of these options prior to moving ahead - to ensure their financial viability and to evaluate their robustness to possible changes in market conditions. He lacked the in-house skills to perform this analysis so he engaged BusinX to provide this business analysis support.

The Approach

A Driver Tree approach was used; based initially on the information available in monthly Profit and Loss statements, Sales and Production reports.  Once developed, the Driver Tree was used to:

  • Examine current breakeven point and product margins.
  • Critically examine the assumptions underpinning the expansion options.
  • Identify high-leverage opportunities for improvement, and
  • Evaluate the return on investment of different improvement options.

Details

The business had a lot of good quality data in its business accounting system, but this information was not in a form that could be easily used to support decision-making.  For example, cost elements in the P&L were not split into variable production costs and fixed overhead costs, and so it was not easy to see the impact of a change in sales volume. In addition, the accounting manipulations and one-off costs that form a normal part of Profit and Loss reporting made it difficult to use the P&L reports for variance or trend analysis.

Using the Driver Tree approach, we re-organised the cost elements and separated fixed overheads from variable production costs.  We then looked at the key drivers of each of the variable costs, ie we looked at whether variable costs changed with production volumes, or equipment type or product type. This approach allowed us to predict the impact on earnings of changes to these drivers.

This analysis also identified where additional data needed to be captured, and led to a changes in the way KPIs were reported and analysed.

The Results

Small businesses don’t have access to the in-house analysis support that large companies have, but it is equally important that their business decisions are supported by fact.  This consulting arrangement gave the business owner access to the support he needed in a cost-effective way.  It enabled him to assess his options in a more thorough and structured way – resulting in changes to his proposed course of action.

Within the first week of the engagement, opportunities to improve business profitability were determined, and we were able to put in place actions to capture those improvements.

BusinX continues to provide on-going analysis support to the business.