Agri-Food/Trading


Summary:

To re-structure & turnaround the $300M t/o business.

Date:

2010 – 2012 (16 Months)

Company:

A wholly owned subsidiary of E. D. & F. Man, a privately owned trading house of over 200 years standing. The business, Sugat Industries, is based in the Middle East and provides sugar in various forms to industrial and retail markets. Other branded products include: rice and pulses varieties, salt, flour, bread crumbs, spices and flavourings.

Assignment:

To re-structure the business to bring it in line with the rest of the international group’s matrix management approach and turnaround the company’s operational performance to bring back to profitability. To establish a medium term planning methodology, with a view to attracting external investment.

Role:

Interim General Manager

Assignment Length:

16 Months

Background:

The company has a turnover of c.$300M, employing about 300 people across 4 sites with $190M capital employed. The company’s brands enjoy very strong market shares, rising to over 85% of the country’s retail sugar market. Industrial clients included Coca Cola and Jaffora, with over 230kT sugar being produced in 2011 at a time of world sugar shortage.

About 3 years earlier, a new sugar refinery had been constructed in country ($80M capital project), with the expectation that EU sugar exports would reduce considerably after undertakings to the World Trade Organisation in the mid 2000’s. The plant was scaled to deliver up to 370kT sugar and based on the ability to generate steam and power from a ‘dual fuel’ boiler that would predominantly operate burning natural gas shortly after start-up.

Historically, there had been a ‘hands off’ approach by the group and a ‘theory ‘x’ management style within the subsidiary. There was little local experience of running a refinery and the retail branded activity had grown from being a small business to a significant national manufacturer with a high company profile. The business had rapidly growing volumes, with over 200 SKUs in its brand portfolio.

Raw sugar cane was purchased and transported to country with support from London but all other materials, including rice and pulses were sourced using local staff.

Over the previous 2-3 years, there had been considerable effort to commission the refinery and run efficiently on a regular production basis. This had proved very difficult, not least due to little local expertise, either technical or with modern plant manufacturing methodologies. In addition, energy costs were much higher than expected due to conversion efficiencies but also, importantly, natural gas was not available in the area for use as a fuel. This required Heavy Fuel Oil (HFO) to be burnt instead. A final issue is the need for Kosher certification of output for the home market, necessitating 5 day, 24 hour operation and not running 7 days.

The business had suffered a large loss in the previous financial year (end September, c.$35M), both from operational and trading issues, in a very difficult market. This, coupled with significant problems in commissioning the new refinery and large staff turnover, resulted in a group senior management review of the business.

 

Assignment Brief:

The review outcome was to re-structure the country business to align it organisationally with the rest of the group, vastly improve information flows to and from head office and strengthen local management to achieve the transformation back to profit. Additionally, the client requested the development of a medium term planning methodology and the production of a brand valuation, with a view to seeking potential external investment in the subsidiary.

 

The Operating Situation:

About 6 weeks before the start of the assignment, a new COO had been appointed, and immediately prior to starting in-country, an initial agreement was reached over the split between commercial, operational and finance activity to work within the group’s functional alignment.

For most of the assignment period, there were cultural difficulties between the historic modus operandi and the new approach being adopted.

Within 3-4 months, it was clear that the finance function did not have complete control over the resources necessary to be able to deliver the budget process, or manage the monthly management accounts activity. This was corrected.

In parallel, work was initiated with the Operations function (containing c.90% of the workforce) to establish a new way of working. The primary drive was to enable more delegated authority, encourage initiative, reward success and jointly learn from mistakes. The culture and management style required to encompass this approach, was captured by constructing “The 4 Pillars” of the business.

Problem solving teams became established and stability was brought to the way that production operated. Once processes were reproducibly stable for a certain output, an increased production rate was adopted. The process was repeated once new stable running conditions were established.

At the start of the assignment, it was found that a negotiation with potential low cost energy providers had been underway for over a year, with the goal of agreeing a Memorandum of Understanding. This was brought to a conclusion within 3 months and then the work to establish a full agreement began. Although much more complex, this was concluded in 6 months, followed by a further 2 months to achieve formal group main board acceptance. This agreement is for the supply of steam, electricity and carbon dioxide over 25 years at a much more economic rate than that currently enjoyed by the site. Savings of the order of 50-60% were achieved, with improved security of supply. The availability of natural gas to the site is integrated into the approach, along with the building of a minimum 55MW power station by the side of the main manufacturing site.

3 years previously, the site’s power station had been commissioned in conjunction with the national electric company (IEC). A temporary licence was granted to enable commissioning of the plant and the export of excess electricity to the national grid. During the period of the assignment, significant effort was made to change the licence to the permanent one required by law. This proved difficult due to local bureaucracy, even with British Embassy support (as a foreign direct investor) and writing directly to the Minister of Infrastructure. Sluggish response was due almost entirely to the benefit of approximately doubling the tariff payable for the power.

Working in tandem with the COO, a new operations team was established, comprising a blend of some long serving and some new people to the business. Working relationships with the parent group’s technical team was improved dramatically, which lead to much more rapid productivity improvements, particularly in the refinery and enhanced, important knowledge transfer.

Across the business, a complete set of job descriptions was established, along with clear management structure and reporting lines for the first time. On the main operational site, much improved recruitment processes and induction planning was introduced, with the effect of reducing recruitment costs and people turnover by over 50%. A performance review process was introduced, top/down, that dove-tailed into the parent group processes at senior level. This included the start of people development planning. Additionally, key personnel policies and practices were established and written down for the first time.

In the packing department, large numbers of temporary staff were removed and production processes operated efficiently in spite of the age of the equipment (some machines in excess of 40 years old). A productivity bonus payment scheme (self-financing) was put in place successfully.

The warehousing and distribution activities were reviewed and processes improved. New, fit for purpose warehousing facilities, close to the main production site were established. Line management was improved, along with department resilience as order picking more than doubled in just a few weeks. Reduced transportation costs were achieved for raw material delivery from the port, especially for raw sugar cane shipments. For finished goods, new distribution patterns were established to cater for the rapidly changing customer delivery patterns across the country, whilst maintaining an optimum cost per tonne of product delivered. This was the subject of a clear Service Level Agreement (SLA) between operations and sales functions.

In terms of materials procurement, a number of savings were achieved especially in packaging.

Raw material (especially food based materials) quality was focussed on to upgrade the group’s ability to provide the business’s requirements along with changing national regulations relating to the standard of materials brought into the country and the changing packaging regulations (more rigorous than the EU). This included tighter specification of raw cane sugar analysis to optimise processing costs. Additionally, work was undertaken to establish processing conditions for raw materials from different points of origin.

Throughout the assignment, there were many upgrading projects in the areas of health, safety, environmental and food quality standards. These activities brought the site into line with corporate acceptability plus local, regional and national environmental and health ministry requirements.

Other capital expenditure projects were initiated with a total spend of about $3M in the year (close to 100% of depreciation). Approximately half of the expenditure was on projects with an RoI of less than 12 months. All CAPEX was the subject of a rigorous control process established with the finance and technical purchasing functions, plus final cost benefit review.

In parallel, the maintenance budgets (refinery and packing department) were carefully controlled to within budget figures (over $1M for each department).

During 2011, world sugar supply became a problem, with poor harvests in Australia, China and the EU. Brazil’s sugar cane crop came under pressure (the site’s main source of cane) as the world shortage became more keenly felt. In spite of all this, the company maintained its supply of locally refined sugar to the national market, with no shortages at any point. Indeed, c. 15kT was produced for export into the EU.

The budgeting process was undertaken for the first time in an open, controlled manner, with realistic goals. The results for year ending September 2011 were much improved over the previous year and the start of the new budget year has had variance; explainable, understood and close to plan.

Capital Projects, the approvals and monitoring processes were all enhanced in the period.

Product development resulted in improved margin for existing products and a greater range of products offered. The search for client value added compared with what is possible for imported sugar in particular resulted in a range of options including the installation of silos for storing sugar on client sites where current facilities were not available or requiring significant upgrade.

Continuous Improvement in all areas became the way of working, resulting in significant cost savings. For example: refinery waste products were dealt with by reducing cost of removal or improving sales value. In the latter case, molasses was sold for a further $120/T compared with the price previously negotiated.

Medium term planning was introduced to be able to identify investment needs to achieve the market growth planned. An additional objective of obtaining a brand valuation was built into the work, designed to provide a strengthened balance sheet and an opportunity to understand the level of 3rd party investment that might be attracted to the business.

Achievements:


Key improvements in the site’s cost base and performance were:

  • Negotiated energy supply partnership, worth savings of c.$7-10M/yr at current prices.
  • Re-structured the organisation reducing labour costs by c$.1.5M/yr.
  • Improved refinery stability ($80M+ spend) & increased output by 55%+.
  • Stabilised product quality, reduced recycling on-cost & controlled refinery material losses to ≤2.5%, representing a saving of c.$1.6M.
  • Established a new corporate structure & culture; accepted, supported & operated.
  • Approved c.$1.5M CAPEX with < 1 year return.
  • Improved power plant energy performance by 25%, worth c. $2M on HFO costs
  • Total process materials, waste product & bi-product savings c.$0.25M
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