Key Take Away: Western client successfully integrated acquired Chinese manufacturing operation after East West restructured Chinese facility by implementing transparent operational standards
Background: As part of a recent acquisition of a competitor, a U.S. company gained ownership of a Chinese manufacturing operation. The Western company had conducted an Operational Due Diligence of the Chinese firm with their internal operational and manufacturing resources; however, no one conducting this Due Diligence had ever lived in China and managed a Chinese manufacturing and distribution facility.
During the 'Integration Phase', the U.S firm discovered the manufacturing operation was managed by a Chinese General Manager who had an operating philosophy much different than the Western company. The Chinese facility had minimal transparency of financial reporting and limited processes and systems for forecasting sales and marketing, procurement and supply chain needs, manufacturing and inventory data, etc. Additionally, the Chinese company was sole sourcing several key raw materials and paying higher material costs than their competitors in the market, thus hurting cash flow and margins.
As a result of the acquisition, the Western firm was now responsible for all outstanding and future contracts signed by the General Manager - contracts with employees, vendors and partners, outside third parties.
Challenge: Client needed to obtain a better understanding of the operational capabilities and weaknesses of the facility in order to determine if and how they would integrate this plant into the organization. The American company did not have senior executives with extensive operational and trouble-shooting experience in China and hired East West to assist them in this effort. Additionally, immediately after the acquisition, the Chinese firm began requiring regular monthly cash injections from the American parent company to remain solvent and the GM added additional personnel in a business which was not making money.
Solution: EW recommended and performed the multi-step approach:
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Conducted an Operational Audit of the existing facility to evaluate the health of the business, operational capabilities, business processes for Sales & Marketing - Supply Chain and Procurement - Manufacturing - Operations - IT, evaluation of senior executives, and financial and contractual risks.
- Based on the Audit results, EW made a series of detailed recommendations to restructure the operations in order to restore the financial health of the business.
- EW implemented these recommendations, including replacing the GM with an East West Interim GM well-versed in the Western management style of the American company. The Interim GM was native Chinese and was a former Plant Manager in China for a Western company.
- The Interim GM was given full management responsibility, and immediately began improving the company's operating standards. Since overall P&L health was their primary focus, the Interim GM implemented a series of business processes for the organization and financial data reporting procedures
- The Interim GM also implemented a number of operational processes designed to bring greater efficiency as well as highlight weaknesses with their procedures. For example, in reviewing the sales and marketing processes, the Interim GM identified weaknesses in sales process and distribution channels - thus, he worked with the existing sales team to correct these procedures and identified an additional distributor.
Result: In 6 months, the Interim GM had set up a compatible system that was a good fit with the American parent company and had stopped the financial 'bleeding', so monthly cash injections were no longer required. Subsequently, the Interim GM assisted the company in identifying and interviewing a permanent GM, who walked into a company with a "Western" operations system and was positioned to grow.
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