Case Study: Restructuring a Manufacturer Through a Demand Slowdown
The promoter asked: “Do I shut down, or can this be saved?”
Executive Mandate Summary
Key Transaction & Governance Challenges
- •An OEM slowdown cut revenue by about 21% in six months. With 85% of sales going to three OEMs, the company took the full hit while its fixed costs stayed at Rs 28 crore levels.
- •The OEMs stretched payments from 60 days to 70 to 75 days, creating an Rs 18 lakh monthly burn and putting significant pressure on working capital.
- •The working capital facility was 95% drawn and debt service coverage had fallen to 0.7x, breaching the lender's covenant.
- •Cutting discretionary spend had saved only Rs 80,000 a month, while the OEMs refused price increases.
- •The business needed to restore cash generation without layoffs, despite operating at only 60% of capacity and facing a significant demand slowdown.
Northrop Execution Architecture & Methodology
The Problem
An OEM slowdown cut revenue by about 21% in six months. With 85% of sales going to three OEMs, the company took the full hit, while its fixed costs (lease, EMIs, payroll, power demand charges, insurance, compliance) stayed at Rs 28 crore levels. The OEMs also stretched payments from 60 days to 70 to 75 days.
The result was an Rs 18 lakh monthly burn: about Rs 8 lakh of operating shortfall after EMIs, and about Rs 10 lakh absorbed by slower OEM payments. The working capital facility was 95% drawn and debt service coverage had fallen to 0.7x, breaching the lender's covenant. Cutting discretionary spend had saved only Rs 80,000 a month, and the OEMs refused price increases.
The Three Levers
1. Grow the aftermarket on idle capacity (Rs 4.6 lakh a month). A product-level P&L for all 18 SKUs showed that 4 SKUs already sold to the aftermarket earned about 35% gross margin, against 12% on OEM work. They were the same parts, packaged differently. The OEM contracts placed no restriction on these sales, and the plant was running at only 60% of capacity, so no OEM order had to be given up. Adding Rs 2.4 crore a year of aftermarket sales at an incremental contribution of about 23% (after distributor margin, packaging and freight) adds Rs 55 lakh a year.
2. Benchmark procurement (Rs 3.3 lakh a month). Material spend of about Rs 12.6 crore a year had never been tested against the market. Competitive quotes brought steel prices down about 4% (Rs 25 lakh a year). Consolidating 14 consumables vendors into 4 saved about 10% (Rs 9.5 lakh), and re-tendering packaging saved about 12% (Rs 5.6 lakh). In total, about Rs 40 lakh a year.
3. Consolidate the production window (Rs 1.4 lakh a month). The evening shift was only about 35% utilised. Production moved into a single 6 AM to 6 PM window run by two overlapping 8.5-hour crews, keeping within the Factories Act limit of 9 hours a day. All 12 evening workers were redeployed, so payroll stayed the same. The savings came from the evening supervisor, idle-hour energy, security and canteen: Rs 1.42 lakh a month.
4.The lender. A data-backed projection showed coverage recovering to about 1.15x within two quarters. The lender kept the facility unchanged and waived the covenant breach for one quarter, subject to monthly reporting.
Impact
- Cash moved from an Rs 18 lakh monthly burn to a surplus of about Rs 3 lakh a month in six months.
- Aftermarket grew from about 15% to about 22% of revenue, lifting gross margin from about 15.5% to about 17%.
- Procurement costs fell by about Rs 40 lakh a year.
- Working capital utilisation fell from 95% to 78% within 12 months as OEM payment terms normalised.
- There were no layoffs: all 42 employees stayed and 12 were redeployed.
The Data Was Already There
Growth years hide inefficiency because volume pays for it. The data to fix this business was already in its own records; nobody had read it.
Case Study Disclaimer
This is an illustrative case study. Names, figures and identifying details are altered or constructed.
Verifiable Institutional Outcomes & Value Realized
- Cash moved from an Rs 18 lakh monthly burn to a surplus of about Rs 3 lakh a month in six months.
- Aftermarket grew from about 15% to about 22% of revenue, lifting gross margin from about 15.5% to about 17%.
- Procurement costs fell by about Rs 40 lakh a year.
- Working capital utilisation fell from 95% to 78% within 12 months as OEM payment terms normalised.
- There were no layoffs: all 42 employees stayed and 12 were redeployed.
- The three levers delivered Rs 9.3 lakh a month on their own, enough to turn the Rs 8 lakh operating shortfall into a surplus.
Ashish Chaudhary
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