Baird’s operational resources drive profit and exit value at Paddock
November 30, 2010
Baird Capital Partners Europe (“Baird”) exited Paddock Fabrications in August generating a 2.7x return for its funds.
Over the course of Baird’s investment and despite the recession:
- Gross Margins rose from 33% to 40%; and
- Revenues grew in 2009 after a 15% fall in 2008 - in a market that fell c. 30% over that period.
Baird Portfolio Director, Dennis Hall, explains how Baird’s operational focus and Asia resource base drove the return.
It all starts with people - even in manufactured products! In Paddock we backed a business led by a dynamic CEO who had an open and progressive appetite. There were executive team holes we had identified and we quickly set about filling those. We also installed one of our Operating Partners as Non-Exec Chair - David Fraser is an experienced industrialist who has worked with us in 9 prior investments and knows both manufacturing and Baird. The right people and our proactive attention to the potential buyer audience all contributed significantly to the Paddock success.
Equally important was the utilization of the Baird Asia resource base. Baird is unique in the UK mid-market in having a dedicated team of 16 people based in Beijing, Shanghai, Hong Kong and Bangalore. Paddock allowed us to fully engage the breadth of this Baird Asia resource across supply chain, process outsourcing and Asia revenue generation.
Mid-market companies may well understand the opportunity and the threat of Asia, but they tend to have limited direct experience and limited internal resource to devote to addressing this.
The typical result is inactivity (so missed opportunity) or frustration – very few get it right quickly.
At the time we invested, Paddock had already been brave enough to have started sourcing components from China and was seeing some headline unit cost savings, but with issues around on time deliveries and variability in quality. The result was low confidence on when they would receive product and how good it would be!
So what did Baird do?
Often, as with Paddock, the first priority is sorting out the current position
Having a dedicated team on the ground coordinated by the UK Portfolio Director, enables us to introduce systems, processes, controls and proper communication between the portfolio company and Asian suppliers. As a result, very promptly only quality approved product left factories, proper achievable plans were openly agreed then visibly monitored and a communication plan was put in place between all the parties – sharing the same information and talking about it openly.
The result…..within 3 months of investment On-Time Deliveries increased from 60% to above 90% with virtually no shipped quality issues.
The next step is improvement
The Baird team have supply-chain skills spanning commercial, logistics, quality and engineering. This enables us to look to improve the supply equation in a number of areas:
i) New Suppliers
At the same time as sorting the existing position, we visited forty potential suppliers before sourcing alternative suppliers.
An essential attribute of Baird Asia is that they maintain an extensive database of suppliers which they identify, visit, assess and audit…in significant depth.
Supplier Audit Scoresheet
Through this process we developed the current factories that are Paddock’s main Asia supply relationships. As well as bringing a further ‘price down’ benefit, these selected factories have been more reliable and with better capabilities giving Paddock essential ‘confidence of supply’.
ii) Developing the Supplier’s Capability
The Baird team works proactively with suppliers to improve their quality and capability in areas such as lean manufacturing, operational improvement and quality initiatives. We also communicate openly to enable them to understand our portfolio company’s plans so they can plan for themselves.
We have demonstrably seen that improving the supplier brings cost and quality benefits to us as well as building both trust and the working relationship with the supplier.
Poor layout, lack of efficiency
and quality control
Proper assembly layout and good
iii) Re-engineering of Products
Our team understands the different skill-sets and cost bases of Western and Asian manufacturer. Utilising this they facilitate cost down projects. Two examples for Paddock are:
- Deadbolt – Paddock had historically tried to source this brass product in Asia, but unsuccessfully. After managing a solution with the new Chinese suppliers (reducing the cost from the £1.00/unit in the UK to 60p) we then looked at a steel alternative. Whilst the route increased manual labour (so would not have been viable in the UK) at Chinese labour rates it reduced the unit cost further to 40p.
- Stainless Steel Keep – a simple re-engineering of the product to use less steel and more labour reduced product costs by c£100k annually.
Baird’s combined volumes enable it to negotiate group freight rates to the benefit of the portfolio.
Retaining UK control and local Chinese design skills, cheaper packaging solutions were introduced. The subsequent benefit of this is that product no longer has to be sent to the UK, broken down, put into customer order groups and reshipped. It can often be shipped with limited UK ‘touch’ or even shipped direct.
vi) Working Capital
Cash is king and the Baird Asia team understands the importance of working capital management in our businesses. As such, they work to build supplier confidence and to negotiate the best commercial package including payment terms. For Paddock, this meant the transition from cash on order to Letter of Credit on shipment to 60 day terms. With better planning and supply chain transparency, lead times have improved with the suppliers holding some local stock buffers on call off and lead times moving to 20 days from Purchase Order to shipment on bulk orders - 1/3rd of what it was.
So it is not just about the initial product price, Baird Asia has a much wider capability to continuously improve product margins, supply chain capabilities and to develop the entire service model. The benefits are clear - in combination, all of the above drove Paddock’s increasing market share and considerably higher GMs even through the recession.
Process Outsourcing – Leveraging India
The exercise of taking processes offshore to attain a cost and flexibility benefit has been widely applied across the Baird portfolio in functional areas as diverse as quality, payroll, compliance, development, testing and R+D/drawing.
For Paddock this applied to two areas:
Asia Revenue Development
- Baird Asia recruited and trained Quality Control staff in China to operate within Paddock’s supply base; and
- Paddock had capacity constraints in its UK design team. Recruiting in the UK was both difficult and expensive so Baird Asia sourced capacity in engineering design skills in India which proved a cheaper (saving some £75k pa) and entirely flexible solution.
The growing appetite and buying power of Asian businesses and consumers is an important opportunity for our portfolio and an increasing focus for the Baird Asia resource. The team is able to:
For Paddock, the local understanding of the geographic market specifics was essential. Baird Asia identified target markets and established a distributor relationship.
- identify and evaluate opportunities at the macro level;
- undertake customer/competitor analysis;
- assess routes to market; and
- initiate and manage the agreed solutions.
As a result Paddock achieved its first sales into China with Vietnam orders to follow. More importantly, the creation of a market presence in Asia brought strategic value which contributed to the overall return to the shareholders.
So, in summary, is this rocket science? No. It is about systems, processes, the quality and dedication of our people on the ground and how we manage the interface between our Asia team and our portfolio companies. We believe Baird is unique in the mid-market in having this depth of capability.