A client called me this morning and told me that he was going to close down one of his production facilities. This particular client has 3 state of the art production facilities, geographically dispersed in the state which he is located. All of the production facilities were doing well with the product they manufactured. Each site was ran by local site management. The inability of one production facility to generate a profit did not impact the other facilities. Said another way, those facilities that were profitable were not subsidizing facilities that were not profitable.
I asked the client how he had made this decision. He told me that this particular facility was bench marked against company and industry benchmarks. Unfortunately, the production facility that was closed failed to achieve either corporate or industry benchmarks regarding profitability. The client said that they had tried several different things to try and increase facility profitability, but to no avail. The bottom line was that a corporate decision was made to close the facility.
As the client was explaining this to me, I was proud that he had made the decision without a lot of anguish or teeth gnashing. Profitability benchmarks were established, the facility failed to achieve those benchmarks and the client was unwilling to allow one poor performing asset to weight down the rest of the company.
The equipment in the facility can be used in other parts of the company, in other facilities. Some equipment will be sold off and some will be sent to disposal. The physical plant will be put up for sale.
This client made a good decision, in our mind! He recognized that no matter what type of additional capital infusion, marketing strategies or production techniques that he were to employ, the market for this particular product was not economically sustainable.
If you are faced with this situation, don’t wring your hands. Establish some corporate benchmarks, review industry benchmarks and watch how your organization performs. If the company fails to achieve those benchmarks, make some strong decisions that will allow you to not continue to put good money after bad– causing you to lose more money. It is not easy to close a major production facility. Even harder is the disposal of the equipment and physical plant, however, once done, the problem is resolved and the company can they focus on the parts of the company that are profitable.