We have worked with clients over many years to scale their businesses through operational excellence. We think of it as grooming a company over time for a potential sale even if the shareholders choose to hang on to it. As a private company owner considering floating on a stock market through an IPO, you would expect to follow a rigorous pre-IPO set of actions to get ready for primetime. But so few company owners who are considering a sale of their company do the equivalent preparation for sale. Executing relevant operational excellence projects over time can make a huge difference to the valuation of the company on exit and in many cases can ensure a deal happens or not. One example of an operational excellence project is the execution of an effective 6S program.
6S is a workplace organization methodology that creates and maintains a clean, organized, and efficient work environment. It originates from six Japanese words Seiri, Seiton, Seisō, Seiketsu, Shitsuke, and Shuukei which translates as sort, set, shine, standardize, sustain, and safety. The critical steps of 6S are as follows:
- Sort (Seiri): The first step is to sort or declutter the workplace. Identify and remove all unnecessary items from the work area, including tools, materials, and equipment that are not required for immediate tasks. Keep only essential items and dispose of or relocate the rest.
- Set in Order (Seiton): Once the unnecessary items are removed, arrange the remaining items in a neat and organized manner. Designate specific locations for each item, ensuring that they are easily accessible and clearly labeled. This step aims to reduce the time wasted searching for tools and materials.
- Shine (Seiso): Clean and shine the work area thoroughly. Regularly perform cleaning tasks to maintain cleanliness and hygiene. A clean workspace is not only more pleasant to work in but also helps identify potential issues like leaks, damage, or defects that need attention.
- Standardize (Seiketsu): Standardize the first three steps by establishing clear guidelines and procedures for maintaining an organized and clean workspace. This step involves creating visual management tools such as checklists, color-coding, and floor markings to ensure consistency and promote ongoing adherence to 6S principles.
- Sustain (Shitsuke): The most critical step is to sustain the 6S practices over the long term. Encourage a culture of continuous improvement and employee engagement to ensure that the workplace remains organized, clean, and efficient. Regular audits and inspections can help identify deviations from the established standards and trigger corrective actions.
- Safety (sometimes referred to as Safety, Security, or Shuukei): Some variations of these programs stop at the 5S actions above; however we prefer 6S which adds a sixth “S” for Safety. This step emphasizes the importance of integrating safety practices into every aspect of the workplace organization. It involves identifying and eliminating potential hazards, promoting safe work practices, and fostering a safety-first culture.
By following these critical steps, organizations can create a more efficient, organized, and safe work environment, improving productivity, reducing waste, and enhancing employee morale.
As you scale your business it’s worth considering the positive impacts on your business of a 6S program as viewed through the lens of an acquirer:
- Increased Productivity: A target company that has successfully implemented 6S principles is likely to have a more productive work environment. Improved organization and efficient processes can lead to higher output and reduced downtime, positively affecting the valuation of the deal.
- Cost Reduction: 6S focuses on eliminating waste and optimizing processes, leading to cost savings. A target company with effective 6S practices may have lower operational costs, which can enhance the deal’s valuation by improving the target’s profitability and financial health.
- Quality and Customer Satisfaction: 6S emphasizes maintaining high-quality standards and meeting customer needs. A company that delivers consistent, high-quality products or services is likely to have a loyal customer base and a positive brand reputation, which can positively impact the deal’s valuation.
- Risk Mitigation: Effective 6S practices help identify and address potential hazards and risks in the workplace. A target company with a strong safety culture may experience fewer accidents and operational disruptions, reducing risk exposure and potentially increasing the deal’s valuation.
- Cultural Alignment and Integration: If the acquiring company also embraces 6S principles, a target company with a similar approach may have a smoother integration process. Shared values and methodologies related to workplace organization can facilitate better cultural alignment, leading to a more successful post-acquisition integration.
- Employee Engagement and Morale: 6S encourages employee involvement and empowerment, leading to higher job satisfaction and engagement. A target company with motivated and committed employees may have higher retention rates and overall employee productivity, positively impacting the deal’s valuation.
- Long-term Sustainability: A company with ingrained 6S principles is more likely to sustain operational improvements over the long term. The potential for continued efficiency gains and cost reductions in the post-acquisition phase could contribute to a higher valuation of the deal.
- Due Diligence: During the due diligence process, the acquirer would assess the target company’s implementation of 6S and evaluate its effectiveness. The findings from due diligence would be factored into the overall valuation of the deal, considering the potential benefits and risks associated with 6S practices.
In summary, a company scaling its business for a potential sale should consider the dual benefits of a 6S program. Firstly, it can create a safer and stronger business whether you sell it or not. Secondly, acquirers are likely to appreciate the positive impact of the program on productivity, cost reduction, quality, customer satisfaction, risk mitigation, cultural alignment, employee engagement, long-term sustainability, and the due diligence process. An effective and well-implemented 6S methodology can positively influence the deal’s value by enhancing operational efficiency and overall business performance.
TPP scales companies through operational excellence and through acquisitions. Think of us as hands-on Operating Partners. It’s fractional corporate development management through the lens of an operator.
Reach out to Kevin or Ian to discuss how Operational Excellence projects can transform value.
Kevin@TPPBoston.com or Ian@TPPBoston.com