Thursday, June 17, 2010

Last Year’s Model and Flawed: A Good Investment for the Operations Warrior

With private equity groups out and about, constantly shopping for luxury goods companies and with the economy not recovering as fast as everyone had hoped, brand valuations are a good sport for buy-out specialists. This is because at the moment most valuations reflect the brand’s profit making ability, which is very low, while private equity firms gamble on the value of the intangibles. According to the Financial Times’ “Special Report on the Business of Luxury” (June 14, 2010), there is a lot of activity in the buying and selling of luxury brands and this reflects the eagerness of several private equity firms whose main goal is to capitalize on their record-low acquisitions of yester year and take advantage of the slightest signs of economic recovery. Luxury goods make for a cyclical industry that requires finance professionals to be bold when it comes to fashion.

In the case of Ferré’s auction one hopes that the results are going to be a little bit different. Gianfranco Ferré, the Italian designer who founded the Ferré Fashion House, passed in 2007, while his firm had already been bought by IT Holding, a luxury brands group that went bankrupt last year due to the economic recession. (The Financial Times, June 17, 2010,

But in bankruptcies of that type is when things get interesting, not so much for the sport-loving buy-out shops, but rather for the hard-core operations-driven private equity firms. These are the people who roll-up their sleeves and bring out the operations manual with the goal to turn the firm around and create economic value for the firm, their own team, and the rest of the stakeholders. Their success is based on their ability to identify flaws and work with them, around them, or against them. Whichever the case, here is what the rest of us should keep in mind for ventures of similar kind:

Manufacturing management: Production processes are key, more so than production capital (machines, manpower, or space) to produce the product. Process is what consumes time and resources to produce quality. The latter is a major differentiation point from the competition.

Inventory control: Make inventory control part of your production process or at least try to identify where the two models intersect.

Quality control: Setting standards and inspection systems should happen on both the micro and macro level. Dumb proof checklists will never amount to anything useful if you don’t give your own management breathing space for macro inspection. Rethink your systems on a regular basis. Where your processes fail is where your business model needs tweaking.

Purchasing: Identify supplier sources and work with them to add value to their business model. If you hesitate ask yourself why. This could reveal an opportunity for business expansion for you (vertical or horizontal integration).

Operations skills and management: Don’t be afraid to spend some time in the “production trenches” before holding a meeting at the senior management level. Take some time to reflect on what you learn on the trenches and ask a lot of questions even if, as the company owner or CEO, you are supposed to hold all the answers.

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