How to turn a loss-making manufacturing into a profitable one

I entered the metal door manufacturing business in 2016. The cost of shares was cheap. The business was tiny, and competitors were squeezing out its products.

However, I understood that Oleg was the best manufacturer in the metalworking industry. Every chance was to lift the business; we needed to improve the commercial block.

The first thing I did was to manage promotion: I launched paid advertising, started sales and promo through the Instagram page, and enhanced the website. This allowed us to boost retail sales in Almaty.

The turnover increased almost 5 times in three years. But then things stalled. We tried to start trading in Tashkent, but it didn’t work out. We had reached our maximum.

At the same time, Oleg asked me to deal with the accounting, and it became evident that we didn’t control the financial flows and often didn’t understand where the money went, where it came from, and where our profits were. He approached me because, by education, I’m a tax specialist and have experience in financial auditing at Schlumberger.

At that time, six accountants were in the «Metako» team, and I saw that we were in complete chaos. At the same time, they complained that they couldn’t do anything, penalties and fines were coming, and reports didn’t reflect the actual situation.

I suggested to the other owners, Oleg and Arman, to split the accounting system and outsource accounting services. It was an unusual proposal that raised questions.

Then I turned to external auditors — they all confirmed that the existing financial system was not just wrong but terrible. It became clear that it wouldn’t be possible to scale the business with this state of things.

I understood that accounting for business and business purposes should be separated. While 1C (accounting software used in Kazakhstan, in some things similar to Tally) was perfect for tax accounting, I started to look for a solution to manage inventory and manufacturing.

The first one I tried was SAP Business One, but it didn’t work out for several reasons, the main one being the price, which is $15 per employee.

Among the cloud-based solutions was also Kladana, but I was sceptical about whether it would be a good fit. I started testing it more for fun, not expecting to gain any significant benefit. I showed the service to our chief accountant. He looked at me and said, «Tanat, I will never work in this program!»

However, I continued to use Kladana and appointed an employee to work in it. Meanwhile, we had two systems running simultaneously.

Kladana quickly showed us its benefits. The thing is, it has two modes: allow negative stock and deny it.

After we had switched on ‘deny negative stock’, we found a shortage of 1 million tenges. It turned out that the cashier was stealing. And this was during the first month only. It became clear that it was time to rebuild the system of how departments work.

We realised we had two problems preventing us from growing our business.

Firstly, business processes needed to be established.

Secondly, the financial and inventory management needed to be stronger. I began the reform: sales, finance, inventory, and manufacturing. The entire process took a year, and I went through all the stages: denial, anger, bargaining, and depression.

We had to part ways with some people, with the most significant losses being among storekeepers and accountants.

The accounting and warehouse departments were the most resistant to the cloud service and new processes.

The Kazakh accounting school is traditionally powerful and professional, but the problem is that they don’t work for the owner. They work for the tax department, for the government. And Kladana implies working for the owner’s interests first and foremost.

Many accountants are not ready to work like this. And as the owner, I believe the accountant should calculate everything for the entrepreneur and then for the tax department.

Warehouse people also actively opposed the changes. They had an established habit of working with documents rather than factual stock.

For example, goods came to the warehouse but without documents applied. With documents, storekeepers or accountants could do something. Inward stock is in place, but we can’t do anything with it. And vice versa, there is a document but no goods — they would still process it. We said: we switch to recording inventory according to physical stock. If goods are physically received in the warehouse, we record them in Kladana without waiting for documents. In Kladana, you can indicate the absence of documents with a particular checkbox. We don’t do anything if there are documents but no physical goods — we wait.

The goal was to orient the processes towards actual stock operations so that owners could see the real situation without distortion.

Working with people was the most challenging part. We convinced some, motivated others, forced some, and had to part ways with others.

Today, the «Metako» company has a financial director and the accounting department is outsourced to whom we send all the documents. They keep records in 1C precisely for the tax department.

Kladana’s implementation allowed us to grow both qualitatively and quantitatively. The most significant achievement is structured business processes. A spiral dynamics model teaches how to transition from a culture of power to a culture of rules.

If a company relies solely on total control from management, then sooner or later, there will be a failure. To prevent this, scenarios for each stage are needed. When learning Kladana, I saw that the logic of processes from manufacturing to customer delivery was suitable for us. There was no need to develop expensive IT solutions to meet our needs.

Now all of our business processes are digitised in Kladana. We created a regulatory structure without regulations by taking a ready-made mechanism and implementing our procedures. Digitisation allowed us to see our business’s strengths and weaknesses. We realised it was advantageous to produce expensive products rather than mass-produced ones. We stopped making cheap models, changed the range of products, paid more attention to design, and used expensive materials.

Our stores, as well as our advertising campaign, changed. Retail outlets turned into showrooms. All of this allowed us to become leaders in the premium segment.

Kladana stopped the theft in our company. When we switched to Kladana, many facts about dishonest employees came to light. If all processes in the company are transparent, and every action is reflected in the system, employees work differently, and the atmosphere changes.

Understanding our Net Income allowed us to change the incentive system for employees. We began to calculate the Net Income of each employee and each transaction and reviewed salaries. Employees started thinking like owners, correlating their actions with profits. We allocate a percentage of net income to the department or workshop, whose managers distribute it among the employees. This is called a transition to a culture of success.

Many factories in Russia, like ours before, were focused solely on revenue. We call it «pushing metal» when there are huge turnovers but no profit.

Such a situation arises from poorly organised business processes. The cheap segment produces quality products at low prices, meaning work is carried out in a high-risk margin mode, around 20%.

With such a low margin, breaking even or going into the negative is effortless. Everything affects it: currency exchange rate fluctuations, any production cycle disruption, and any unforeseen situation. In such a segment, mastery is in having processes that work like clockwork on the one hand and constant financial control of profit and expenses on the other.

In Russia, some factories can produce a lot at a low cost, but they don’t know how to make a profit and sell their products.

For comparison: our first factory makes 300 doors per month, but they are expensive custom-made products, while the factory we took over management makes 3,000 standard doors in the same period.

These factories lack customers, and we have them, but we are expensive for them. Additionally, in Kazakhstan, there is a shortage of welders, while in Russia, some are born with a welding machine in their hands (laughs).

We can produce our orders at the Russian factory. What is missing? Correct business processes. The margins are low, so we cannot afford to make mistakes.

We implemented Kladana at the factory, and things started to work. Our corporate department started to make a profit.

Today, we are leaders in the premium segment and control half of Kazakhstan’s corporate sales market.

In 2022, we took another plant under our management, this time in Turkey. The ruble is becoming expensive for us, and all political processes affect the Kazakh currency, so we minimise risks. Now that all processes are working smoothly, it is not a problem for us to enter foreign markets.

Currently, we plan to open a sales department in Astana. It will be managed remotely by us from Almaty.

There are a lot of Russian-made products in Astana due to its territorial proximity so we will be competing with them. Our strategic goal is to learn how to build a sales department remotely.

Finding a dealer in Astana would be easier, more economical and faster, but we are taking the difficult path by creating our own sales department. Whoever owns the client owns the profit.