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

Kazakhstani entrepreneur Tanat Sarsembay, co-owner of the company ’Metako’, told Kladana how he broke the long-established traditions, revolutionised his manufacture, and became a market leader.

Metako is the № 1 producer of steel doors in Kazakhstan.

  • Their factory is located in Almaty, and the company manages two other factories: one in the Republic of Mari El, Russia, and the other in Turkey.
  • Their annual turnover is 2 billion tenges.
  • They also have two retail stores in Almaty and an online store.
  • The production volume is 3,000 doors per year.

Start of Metako company

The story of Metako began in 2006 when Oleg Khodorenko rented a workshop at the former Kryuchkov defence plant in Almaty.

Oleg started producing metal doors, which sold well. He had a manufacturing team but delivered orders in an old car, tying the finished doors to the car’s roof.

The business was going well until Kazakhstan joined the EAEU. Cheap products flooded the market from Russia within the framework of the Eurasian Economic Union, which hindered Metako’s business. The company couldn’t keep up with the competition, and sales declined. Then the principal investor wanted to sell his share, as he lost interest in the business. That’s when Tanat Sarsembay and Arman Baymukhanov bought out the shares.

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.

Tanat Sarsembay
co-owner of the company ‘Metako’

Accounting is for the tax authorities, Kladana — for the owners

Tanat realised it was necessary to change the system and build business processes. He tried to reorient the accounting team to work for the owners, but he failed.

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.

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From paper documents to real transactions

Tanat had to carry out harsh reforms, breaking established traditions. The processes were complicated.

It took a whole year to restructure all departments. Employees resisted. Even other owners were only sometimes in agreement with the changes.

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.

Was it worth it?

The implementation of Kladana was also complicated because «Metako» is a company with complex internal processes, including multi-workshop manufacturing.

The company has 8 locations: the central warehouse, the finished goods warehouse, and six workshop warehouses. Goods move from one warehouse to another, accumulating costs. Every movement is recorded in the Kladana.

All people are using Kladana, including the manufacturing manager, workshop managers, and warehouse workers.

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.

This was just the beginning

After «Metako» successfully developed the retail sector and captured the premium segment, it was necessary to move further — to go to corporate clients to work with construction companies.

However, we had two obstacles to working in the mass market: too high prices and weak manufacturing capacity.

At the same time, there were factories in Russia that could produce 20 times more at a low cost but were operating at a loss. In 2021, «Metako» took control of a factory in Russia, in the Mari El Republic.

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.

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Hunter, farmer, closer

The corporate department at «Metako» is also structured uniquely. There are three categories of employees working in the department.

The first level consists of ‘hunters’, those who seek out clients. These employees go to construction sites and engage in cold sales. A hunter is an extrovert who must always be on the move and communicate with others.

The second level consists of ‘farmers’, who are more introverted. They process requests that come from the hunters. Their task is to process the order and translate it into the language of production. Farmers create Sales Orders in Kladana, then create Purchase orders, and place Production Orders.

The farmers are also divided. Some prepare Proposals, others place orders at the factories, and a third group accepts and processes orders on behalf of the factory.

When the product is ready, the ‘closer’ appears. They are the ones who accept the order and work on the site: they install, coordinate, and sign documents. The closer leads the installation team.

The hunter is responsible for what happens with the client in the office, the closer is responsible for what happens on the construction site, and the farmer is the connecting link.

The salaries of all three categories are tied to the company’s income. The hunter receives 10% of the net profit. In addition to their salary, the farmer and closer receive bonuses from the net profit if they meet their targets.

Factory in Turkey and sales in Astana

Due to the strict COVID restrictions that lasted six months in Kazakhstan, Metako survived by equipping hospitals with doors. This allowed the company to stay afloat and pay its employees’ salaries.

Of course, there was no talk of making a profit during that period, but the company could keep its people and not lose control despite the remote work format.

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.

Corporate culture: rules of «Metako» company

  • Everything must be digitised. If it’s not digitised, it doesn’t exist.
  • The rule of digital trace. All communication between employees or partners takes place in the digital space.
  • The rule of authority separation. Everyone is responsible for their area and does not interfere with others.
  • The rule of free competition. Whoever brings the customer first gets the customer.
  • The rule of net income. All employees are rewarded based on net income.

The main rule of production:

  • Do not create defective products, and do not pass them on. If you received and approved a defective product, you are responsible for it.
  • Any rule can be broken, but you bear material responsibility for the consequences.
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