We’re hearing concerns from business owners and executives that it’ll be harder to fund their growth initiatives.
It’s understandable, with most companies experiencing increases in the cost of their inputs (people, materials, etc.) and some facing softer demand.
The good news: There are two major sources of money companies can tap without needing to raise external capital:
In this article, I’ll focus on the first. (Next time, the second.)
Two big trends have increased the amount of money companies send out the door:
Not all of those increased expenditures are actually necessary, and those that are can be offset.
Recent conversations with the operational improvement experts at our client The ProAction Group illustrate the opportunities that manufacturers and distributors have to alleviate the effects of these trends. (Pure services companies have their own opportunities; more on that to come.)
Companies that implemented just-in-time raw and work in process inventory over the last couple of decades made themselves highly efficient, lowering costs and working capital investment and increasing sales.
When the pandemic hit and previously predictable lead times became not-so-predictable, some companies concluded that JIT inventory had to go out the window.
That conclusion was questionable, to say the least, according to ProAction. Yes, many companies operating with JIT inventory were caught off guard and didn’t have enough. But the companies who had plenty of inventory because they carried too much were lucky once, rather than practicing a good habit.
Just in time inventory—planning raw and WIP inventory based on demand usage patterns, lead times, and capacity—is still a valid practice. If a lead time on a part became longer, it leads to a different inventory outcome than in the past. But it doesn’t invalidate the discipline of forecast-driven decisions about what the company orders and when.
Some opportunities to stop sending so many dollars out the door pre-date the recent supply chain disruptions.
Many companies delegate buying authority to clerk-level people who have neither the training, the big picture information, nor incentive alignment to make the right tradeoffs. People who are measured on Purchase Price Variance (buying at lower prices than in the prior period) tend to order big quantities to get a better price from the supplier.
That combines with another human behavioral element to increase and accelerate spending: if you are a buyer and the production line runs out of a component and must stop production, you’ll hear about it! But if your buys lead to too much inventory, you may not get chewed out for that.
In a tight labor market, manufacturers and distributors certainly face a bigger challenge in recruiting and preparing new employees. But they may not need as many people as they think, because current operations are seldom as efficient as they could be.
ProAction says they get called into crisis situations, where a company that’s been a good performer overall starts losing or delaying a lot of sales because of production shortfalls, or faces a loss due to cost inflation.
By overhauling operational processes, the existing people often can produce 30% to 40% more with the same labor hours, facility, and equipment.
That potential was always there—it never should have required a crisis to trigger action. Companies and private equity sponsors tend to grossly overestimate how operationally efficient a plant or warehouse is, ProAction says.
In mid-market and lower mid-market industrial companies, otherwise great business leaders may not be process oriented or trained. Ditto their long-service operating managers and employees. So, operations are run based on tribal knowledge rather than streamlined and documented processes.
Lean practices, Enterprise Resource Planning (ERP) and Sales & Operations Planning (S&OP) can rectify that. These disciplines greatly reduce lost / delayed sales, create a more satisfying work environment, and hold down and hold off the need for expenses and working capital expenditures.
By working to get demand signals earlier, the team can develop a better supply chain plan and production plan. Talking to customers can be part of that. “If you want these quantities of those products for your busy season, we need to work together to be ready and order materials earlier than in the past.”
The immediate result of better practices like Lean and S&OP is a schedule that the company can measure against, and that’s developed to fill orders. This can nearly eliminate time waiting for materials with a full staff watching the production line not run.
Lean makes various operations in a plant run at a coordinated speed that’s suited to the speed of customer demand. By reverse-engineering every operation to that, one can eliminate wait times and much WIP inventory.
With S&OP it’s the same concept except multi-departmental— with Sales providing the best demand signals they can, making sure that Purchasing works at the same pace as manufacturing, and finance knowing to supply the right capital.
So those are a few ideas from The ProAction Group about how to keep more dollars in the company or distribute to shareowners.