Going Lean: Increasing Productivity and Profits for SMB Manufacturers

Back in the ‘80s and ‘90s, going lean (also known as cutting the fat, downsizing, rightsizing, getting competitive and any number of other pathetic euphemisms) meant getting rid of that which companies claim are their most important resource: people. However, today, for small and medium sized business (SMB) manufacturers, going lean means something entirely different. It is a way to apply best practices and technology to increase productivity and profits without adding to your workforce.

The Manual Mindset

Let’s face it, small businesses tend to be labor intensive. A lot of things that larger companies do through automation tend to be done manually. There is a good reason for this. Manual processes provide a wonderful level of flexibility. After all, a human being can handle exceptions and problems easier than can a computer program. On the other hand, this flexibility comes at a price. Many of these manual processes tend to take people out of the value stream (those activities within a company that provide direct value to the company such as sales or manufacturing). That is part of the overhead and for many small businesses, the overhead is pretty high.  

A Question of Quality

Quality is King; there is no question about it. A product can be cheap or expensive, but at the end of the day, no matter how nicely you fix it up—no matter how pretty the wrapping—if the quality isn’t there, nothing else matters. That goes for your products and it goes for your customer service as well. Consumers remember how they were treated by your company every bit as much as they remember whether or not your product caught fire when they plugged it in or crashed Vista when they installed it on their computer.  

Inventory Madness

Having inventory on hand is another way to add welcome flexibility to your company; however, this also comes at a price. In fact, one of the biggest costs that small businesses face is inventory and storage. Items on the shelf in the warehouse are not making any money; they are, in fact, costing money. These are purchased in advance of orders—orders that may not come for some time—and so they sit and wait for the day that they are wanted. This constitutes another aspect of business overhead and it, too, is often very high as well.  

To compete, a low overhead is necessary; however, as a small business, you need to retain your employees. The key is to move as many as you can back into the value stream of your company while, at the same time, minimizing the need and expense of a large inventory and maintaining (or even raising) product and service quality. To do this will require a radical shift in thinking away from the approaches of the past and toward a practical approach for today and tomorrow. It was said, at the time, that the huge personnel cuts from the ‘80s and ‘90s were merely pragmatic solutions to the problems posed by competing both nationally and internationally. The truth is that making such cuts improved immediate profitability (much to the delight of shareholders) at the expense of future stability (much to the annoyance of said shareholders). The one benefit from all that pink paper going out was the way businesses were forced to reexamine their processes to squeeze as much productivity as they could out of their reduced workforces. From the lessons they learned, we now understand what it is to go lean.  

Going Lean

According to Do more with less: The 5 strategies used by successful SMB manufacturers, a white paper from Infor, a leader in enterprise resource planning (ERP), there are five essential areas to look at when you plan to make your business lean:  

·        Vision: A clear understanding of the solution, the need you are looking to fulfill, the target audience you are serving, and the internal business model and guiding principles of the company.

·        Process: Adoption of Lean Manufacturing and Six Sigma principles that seek to eliminate waste throughout all aspects of the organization and process and focus on the production and delivery of products directly associated with customer orders.

·        Metrics: Identification and application of business metrics and Key Performance Indicators that can keep each aspect of the business on track and meeting or exceeding established goals.

·        Automation: Use of automated technologies that can accelerate individual processes such as design and engineering, production, quality control, product movement, inventory management, order fulfillment, and accounting.

·        Information Technology: The systematic integration and sharing of information for the efficient flow and management of work between internal and external functional areas of the company.  

By taking each area and applying some thought and work to it, you can come up with the kind of lean policies and procedures that will help you to increase quality, lower your overhead and raise your profits and productivity. The key is to simplify the complex by imposing the focus and discipline of a well-defined strategy. The first step in doing that is to examine your business plan.  

Your Business Plan

Do you remember your business plan? When was the last time you had a look at it? When was the last time you revised it? If it’s been a while, you might want to go find it, dust it off and see what it says about your business.  

A revision of your business plan in accordance to the five principles outlined above gives you a chance to examine the previous year’s operational performance, corporate vision and target markets with a specific direction and strategy in mind. It offers you a chance to analyze your strengths, weaknesses, challenges, new competition and emerging economic threats; re-test initial assumptions, look at expected changes in the market, develop efficiency and productivity improvements and update business goals and operating plan in a way that is truly focused on improvement and profitability.

Vision

Since your company is established, you should take a moment to examine your business model, especially in terms of cash flow and inventory. You may try, for example, to pay your own suppliers after your customers pay you. In one scenario where this kind of arrangement works, your suppliers will have to deliver on shorter lead times since you would be building product to specific customer orders, but doing that will cut your excess inventory, increase inventory accuracy and give you more control over current inventory. This means less money going to maintain inventory and more money being available for other needs.  

Another thing to look at is the growth of your company. You need to grow to survive, but you cannot allow that growth at the expense of your core competencies. Are you working to add products or increase your target market? Either is fine since it is usually best to introduce new products to an existing market or established products to a new market. Doing both—introducing new products to a new and unfamiliar market—is notoriously difficult and usually very expensive. By doing just one or the other, you can leverage your existing expertise in your products and your customer base into an expansion of your profit projections.

Process

According to an AMR Research study, over one-third of small manufacturers (fewer than 500 employees) and nearly one quarter of midsize manufacturers lack a formal process for bringing new products to market. Often, many of these companies follow informal processes that change with each project.  

A consistent process is, essentially, how you take the vision and turn it into a reality. That consistency has to extend from project to project, employee to employee. In other words, on each project, the same processes are used in the same way. This is, of course, always subject to improvement. The goal of process improvements is to deliver more products with less effort and resources. That is achieved by following a strategic program that continuously improves your product and your business operations, increases operational efficiency and cuts waste by focusing on the production and delivery of products that are directly associated with customer orders. More than that, your processes should address issues of delivery speed and quality. The lower your lead times and the higher the quality of your product, the less waste you will have to deal with and that can only help your bottom line.  

Metrics

Improvement efforts don’t mean much if you don’t measure them. Likewise, it is important to measure the right things to make sure that your efforts are on track. Some of the metrics that you should keep an eye on—and the percentage improvement you should see with lean manufacturing—include:

·        On-line Delivery--99% - 100%

·        Manufacturing Cycle Time Reduction--50% - 90%

·        WIP Reduction--50% - 90%

·        Productivity Gain--30% - 40%

·        Reduction in Required Floor Space--50% - 70%

·        Reduction in Unplanned Overtime--90% - 100%

·        Reduction in Finished Goods--20% - 50%

·        Reduce Raw Material Inventory--25% - 60%  

By taking a hard look at how you measure performance in your company, you will see areas where you can save money. This is even truer when you use lean manufacturing metrics.

Since lean manufacturing is a throughput system, that is, it is based on actual orders; accounting systems that are not adapted to such a system may well cost you business by suggesting that certain jobs would not be profitable. This can be avoided by using a system called Throughput Accounting.

Throughput Accounting. Invented by economist Eliyahu M. Goldratt as an alternative to traditional cost accounting, Throughput Accounting is based on the idea that organizations have goals and that value increases with better decision-making. The system uses three measures of income and expense:

·         Throughput (T) is the rate at which the system produces "goal units." When the goal units are money (in for-profit businesses), throughput is Net Sales (S) less Totally Variable Cost (TVC), generally the cost of the raw materials (T = S - TVC). T does not exist without a sale.

·         Investment (I) is the money tied up in the system. This is money associated with inventory, machinery, buildings, and other assets and liabilities. Inventory should be valued only on the totally variable cost of creating the inventory.

·         Operating expense (OE) is the money the system spends in creating throughput. It accounts for all expenses—maintenance, utilities, rent, taxes, payroll, etc.—other than the cost of raw materials.

With this system, management decisions can be tested to see whether they would benefit the company. Will the proposal:

·        Increase Throughput? How?

·        Reduce Investment (money that cannot be used)? How?

·        Reduce Operating Expense? How?

The answers will determine how a given proposal would affect the following system wide metrics:

·        Net Profit (NP) = Throughput - Operating Expense = T-OE

·        Return on Investment (ROI) = Net profit / Investment = NP/I

·        TA Productivity = Throughput / Operating Expense = T/OE

·        Investment Turns (IT) = Throughput / Investment = T/I

Automation

While it is true that most manufacturers use automation to one degree or another; after all, automation does save time and money, these solutions can be rendered even more effective if they can be integrated with planning and execution systems. For example, by connecting Computer-Aided Design (CAD) engineering with manufacturing planning, such as a Bill of Material System, you could speed up the design process through direct access to existing parts in the BOM part master. This could also lead to faster turnaround times between engineering and manufacturing during engineering change requests.

Information Technology

Given the speed of business today, the sharing of information across the functional areas of a business is imperative. This is where Enterprise Resource Planning systems come in. Once you have mapped out your practices and procedures, ERP systems can increase the efficiencies you have come up with even further. One example would be the ERP system that acts as a central hub, where every department has access. This increases the availability of data to everyone, thus improving decision-making and efficiency while decreasing redundancies, such as maintaining the same data in different databases.

For smaller scale or even non-manufacturing operations, the concepts behind both Automation and Information Technology principles still hold true. By integrating your automated processes so that they work together, spreading useful information across your organization and eliminating redundancy from your business operations, you can benefit from these ideas.

Lean manufacturing is all about maximizing profits by changing the way you use money and resources. Yes, it requires a change from older ways of doing things to the newer throughput system, where things don’t count unless they are attached to an order, but it is the way some of the most successful SMB manufacturers do things. By giving your vision, your operating plan, your goals and your market a thorough review, by seeing where you planned to be and comparing it to where you are now, you will see areas for improvement and that is the first step.