By BJ Schramm (B_Schramm@hotmail.com)
In this era of COVID 19, most manufacturers have been experiencing significant reductions in volume. While the recovery time will vary from industry to industry, markets will return and volumes will come back to pre-COVID 19 levels.
While we are strained financially for the short term, are we taking advantage of the fact that our facilities are not fully utilized, are experiencing down time, and consequently available for making process improvements which will not be possible as demand returns to pre-COVID levels?
In conversation with Southern California manufacturers, my observation is that most are doing an excellent job of managing their variable costs. Costs such as labor, materials, tooling, and outside services should remain constant as a percent of sales. Most manufacturing managers are highly focused on these costs and generally do a good job of managing them.
The reality however, is that variable costs account for only 30% to 40% of costs in most manufacturing operations. The balance of costs are fixed. This includes buildings, equipment, insurance and a significant portion of utilities. While little can be done to control these costs in the short term, we can take action now to dramatically improve our future fixed costs per unit.
Let’s take a look at the simple reality of fixed costs. The fixed cost per unit of production is a very simple ratio. The numerator (fixed costs) may be moved slightly through re-negotiation but these reductions are not likely to be significant. The key is growing the denominator (units of production) without increasing the fixed cost numerator. That requires that I learn to increase throughput without increasing fixed costs. This must be done at every level: administration, engineering, inspection, shop floor, logistics and maintenance. How do I change these manufacturing processes in a way such that more product moves through the manufacturing flow while maintaining (or reducing) facility, equipment, technical, administrative and managerial costs?
The first question is where do I look? How do I identify where to focus time and resources for efficiency improvements? Consider looking at two fundamental process drivers: Variation and Velocity.
Ask yourself, based on your personal experience and your production data, where do I see variation in the process? What are the indicators? Are we making excessively large lots of product to overcome variable yield losses? Do you see inconsistent scrap rates? Are these inconsistencies related to equipment, suppliers, processes or personnel? Does the amount of rework vary from lot to lot? These are red flags which should cause us to look deeply to explore the root causes, identify improvements required, and commit time and resources to correct deficiencies.
What is slowing the “cash to cash” cycle in my operation? Mapping out the processes from the time the order is received and cash is laid out for internal staff time (estimating and administration) to the moment cash is received from the customer, where does the process stop or bottleneck?
- Where are processes taking longer than necessary?
- Are there unnecessary steps which need to be eliminated?
- As you walk the shop floor, are excessive amounts of product idle on the shop floor, driving up fixed unit costs?
- Are inventories increasing as demand decreases?
As future demand increases, we will again be consumed by the drive to meet customer demand. Let’s take the time now to prepare so that we come out of this COVID era stronger and more prosperous than ever.