Ralph Keller, president of the Association for Manufacturing Excellence (AME), offers insight on what manufacturers can do to stay profitable even during an economic downturn.
Mnet: How has the current state of the economy affected manufacturing operations?
Keller: The banking community’s problems with subprime mortgages and the devaluation of those securities have forced many banks to write off large amounts of value from their balance sheets. As a result, they are much more restrictive in what way they will allow for loans and rates that they charge, making it more difficult for smaller manufacturers to have access to capital.
Mnet: What should manufacturers be doing to ride out this current economic situation?
Keller: One of the biggest sources for pre-cash flow in a business is the amount of money you have tied up in inventory. If manufacturers reduce those inventory levels and convert that to cash, then it will substantially improve the cash flow of a business. It’s the same as going and getting a bank loan, except you don’t pay interest on it.
There’s an old saying that inventory is an asset on the balance sheet, but inventory is only beneficial to bankers. The banker looks at it as an asset so they can loan money to the business and add the inventory as collateral against the loan. But for the manufacturer, there really is no value in it. It’s more of a liability than an asset and tends to hide problems and inefficiencies in the manufacturing process.
CFOs need to know that if they’re going to reduce inventory levels, in the short term it will do some nasty things to the profit line of the company’s balance sheet. You’ll see a reduction of assets to the business on the balance sheet and the profit-loss statement will actually show an increase in manufacturing costs. You’ll have terrific cash flow, but in the short term, your profit-loss statement will look worse.
Mnet: How might manufacturers continue to make improvements in their operations if revenues are down?
Keller: During an economic downturn, manufacturers should focus on streamlining operations. Lean manufacturing, or eliminating non value-added waste from your business processes, is an ideal way to improve your business operations and save costs as well. It’ll make your business much more responsive with shorter lead times, so that you can spend more time focusing on getting new business. Shorter lead times also give you a big competitive advantage over most businesses out there today.
In addition, the savings you gain from eliminating wasteful practices in some cases will help pay for wages. You’ll also have a much more efficient and better organization when the economy improves and order volume increases.
Mnet: What common mistakes do manufacturers make during economic downturns?
Keller: A lot of manufacturers make the mistake of reducing their work force. In most businesses, the people that are walking out the door take a lot of the organizational knowledge with them. Very few companies have all their processes and procedures well documented, so when people leave they take that institutional knowledge with them. When the business recovers and they hire new people, all that knowledge has to be relearned and that relearning can come at a big cost.
Mnet: What other ways can manufacturers maintain or improve their businesses during leaner times?
Keller: If they haven’t already, manufacturers should establish close relationships with suppliers and evaluate their supply chain operations. When a business is going through a downturn, is a prime opportunity to work with your suppliers on how you can streamline that relationship.
Many businesses use MRP/ ERP systems to procure materials and that’s based on a sales forecast of what you’re going to sell. The system then generates the purchase order to suppliers based on this forecast.
The common problem with this system is that most forecasts are wrong. Incorrect forecasts of sales volumes can cause you to buy the wrong amount of material at the wrong times and you end up with an inventory of material sitting around that you have no use for. It is much better to work with suppliers using a pull system for materials, where you don’t bring materials in until you actually need them. When operations are slow is an ideal time to work with suppliers to set up or update your MRP system.
Mnet: When the economy is slow, how might manufacturers improve business in the short term and the long term?
Keller: Each company is going to have to assess that on their own, but when the economy is down like this, you’ll want to try to look at how you can expand your market. If you find your customer base is declining, how do you find new customers in order to maintain that revenue for your business?
One of the best ways to do that is to look at international markets. Look at getting into exporting and expanding your market overseas. That is one thing you can do to address the short term.
In the long term, remember that ‘this too shall pass.’ We’ve gone through a number of recessions and economic slowdowns over the years in the U.S. You need to ask yourself, “How can I best use this time to improve my business so that when the economy does turn around, I can get more market share and be better positioned in terms of improving my profit margins and the value I provide to my customers?”
When you talk about other alternatives, there really is no magic silver bullet -- which is what companies look for. All of this is hard work. It’s not something that is easy to do and a successful lean transformation really is about changing the culture of the business. It’s something that takes time, perseverance and a lot of effort, but it can have huge rewards for companies that really stick to it.
A lot of companies will see measurable improvements in key metrics like cash flow and inventory levels, lead times to deliver products to customers, reductions in scrap and improvements in quality less than a year from the initiation of these changes.
Mnet: How can manufacturers maintain a competitive edge in the global marketplace today?
Keller: Manufacturers in the U.S. right now are in a very competitive position because of the declining value of the U.S. dollar. The dollar value has made U.S. manufacturers very competitive versus other international currencies.
In addition, the American worker is one of the most productive in the world and the combination of American productivity and the declining value of the U.S. dollar have made American products very cross-competitive on a global basis.
The Association for Manufacturing Excellence (AME) is a not-for-profit organization dedicated to helping companies with continuous improvement and their pursuit of excellence. For more information visit www.ame.org