June 2008 Edition

THE LAST WORD

It’s Just Like Free Money

Cutting the “fat” from business – shedding the unproductive processes that can be embedded and overlooked in a company – can mean freeing money for investment or new business mining

With the subprime mortgage crisis persisting without end and taking down major institutions like Bear Stearns, we continue to see financial institutions writing off billions of dollars to revalue their mortgage-backed securities.

Not surprisingly, this has caused considerable angst in the financial community, resulting in much stricter covenants and higher rates for loans, if they could be negotiated.

How can companies acquire capital these days to invest in new products, grow the business, and expand into new markets? With the declining value of the dollar, now is the ideal time for domestic manufacturers to look at exporting into European and Asian markets, since U.S. products are now both desirable and competitively priced in these global markets. So, how can such an initiative be financed?

Money-saving Alternatives

Fortunately, there is a business practice available that can generate large amounts of free cash flow to finance such growth and development. It’s been called Just-In-Time, Lean Manufacturing, Continuous Improvement, and a number of other labels but, at the core, it’s about engaging everyone in your organization and teaching them techniques to identify activities that do not add value to a business, and eliminate them.

A way to visualize this is to think about every activity that occurs in processing and fulfilling a customer’s orders, including product development, order entry, scheduling, material procurement and processing, production, shipping, billing, and collection. If each of these activities that occur in all of these business processes were itemized on the customer’s invoice, which ones would they be willing to pay?

From the customer’s perspective, the ones for which they would be willing to pay are the value-adding activities. All the rest are an expensive waste. One of the major results of embarking on a business transformation to eliminate this waste is that there is a substantial reduction of the cash-to-cash cycle time on customer orders, producing substantial improvement in quality that reduces scrap and rework costs, and generates huge amounts of free cash by converting inventory into cash that is then available for investment.

Organizations that have embarked on this journey to a new business model – and it is a journey, since continuous improvement never ends and better practices are continually found – have seen cycle times reduced by more than 50 percent, inventories reduced over 70 percent, on-time delivery in the 98+ percent range – to customer’s requested date – and scrap and rework reduced by 80 to 90 percent.

Converting manufacturing facilities from warehouses of raw material and work-in-process inventory to production operations can free-up as much as 70 percent of facilities to expand production and add new products without the cost of additional space.

Imagined Cash

Imagine all the cash generated for business investment if inventory were reduced by more than 70 percent, scrap and rework both cut by 80 to 90 percent, and production increased more than three times the current output from the same floor space.

Make no mistake, this is not easy and it takes time to see the results, but many organizations that embarked on a Lean transformation have seen real, measurable improvements in these metrics in the first year.

It takes a commitment from the senior leadership of the organization, including the CEO and CFO, to make this happen. It’s not something that can be delegated. The people in the organization have to see the commitment from the top, including gemba – shop floor – walks by the senior management, to make this successful and it takes ideas and improvement suggestions from everyone to get these results.

If you want to know how a business practice or activity can be more effective, ask the person doing the job how they can do it better and easier, because they have the first-hand ideas for improvement – if management will listen and act on their suggestions.

There are companies that are doing this that generate free cash flow in
excess of net income. So, if this is done diligently and well, who needs a
banker unless it’s to grow the business through acquisitions?

Ralph L. Keller has more than 35 years experience in Operations and Supply Chain Management, focused during the past 15 on Lean Manufacturing and Lean Supply Chain implementations.

What do you think?
Let us know by e-mail from our website at www.ModernApplicationsNews.com
or e-mail the editor at pnofel@nelsonpub.com.