The Institute for Supply Management (ISM), a not-for-profit industry research and educational association, recently reported that as of February 2013, U.S. manufacturing activity expanded at its fastest monthly rate since June 2011. While several factors have contributed to this growth, the uptick largely has been attributed to the strengthening of the U.S. housing market and increases in consumer confidence and spending, both of which have bolstered demand for a variety of goods. While this news is a welcome sign for small and midsize manufacturers, many will struggle to keep pace with this increase in demand, and that will result in disgruntled customers and the loss of potential profits.
In order to prepare for increased customer-driven demand, many small and midsize manufacturers are planning to increase capital spending and hiring in the coming year. But to maximize the benefits of staffing and investment growth decisions — and to ensure that operations can support spikes in demand as quickly as possible — CFOs and other financial executives should first consider implementing a comprehensive cycle-time reduction program.
Cycle-time reduction — the process of compressing the time to perform manufacturing tasks — can be a powerful tool to help manufacturers better align capacity with demand, reduce waste, improve order-to-cash cycle time, and improve customer satisfaction.
The first task for any cycle-time reduction program is to evaluate existing manufacturing processes and identify opportunities to remove nonvalue added activities or improve productivity. Potential improvements can include a wide range of actions, such as changes in manufacturing techniques, adjustments to nominal staffing levels, or even the outsourcing of certain activities. Some of these options will undoubtedly require capital investment or product-design changes that can significantly affect an organization’s liquidity, inventory balances, and borrowing costs.
The Role of the Finance Organization
The process of making these kinds of improvements is often hampered by the common misconception that cycle-time reduction programs are exclusively operations-focused efforts. The truth is the exact opposite: the most successful cycle-time reduction programs involve executive leadership across multiple business functions, particularly the finance organization. As financial executives are responsible for the planning, oversight, and allocation of financial resources, they need to be involved intimately in trade studies (the work of multidisciplinary teams to choose the best technical solutions among many variables and options) for determining how to best improve productive capacity.
For example, a manufacturing organization needs to increase output by 30% to meet customer demand. Should the organization invest in new machinery or increase staffing levels to support an additional shift? Answering that basic question involves considering labor costs, equipment-depreciation methods, cost of capital, utilization rates, and myriad other factors. Finance executives are the best-positioned individuals within the organization to understand the long-term and strategic consequences of each potential cycle-time reduction initiative.
Finance executives should also be actively engaged in assessing the impact of cycle-time reduction decisions on internal and external financial reporting. Imagine a company that’s considering outsourcing work to an existing supplier. In addition to reduced cycle time, there will be impacts to the timing of operating cash flows, overall inventory balances, and labor expenses, all of which can have an effect on debt-covenant compliance and overall financial performance.
Although it may seem a little like mixing oil and water, getting both operations and finance to engage in cycle-time reduction is critical for sustained, measurable success. To make the process easier:
While there are reasons to be skeptical that U.S. manufacturing will maintain its current aggressive growth — matters such as the sequester and the turbulence in certain European markets — for the time being, demand for U.S. manufacturing appears poised to continue its rise. Will your organization be ready to capitalize on the next spike?
David Savier, a manager with RAS & Associates, a Denver-based strategy and management-consulting firm, advises a wide range of clients from Fortune 500 companies to high growth start-ups. He specializes in financial modeling, financial-statement analysis, accounting advisory services, and operations management.