Sunday, March 2, 2008

It is time to retool – managing a shrinking economy

manufacturing ERP software
It is no secret that the US economy is tightening and the months ahead may be leaner than the months that have passed. As I travel from one formula manufacturing facility to another and meet with owners, managers and line workers I have gained a few insights that I would like to share with you.
If you are over 40 years of age you have now experienced at least one economic pull back and at least one economic expansion in the manufacturing sector. If you are over 50 you have probably experienced more than one.
One fact remains true - The US economy will change and eventually it will be stronger than it is today. With this change we will be faced with different challenges then we have in front of us now. The key is to ride out the down times while preparing for the next wave. The most successful companies are able to manage down times while retooling for the expansions.
How do you do that?
The key to a down market is cash flow and liquid working capital. In other words find ways to increase the cash flow and increase working capital. But don't do that at the expense of your future. Don't get caught flat footed when the market begins to come back. Your competition is hoping you will do just that.
Below are some ways to squeeze out working capital while investing in the future. It is all centered on cash. If you can watch the cash and working capital you will find you have plenty to make it through the slow times and will be in a position to complete as the market comes back around.
Reduce the inventory part numbers – Examine inventory levels of raw materials, packaging, intermediates and finished goods. Look for ways to reduce the number of different inventory items you are carrying in inventory. The more items you carry the more you will need to invest in safety stocks or relationships that you need to manage. Are there raw materials or packaging that can be consolidated my adjusting the formulas slightly? Look at your top 20 raw materials by value – which of those are only used in a small number of finished goods or intermediates? Those items may be able to be consolidated or the formulas may be able to be reworked.
Identify domestic suppliers - Look for local suppliers of the items even if they may cost a bit more per unit. You may be surprised that the offset in transportation and carrying costs may out-pace the cost savings of supplying from a foreign supplier. Additionally during an economic slowdown in the US foreign products become more expensive due to the currency exchange rates. Take this time to help your neighbor. You may appreciate the same attention from one of your local customers.
Collaborate with suppliers around your schedule - By working with your suppliers you can commit to a schedule that they can expect and you can live with. The result is lower carrying cost for both of you and a lower price per product. Remember that if your customers could give you insight into the future sales you would be more willing to reduce prices. The same is true with your supplier. The better your schedule the lower the price you will pay.
Shrink safety stocks - Take this opportunity to reduce safety stocks to an appropriate level considering a slowdown in business. When you are running an operation at 25% more volume you may need more safety stock. When business demand decreases the requirement for this inventory is lowered. Take a realistic look at the inventory levels for each of your items. Start with the items you carry the most – sort in descending order by value of inventory.
Promote most profitable items – If the market is absorbing a shrinking amount of sales then make sure you are selling the products that bring you the most return. Don't promote those items with limited return. Instead invest in advertising of those items that have the highest chance of sale and greatest return. Look at each of your finished goods and compare average selling price to actual production costs. Start with the finished goods that you sell the most by quantity (not price). Are you selling the most of the items that you receive the least return?
Review formulas yields – Concentrate part of your R&D money on refining the products that you will continue to sell the highest quantity. Once these are identified look for ways to reduce the costs and increase the yields. This will provide more profit for the same sale. Only focus on those items that have a high likelihood of sales. You may be amazed at the cost savings by squeaking 1-2% more yield out of each batch. Slow times are the times it pay to be frugal.
Reinvest in systems – In a down market there are often incentives in interest rates or government programs to assist companies to reinvest in the future. Many states provide tax credits for retraining your employees on newer technologies. Additionally as a market slows down it is common for interest rates to lower. Take advantage of this time to wisely invest in your information systems. As the market comes back the companies that have re-tooled will be ready to win in the recovering market. If you wait for a better market you will be fighting growing demand with limited supply.
All of these items are very manageable. The key is to get started. The sooner you look into managing cash flow and working capital the easier any economic downturn will become. Additionally don't trade long term successes for short term benefits. This economy will be back stronger than ever. Many companies make it through slow times only to be crushes as the business returns.
If your existing systems are not delivering the data I outlined above you need to do the best with what you have and address your systems issues immediately. I can guarantee that having the right information will pay for itself many times over in a shrinking or a growing economy. Putting this data at your finger tips is not as expensive as you may be lead to believe.
The primary message is to get started today and if you need help ask for it. There are some real challenges ahead of you but each can be addressed with creative thinking and access to accurate data.

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