Home' MHD Supply Chain Solutions : MHD Jan-Feb 2017 Contents IN THE PREVIOUS INSTALMENT OF JASON FURNESS AND MICHAEL MCLEAN'S
RECENT BOOK MANUFACTURING MONEY, THE AUTHORS EXPLAINED HOW
TO MAXIMISE ROI. IN THIS ISSUE, THEY DESCRIBE SOME CHANGES BUSINESS
OWNERS AND MANAGERS CAN MAKE ON THEIR WAY UP TO BEING A 'BLACK
BELT' IN A MANUFACTURING AND DISTRIBUTION BUSINESS
Before any changes occur inside
any of our clients' businesses,
we collaborate with them to
understand the financial impact in as
much detail as possible before we begin.
This is done for two reasons.
1. We want to have a live 'Measure of
Success' so that we can have very
fast feedback as to the results of our
actions. If you are doing any sort of
improvement project that is unable
to rapidly show an improvement
(days, or a few weeks) in the financial
performance of the business, then I
have to say that it may be the wrong
program for your company, or it is
not being executed correctly. The
'Measures of Success' will help you
confirm this along the journey. Long
gone are the days where you could
undertake a two-year program of
'Cultural Change' and accept that there
will be no financial benefit for at least
2. Before beginning, you really should
determine if the desired changes
are actually worth the effort. If the
changes you wish to make are only
going to have a marginal impact
on the financial performance of the
business, then why bother? It is
extremely good business to sit down
and 'war-game' the impact of the
changes before you start.
We will now 'War Game'
Scenario One: Stock reduction
- how it is often done
Stock reduction is a great way of rapidly lifting
your return on investment. It is often done; I
have done it many times in the past, and will
do so again in the future. However, a word of
caution: reducing stock in isolation of other
business processes can have disastrous
financial impact and even larger impacts on
other areas of the business.
This is a not uncommon scenario. I have
been through similar scenarios, and you many
YourCo corporate head office has decreed
an immediate 50% drop in all stock levels.
The CFO has been monitoring the stock levels
and from the balance sheet they can see
there is $100k being held in stock. They wish
to free up $50k of this value. Purchasing is
instructed to restrict raw materials purchases.
The operations are told that they must still
supply all of the orders. Sales are often kept
unaware of the decision as it really is an
There are no changes to the way
operations process the orders, or the
materials, everyone is told to work harder
and get better.
In the beginning there is no real
difference, some of the operations slow
down or are idled to allow the stock to be
consumed. Labour levels are not changed
as the rate of production is expected to
return to normal once the stock levels are
reduced. Other overheads do not change,
nor does freight. The time it takes for an
order to move from the beginning of the
process through to the warehouse for
despatch is unchanged.
The first sign of a problem is that
customers who are used to ordering from
the finished goods stock, place an order
and instead of the warehouse being able
to despatch the order immediately, they
have to wait for stock from production.
This means that the lead time from order
to delivery has increased. The protective
buffer of finished goods stock has been
reduced, as was the intent, and now the
customers will receive goods only once
their order has been processed.
Customers who have been used to
receiving product within the normal lead times
start to complain. They will ring their sales
representative who may well be unaware of
any changes. The noise from the sales rep
makes its way up the chain, and then back
down again to the production manager. The
production manager says that they need to
purchase more raw materials in order to refill
the stock levels.
Customers are unhappy and vocal. Sales
are irate as they cannot book a sale without
an invoice, and you cannot create an invoice
Figure 1. Financial statements --
before stock reduction.
Figure 2. Financial statements --
after stock reduction.
MHD SUPPLY CHAIN SOLUTIONS --- JANUARY / FEBRUARY 2017
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