Are your hidden inefficiencies hurting your manufacturing operations?

Author: Sanjay Nair

Recently I found myself engaged in a series of conversations with an organization that seems to be “losing money” every single day, but that doesn’t seem to have a sense of urgency to resolve this issue. In their most recent financial report, the company released some very interesting figures and key among them was a decent growth in terms of sales. However, their profit margin remained stagnant, hovering around the 12% level, while their industry peers are at between 18.5% and 25%. Then, looking at the production-related expenses – namely the cost of goods sold (COGS) – this happens to be the largest of their expenses at approximately 85% of sales.

While they indeed operate in an industry with high production costs, it is interesting to see how relatively large the differences are against their industry peers whose costs typically span between 52% and 73% of sales. Could this be attributed to the fact that their peers have a leaner and more cost-efficient production process? I wanted to investigate this matter further, and so I had my work cut out for me!

 

The dialogue

During a subsequent discussion with them, I enquired: “Have you established sufficient visibility and control over your manufacturing operations to enhance your overall market position?” The reason behind my question was that, going into the meeting, I understood that their production planning department was experiencing tremendous difficulties in generating and maintaining feasible production schedules. Their planning system was not fully automated, and there were frequent interruptions in their production operations – and this was in turn affecting their capacity utilization, equipment productivity, and essentially, their overall manufacturing efficiency.

However, rather than the anticipated response of: “Not entirely, but we are currently investigating opportunities to improve our manufacturing process to enable greater productivity and profitability than ever before.” The response was: “We are still trying to convince our stakeholders on the possibility to proceed with an improvement project. It seems to be a huge challenge because such a project is considered a non-budgeted item with no provision for resources allocation. It is an ongoing discussion, perhaps with a possibility to be decided on sometime later.”

Well, doesn’t this sound familiar?

 

The observation

Clearly, they did not seem to be aware of the magnitude of cost leakage around them. But how so when, in the first place, they do not even have the necessary systems in place for identifying such “losses”. Were their stakeholders still firmly entrenched in a set of institutional barriers, which inhibited them from adopting new approaches that are different from what the organization is doing today? Or was it fear of change? Or fear of failure? Whatever the reason, they seem to be remarkably unaware of making suboptimal decisions that were resulting in serious hidden inefficiencies, skyrocketing costs, and lower profit margins.

In my interactions with business leaders throughout the manufacturing sector, I see companies stuck in a string of arguments focused on the theme of standardization of yesterday’s practices versus the adoption of new approaches.

These are the same manufacturing enterprises who are internally facing increasing pressure to manufacture products with high quality, reduced lead times, and low costs, while increasing shareholders’ profitability. At the same time, their external business environment is highly competitive and driven by uncertainties.

In this increasingly volatile business environment, optimized decision-making solutions that leverage data, deliver insights, and propel businesses forward to a stronger competitive position have become a cornerstone in every successful establishment – be it commercial organizations, government bodies, or institutions. A growing number of organizations have begun to recognize the need to transform and adopt such decision-centric optimization solutions. However, the real challenge lies in the execution of that transformation and ensuring that the value that is expected from the investment is realised.

It is therefore very interesting to observe how many of our customers are continuing to expand the deployment of ICRON throughout their enterprises. And mind you, quite a number of them have been our customers for over 20 years. Why? Because they are either realizing some 10% growth in revenue, 15% increase in production capacity utilization, over 20% reduction in operating costs, or are setting the benchmark through delivering the quickest turnaround in their industry.

While some of our solution implementations have been intricate, they were nevertheless quick and less intrusive, ensuring a rapid Return on Investment for our customers. So, without a doubt, the faster an organization can go from idea to implementation, the more it can embrace opportunities to transform and radically improve its operating performance.

Are you aware of how your hidden inefficiencies are hurting your company? Or are you being left behind?


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