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The manufacturer's diet

Kevin Duffy
manufacturing

Most manufacturing organisations, like most humans, want to be leaner, meaner and in better physical shape.

So what do manufacturers do to stay fit in the current economic climate? Kevin Duffy, partner and head of the Global Operations Excellence practice at Kepner Tregoe and David Byrum, managing partner at Kepner Tregoe Australia explore how manufacturers can stay fit and healthy without losing too much weight...

Just as humans have dabbled in a range of diets from low-carb diets, to fruit, protein, and calorie-counting diets, manufacturing companies have tried their own range of weight-loss programs. Beginning in the 1980s with Total Quality Management (TQM) and continuing through Total Preventive Maintenance (TPM), Just In Time (JIT), Kanban and Six Sigma, to today's diet of the moment, LEAN, manufacturers continue to devote huge expenditure to gain advantage in an increasingly competitive market or to extend longevity in the face of global competition.

When a human diet does not produce results, personal trainers are sought for direction and motivation. When an organisational diet is not producing results, a consulting company is engaged. If results remain slow the program is often put aside. Then, just as the organisation becomes resigned to being 'overweight' forever, a new miracle cure is presented and once again the organisation's leaders are inspired to commence a new journey towards its goal.

So what can manufacturing companies do to ensure their diet is a success? Here are some tips that might help make your journey successful...

In manufacturing, weight and shape (i.e. cost base and organisational structure) is determined by the range of suppliers, products and customers. Unless significant changes are made to the activities carried out in these areas, no major reduction in the mass (or cost structure) of the organisation will result.

Organisations, particularly in economic down cycles, are sometimes forced to lose weight quickly (or reduce their cost base) through across-the-board reductions in labour. These efforts often produce the desired weight loss but deplete the organisation's resources, leaving weaknesses that may hinder long-term market recovery.

Because no fundamental lifestyle changes have occurred, the weight (or cost) eventually creeps back and the process continues.

For long-term cost reduction to be achieved, a business style change is required. It is best to begin that change with a detailed assessment of the current state of affairs.

Organisations often carry excessive cost structures simply because they have too much complexity - a condition that exists when a business performs too many low-value activities. In other words, low-value activities are responsible for a significant part of the company's costs but contribute little or nothing to its profit.

The good news is, that the signs of complexity are easily recognised - such things as increasing stock keeping units [SKUs), falling margins, increasing set-up times and falling customer service KPIs are signs that your business has become too complex.

To review your organisation's level of complexity ask your accounts department to run a profile of product SKU sales with a cumulative column. Draw a line halfway down the products list. What value do products below this line contribute to your business? Our research shows it is often less than 5%.

So why do some organisations continue to manufacture products and deal with suppliers and customers that contribute little value to their overall success?

The root cause of this problem is usually the standard cost system, which prevents the company knowing the true cost of manufacturing its products or servicing its customers. The standard cost system treats all products equally when allocating overheads. This makes low-volume, often complex products and customers seem far more attractive than they really are.

Recent programs such as activity-based costing have tried to establish the true cost of product manufacturing. While robust in principle, these programs consume huge resources and often fail to produce results within an acceptable timeframe.

This has led Kepner Tregoe to develop a rigorous analysis process called 'volume adjusted costing'. Our costing program provides accurate product and activity costs much more quickly than other programs and helps organisations carefully challenge long-standing organisational paradigms and perceived sources of competitive advantage. It also outlines the steps that must be taken to improve the contributions that low-value activities make to the business. Ultimately, if your low-value activities are not making a profit they must be cut, along with the cost structures that support them.

And just imagine the cost structure and profit level of your organisation without its low-value products and the engineering, technical and sales support they demand? Imagine if these costs were refocused on enhancing higher margin goods and developing new products?

Like most effective programs, our program requires effort, focus, and robust data and processes, and three basic guidelines for success:

  1. Do it because you need to do it and not because it is in vogue.
  2. Results will only come with consistent daily discipline and lifestyle (business system) changes.
  3. Choose a consultant you can work with and trust.

Kevin Duffy, partner, Kepner Tregoe and David Byrum, managing partner, Kepner Tregoe Australia

Kevin Duffy is a partner and head of the Global Operations Excellence practice at Kepner Tregoe. David Byrum is the managing partner for Kepner Tregoe Australia. Kepner Tregoe are specialists in operational and service troubleshooting using proprietary tools and processes recognised by the world's leading companies and regulatory bodies as "the Gold Standard". Please send any comments or questions you have in relation to this article to: dbyrum@kepner-tregoe.com