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Transforming a manufacturing business into a lean enterprise during boom times is a fun and exciting experience. Lean generates growth, new customers, market penetration … all good things. In today’s world, one might ask, “How do I use lean now?” The answer is much the same as in a good economy. Lean is about identifying and eliminating waste in the operation. In my experience, there is great temptation in a declining business environment for management to condone or even encourage waste as a way to avoid the harsh realities of the business climate.
I was recently working with a company that had a great business. Their demand was steady, their invoices were paid promptly, profits were good … they were really busy. Unfortunately, their biggest customer represented almost 70 percent of their sales volume, a situation that is all too common in most manufacturing businesses.
In an abrupt change in policy, their customer moved a complete project offshore, attempting to reduce costs. As a result, the company faced a sudden loss of about 25 percent of its backlog in one afternoon. The company owners scrambled to find additional sales to replace the lost volume. With great effort, they managed to convince their big customer to source additional work with them to make up for the lost project and were given several million dollars’ worth of product to quote – a monumental task for a small company with thin management ranks. While the owners toiled to wade through the RFQ, separating the wheat from the chaff, the plant manager struggled to “keep everyone busy” by building product for every order in hand, even those due months into the future.
New orders began to flow. Rush deliveries were promised. There seemed to be a glimmer of hope. However, during the slow period, the plant manager had “kept everyone busy” by using all the raw materials on the floor. The products could not be shipped early, so the finished goods inventory sat in the warehouse waiting for the months to go by. Payroll had been maintained and product had been built, but cash collections were months into the future.
To make matters worse, the finished goods inventory was included as “accrued profits” by the company’s accountants, and income taxes were owed on the “profits.” No raw materials, no cash flow and no credit due to the tax liability. This was not a promising future.
During a recession, if your backlog begins to fall, face the music. Avoid the tempting waste of building inventory against future demand (orders that don’t exist or that may be delayed or cancelled and certainly won’t be cash for many months). Don’t commit raw materials before the customer actually will consume them. Lean manufacturers produce at the pull of the customer.