The Great Recession and subsequent slow motion recovery are proving to be something of a crucible for business. Over the past 24 to 36 months, businesses have had no choice but to react in some way to the economic forces currently affecting the world of manufacturing and business in general. Those reactions have mainly fallen into two separate and distinct categories, each with exceptionally different long-term results.
Cut, Cut, Cut
In the beginning, conventional wisdom would counsel manufacturers to look for people, processes and activities that were deemed non-essential. People were laid off, process and activities curtailed. Following this, other tactics would be employed including salary cutbacks, benefit reductions, gaining additional discounts from suppliers or selling off certain types of assets.
These actions are all largely tactical in nature and for the most part are aimed at maintaining the status quo through the application of extreme cost reductions. These tactics come at a very high price. Consider the following:
• These actions deliver a single, one-time benefit to the expense line.
• They frequently leave the enterprise with less brain power, less product and less infrastructure
• Upon recovery, the enterprise is usually inclined to re-acquire the assets put to pasture during the down turn. Frequently this cost is greater than the money saved during the downturn.
• The enterprise is left flatfooted. The recovery is well ahead of the ability of the enterprise to respond to it, thus costing additional profits in the form of lost opportunity.
In a protracted downturn, such as the business environment we are currently operating in, the simple fact is that many businesses run out of things to cut. Like a sinking ship, the crew has thrown overboard everything they can while the ship continues to take on water. Ultimately, the ship sinks or, if not, there is so little left onboard that operating the ship is impossible.
The graph below shows this more clearly. A declining revenue stream against a flat expense line is addressed in May with a cut in headcount. The effect is there, a temporary increase in margin against expenses, but ultimately the gap continues to narrow over time because nothing has really been done to address declining revenue.
I intentionally used the word crucible in my opening sentence to describe the current economic environment. Crucibles ultimately transform the raw materials they contain. Typically, materials placed in a crucible will emerge stronger, more pure or more useful then before. This process involves subjecting those materials to extreme heat.
The enterprise can experience the same positive benefits by embracing transformation rather than fighting it through defensive, tactical, transactional, one-time measures.
Proponents of lean manufacturing will invariable position lean as a growth strategy. A strategy for obtaining a greater share of the market one is engaged in. Repeatedly, we see the press – and in some cases executives – citing lean as a justification for head-count reductions, plant closures, product or divisional spin offs and other cost-cutting measures.
Lean as a Transformational Process
In reality, lean is a process of transformation. Implementing lean is all about focusing on what the customer wants, not on how to cut costs on what is sold to customers. The lean enterprise seeks to eliminate that which delivers no value to the customer. Sometimes this does involve cutting expenses, but ultimately the business grows through increased business activity associated with an expanded demand for products.
ERP has traditionally been concerned with controlling inventory costs. That is a good goal and the application of lean to the ERP process, makes it that much better. Enterprises moving to a pull model from the traditional push model will find transformational change within that process.
Demand-driven manufacturing is literally driven by the customer. Production is tuned to the demand generated by customers rather then by attempts to “create demand” by selling goods at cheaper prices. Rather than stocking unsold merchandise, demand management uses the order to initiate the manufacturing process. This, in turn, moves all the way back up the supply chain. Each preceding link driving manufacturing processes by the demand generated downstream.
Effective demand-driven manufacturing can be enabled through electronic Kanban, which facilitates instantaneous communication up and down the supply chain to ensure minimal inventory levels and simultaneously eliminate stock outs. The Ultriva Lean Manufacturing Suite accomplishes this perfectly within Cincom Control ERP.
When using ERP and Lean for transformational change, important metrics move toward favorable results simultaneously.
A true competitive advantage is created that just keeps on giving. Simultaneous elimination of stock outs and increased inventory turns would seem almost counterintuitive, but that is precisely the type of transformational change that is required to elevate companies out of the Great Recession and into a permanently prosperous future.