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, processes and activities were 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, 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.
Despite head count cuts in May, depicted by the red dash line, the gap between revenue and expense continues to narrow because the primary cause has not been addressed.
A 2006 study commissioned by the International Journal of Manpower involving 250 companies over five years found that overall performance actually decreased in companies that initiated large Reduction in Force programs.
A Newsweek article dated February 4, 2010 cites an example of why this might happen. The electronics retail giant, Circuit City, makes a decision to eliminate a large portion of its brick and mortar sales staff as a cost control strategy. It chose more than 3,000 sales associates to be fired. The selection process was based on those personnel who cost the firm the most money. The obvious implication is that it fired its most effective sales people!
Circuit City filed bankruptcy and now exists only online.
Not all businesses take this route.
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 than 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 invariably position lean as a growth 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, with 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.
The graphic above is a classic display of the effect of transformational change. The two related values move toward favorable levels simultaneously. This is what transformational change is all about within the enterprise.
The point is that transformation is achieved by attacking process as well as looking at traditional cost cutting alternatives. Harris Corporation had a goal of achieving a 10% productivity improvement when they implemented Cincom Control™. Three months into their implementation project they were achieving a 20% productivity increase. That is a transformational change.
This drives a true competitive advantage. Whether you are talking about simultaneous elimination of stock outs and increased inventory turns, increasing productivity or enhancing reporting abilities, you are bringing to bear precisely the type of change that is required to elevate companies out of the Great Recession and into a permanently prosperous future.