With all the noise and rhetoric in the current environment, it’s challenging to determine if we’re in a period of stagnation, economic growth or decline. It depends on which ‘experts’ you’re listening to, but the following is, nonetheless, true.
Manufacturers want to make the most of improving conditions; they want to re-energize their companies to take full advantage of the marketplace, which is especially true in a robust economy when opportunities present themselves. However, being ready to take advantage of the market can lead to waste due to overproduction, one of the eight wastes which adds no value but detracts from profitability, which can lead to a significant cost disadvantage.
For many manufacturers, especially when anticipating increasing marketplace demand, confidence often manifests itself in a surge in production. When anticipating increased sales and potential profit, it’s not abnormal for managers to revert back to the push approach. For these managers, their instincts tell them to ramp up to prepare for the anticipated onslaught of demand which may never be fully realized.
The calming effect of experienced quality professionals, who should be well-trained in lean techniques, and be trusted allies to organizational leaders, should remind management this is not a useful strategy. It is a reaction due to the fear of not being able to meet a spike in demand or missing an opportunity while competitors capitalize on it.
When manufacturers let these ideas prevail, they find themselves trapped in a dangerous cycle. When the economy heats up, production rises quickly, the economy soars, and production levels continue to increase to meet marketplace demand. The problem, though, is as Sir Isaac Newton pointed out, “What goes up must come down.” So…the market cools or, at least levels off, and manufacturers are usually left with depreciating inventory that move, inevitably, toward obsolescence. The law of diminishing returns strikes again.
Certainly, an economic upturn, when it happens, provides the opportunity to break the cycle of overstimulating production. Smart manufacturers, when listening to their quality professionals trained in lean techniques, will not get swept up in this impulsive behavior and experience diminishing returns.
Instead, smart organizations will use the cycle of change to get aligned with marketplace demand. They will seek to synchronize production levels with more realistic demands.
Instead, smart organizations will use the cycle of change to get aligned with marketplace demand. They will seek to synchronize production levels with more realistic demands.
As many manufacturers realize, a forecast is always a gamble. At best, it is an educated guess. The only thing certain about a future projection is that it will not be exactly correct. For manufacturers, this means a projected increase in demand will create overstock.
Inventory represents resources that could be used elsewhere to help the company grow instead of consuming capital to procure raw materials, etc., to ramp up production. This investment inevitably depreciates and often becomes obsolete.
Another aspect of the cycle of overproduction is reflected in a company’s personnel. To ramp up production levels, many companies hire new workers, buy new equipment, and may even expand their facilities. This can significantly drain the company’s agility because these commitments are made assuming future revenues will increase based on projections which may not materialize.
If these projections fail, the company will be loaded down with resources it cannot use nor support. Obviously, this means the company will have excess equipment and underutilized facilities. This leads to decreased production levels which translates into worker layoffs and degrades the morale of personnel left to pick up the pieces.
To avoid this minefield, manufacturers should leverage existing resources to meet actual demand by dramatically shorting lead times. Before rushing to expand, companies should carefully assess their current resources which is where they should be utilizing their quality professionals to lead this effort.
Companies should focus on continuous improvement to cut unnecessary processes and adjust the work environment and tools to fit the tasks delivering value. These proven techniques will increase productivity and eliminate the need for additional capital. By using existing assets more effectively, a company can meet increased demand without overextending itself.
A lean operation that matches production levels to current orders maintains agility. It can respond quickly to changes in market pull and move just as quickly to fill new demand. This results in a better product, greater customer satisfaction and, ultimately, increased market share.
Leveraging existing assets without stepping into the minefield of uncertainty to match product to demand, smart manufacturers can take full advantage of marketplace reality. Smart companies let the less wise organizations step on the mines.
