Decorated Products shortens the cash cycle with lean manufacturing and consignment inventory
September 16, 2010
Controlling inventory, reducing setups, taking advantage of vendor managed inventory arrangements--add it all up, and one metal label manufacturer has become seriously efficient.
Jeff Glaze recalled walking through his father’s plant a few decades ago and seeing row upon row of bins full of work-in-process (WIP). All in all, the company had about 100,000 pounds of aluminum in inventory and between 100 and 200 bins of WIP in every department.
Times, of course, have changed. Today the same Westfield, Mass., plant may have only 5,000 lbs. of raw inventory and little if any WIP in any department. Glaze is now president of the company his father founded in 1950, Decorated Products Inc. The make-to-order shop produces metal labels like those found on automobiles, machines, and power tools.
The last decade hasn’t been an easy one. Glaze knows what it feels like to have a large contract pulled away and sent to China. Large jobs aren’t as plentiful as they were, and to stay competitive, the company just can’t keep the inventory levels of the past.
For this reason and others, Decorated has adapted lean manufacturing to its high-mix environment. The plant may run anything from one-off jobs to orders for several thousand or more. The labels may be different shapes, and every job has different artwork, be it a company logo or identification information specific to one car or machine model.
The goal was to shorten lead-time while unloading burdensome WIP and raw inventory. To do this, they first identified commonalities in production and determined what could be standardized and what couldn’t. Second, they rethought how they managed raw inventory. Third, they tackled the front end and helped automate certain design functions that allow the company to take on a greater number of low-volume jobs faster.
All this has helped free cash both by reducing inventory and shortening the cash cycle—that is, the time between “cash out” (spending money on material and labor) and “cash in” (receiving money for the order). And Glaze and his team did it all during some of the most challenging times in the company’s history.
To make a label, designers first create artwork, which goes to the client for approval before screens are made. Raw metal is cut into sheets, grained to a scratched finish, and then painted if needed. After this, a film master is used to print the artwork on the metal, after which a clear lacquer is applied to prevent scratching. A shear system with photo eyes detects registration marks and cuts the sheets into strips. Subsequent machines punch out the product into individual labels and insert holes if necessary (if, for example, labels are to be riveted to a machine surface).
As Glaze and his team began to implement lean in the late 1990s, they sat back, looked at those manufacturing steps, developed value-stream maps, and had a revelation. “When we did the value-stream map, we began to uncover some commonality between our products.”
For instance, many products required a scratch finish and a painted white background. Many came in very low volumes, and setting up machines to process each run added lead-time. So now the company grains and paints a certain number of sheets every week and has that WIP ready for printing. When an order arrives, the technician takes the prepared stock and starts printing labels.
“So instead of setting up the paint operation five days a week, we’re setting up paint once a week, but we’re making enough parts to last the entire week,” Glaze explained.
This may sound as if Decorated Products is reverting to the traditional production methods, where operators run large batches and flood the shop with WIP to avoid setups. But Glaze said that this approach represents something else. “We have these items in stock anyway, so it’s not like we’re buying more metal and increasing our level of inventory; we’re just shifting our process and making more efficient use of the inventory we have.”
This WIP, he added, is highly controlled. The plant managers track inventory with enterprise resource planning (ERP) software from Epicor, keeping overall inventory levels as low as possible. As the downstream process draws down the WIP, the software helps the company trigger upstream processes into action to replenish the product. Overall inventory levels remain the same, and it takes less time to manufacture a metal label.
When a large contract ends suddenly, an inventory backlog isn’t a good thing, and Glaze knows this all too well.
In 1991 a large power tool OEM approached Decorated about a metal plate needed for a radial saw. The plate had to be cut precisely in an arc to very tight tolerances. Company engineers devised a way to make this product and, because of the volumes involved—about 4,500 pieces a week—dedicated a manufacturing cell to it.
The material, though, added a wrinkle of complexity. The job required a special grade of 0.064-in.-thick stainless steel to meet certain rigidity requirements. “We had to commit to 80,000 pounds of stainless steel at a time from the mill,” Glaze recalled, “which was basically 12 weeks of production.”
In 2001 Glaze got a phone call that all U.S. contract manufacturers dread. “Our customer said we had done a great job. We actually had zero defects and no late deliveries in 10 years. We were their best vendor. But they said they could buy the product from China for less. So they asked how many weeks of production we had left, because they were pulling their business.
“I almost had a heart attack. I had to lay off 20 percent of my staff, and they even tried to stick me with some of the inventory, because they said I shouldn’t have more than four weeks’ worth.” With that 80,000-lb. commitment Decorated made to the mill, the company essentially was sitting on 12 weeks’ worth of inventory.
Decorated eventually settled the inventory issue with its customer, but it still was a very painful experience. “The lesson I took was to look across the plant floor and identify commonality and places where I can apply standard products in order to meet as much customer demand as I can.”
This included standard raw stock sheet sizes. Lean espouses standardization, and after some analysis, managers found not standardizing the raw stock sheet size was costing the company big-time. Previously the coil cutting machine was set up for each job to maximize material utilization. If a job required a 15-in.-long sheet, the coil cutter was set up to cut 15-in. blanks. If the next job required 14 in., the coil cutter was set up again to cut 14-in. blanks, and so on.
Managers found that all that setup time added up to some serious costs. So ultimately they decided to use only several standard sheet sizes. This resulted in slightly more scrap, because a standard sheet size might be slightly oversized for a particular job, but the scrap was a small price to pay for all the savings gained from fewer setups at the cutter.
Using standard sheet sizes had another positive effect: It opened the door to consignment inventory.
Over the past decade, Decorated managers successfully reduced inventory costs by 80 percent and increased inventory turnover from 1.2 times per year to 15. That’s no small feat by any measure—and here’s how they did it.
The company used to buy material based on a three- to six-month forecast. This usually meant buying metal by the container-load, about 40,000 lbs. of coiled metal, which is not ideal when actual demand might call for only 10,000 lbs.
Glaze now avoids buying coil unless there’s no other way to get the material, and even then he doesn’t buy an entire container’s worth. For the most part, Decorated buys standard sheet sizes—but in this instance, “buy” isn’t the best word. The company doesn’t technically own much of its raw stock until a stack of sheets is opened for use.
“We’re in a small industry, and we don’t have much clout with some larger metal vendors,” Glaze said. “We were lucky enough to find a small metal vendor that has worked with us beautifully. We’ve agreed to work with [a minimum size of] 100 sheets to a skid, which I think is a reasonable request, and it gives us the flexibility of at least owning some material on our shop floor.” As soon as a package of 100 sheets is opened, Decorated then technically owns it and is thus invoiced for it.
The company still projects several months of demand and then releases a purchase order to the metal vendor, say for 500 of a certain sheet size. But unlike before, Decorated doesn’t write the supplier a check for the entire amount then and there. Instead, every five business days a representative from the metal supplier visits the shop floor to monitor inventory levels and replenish as necessary. He notes every opened stack of 100 sheets and writes up tickets for them, which triggers the supplier to send an invoice for the opened material to Decorated Products.
Decorated then has 30 days to pay that invoice. This means the company can pay for its material and shortly thereafter receive payment from a customer for completed work. In other words, it pushes material payments (cash out) closer to getting paid for the job (cash in). The ultimate goal is for Decorated to receive payment for a completed job before paying for the material. “It doesn’t usually work out that way,” Glaze said, “but we’re about two weeks off from that at this point.”
He added that the company’s ERP software helps track inventory to ensure managers know what stock on the floor the company owns versus the stock they have on consignment. This is critical, he said, because consigned inventory may not remain on the shop floor. The vendor (which happens to be only a few blocks away from the plant) may call Decorated and request some of that consigned material back to send to another customer—often one of Decorated’s direct competitors.
As Glaze reasoned, “Metal suppliers should not be increasing their inventory just to put their inventory on every customer’s shop floor.” Instead, the metal supplier uses customer facilities essentially as virtual warehouses. If demand fluctuates, the metal supplier can shift inventory from one customer to another. After all, customers don’t own the consigned inventory until they open the package and put the metal to use.
Small orders likely will be Decorated Products’ bread and butter in the future, and this has made streamlining quoting even more important. For instance, in the U.S. small trailer manufacturers need VIN plates that meet certain regulatory requirements. These jobs typically are between only 10 and 25 pieces, but what if Decorated could get those orders and still make a profit?
As Glaze explained, “We can’t afford to engineer something that’s only worth a few hundred dollars for the whole order, so we need to get these orders to the shop floor as quickly as possible.”
For these and even for other, higher-volume orders, Decorated has used the product configurator function inside its ERP software. This essentially takes engineering data that Decorated has gathered over the years and allows nontechnical people to quote certain products very quickly. The software automatically figures the size and color requirements, how many labels fit on a sheet, and other parameters. The result is a significantly streamlined quoting process.
This year Decorated Products turns 60. In 1950 Glaze’s father, then all of 24, decided he could do it smarter and faster than the company he was working for. It took him a year to get his first employee, but the business gradually grew. “And in 1991 he acquired the competitor he had originally gone to work for,” Glaze said, “so there was poetic justice in the end.”
He conceded that business hasn’t been easy in recent years. The challenges come from customers that send orders overseas or competitors that underbid just to get work in the door. More than once customers have come back to Decorated once competitors raised their price after realizing they couldn’t do the work for so little and stay in business. “We don’t kid ourselves,” Glaze said. “We know exactly how much it costs to make every single part. We can’t cut pricing and give orders away.”
Judged solely by the number of people employed a decade ago versus today, Decorated Products might look as if it’s in serious trouble. The company employed 100 then, only 32 today. Still, in 1991 the company spent about $250,000 on internal rejects. Today that amount is down to $5,000. The business has become a small but, as Glaze put it, “a finely oiled machine.”
In other words, the company may be smaller, but it’s much better too. The business stays focused on a service that is difficult to obtain when an ocean separates the customer from the supplier: fast turnaround.
“It’s the FedEx syndrome,” Glaze said. “Everyone thought overnight delivery was a ridiculous concept. Now we’re almost to that point in our industry.”