Shortening the order-to-cash cycle

Today I talked with Ricky Loar, plant manager at Grove City, Ohio-based Horton Emergency Vehicles, a made-to-order ambulance manufacturer that has undergone a lean transformation during the past 18 months.  The shop used to resemble a kind of large custom garage--or, more precisely, a collection of garages that each had its own work practices.

Assemblers would order rough versions of various sheet metal components from the company’s internal fabrication department, which took a week to return that order. Technicians would start assembly, receive those components piecemeal, and manually cut holes and weld aluminum panels and other sheet metal and tubular components during the assembly process. From the initial order to final delivery, the entire order-to-cash cycle would be well more than 100 days.

Today, the company has it down to 68 days. And once an order is finalized and components are ready, plant workers can churn out about two trucks a week. When I talked with Loar today, he was getting ready for a dealer training session. The company has improved its manufacturing process; now it’s tackling front-office operations, including sales, order entry, engineering, purchasing, and customer service. The company literally has torn down walls between departments. When everyone collaborates, managers expect that order-to-cash cycle to shrink even more.

Some of Horton’s customers are private health systems, but some are government municipalities, which aren’t exactly thriving right now. But you wouldn’t know it at Horton. The made-to-order manufacturer is thriving in a market that’s struggling.

Just before talking to Loar, though, this Washington Post article appeared on my news feed. Apparently, U.S. manufacturing productivity gains may not be so impressive after all. In fact, those gains may have come thanks to global outsourcing. A part is made overseas then placed into an engineered assembly here; and that low-cost outsourced part has wound its way into the computations of government statisticians.



Statisticians also say that most of the productivity gains have come from the computer and electronics manufacturing, even though much of that industry has moved overseas. We do make microchips here still, but apparently the government may measure productivity gains there as an amount of computing power a plant outputs during a certain timeframe. If a plant produces more powerful chips, it automatically sees enormous productivity gains, even though those chips aren’t being produced any faster.

These discrepancies really don’t surprise me. Statistics have a way of twisting reality and creating false perceptions. Mark Twain grouped the science with appropriate bedfellows: “There are three kinds of lies: Lies, damned lies, and statistics.”

So now government officials are left wondering what the heck is going on with U.S. manufacturing. Why were so many jobs cut during the past decade? It’s hard to pass off 6 million fewer manufacturing jobs as a statistical fluke. Was it outsourcing or was it technological advancement?

It’s true we have better technology, but in most U.S. manufacturing, you don’t see floors lined with robots. Automotive factories and other high-volume producers aside, this is a country of small and medium-sized shops where robots and large-scale automation are the exception rather than the rule.  Besides, U.S. manufacturers had plenty of access to technology in the 1990s, yet manufacturing employment remained somewhat steady.

What did happen, though, is the rise of China and the global manufacturing economy. The pie of available producers (that is, cheap labor) grew faster than the pie of available consumers.

Right after the financial crisis, I thought that we were in for years of tough times ahead because the entire world economy seemed out of balance. Too much cash was in the hands of too few people--rich people, pension and retirement fund plans (thanks to the aging population), and governments like China’s. They all needed a place to put their money--hence we got all these ridiculous and convoluted financial instruments, which made banks richer, which meant they could afford good lobbyists who made sure government didn’t get in their way as financial folks made more money and took ridiculous risks, at least for their companies, not themselves. (You can probably tell I’m still a little bitter about that.)

After the financial house of cards fell, I thought the problem simply was an unbalanced global economy, that China made too much and didn’t consume enough--and eventually all this just had to balance out for things to be right again. Until the Chinese worker earned and consumed more, the U.S. manufacturer was in trouble.

But the more I looked at manufacturer’s financials--including those in the Fabricators & Manufacturers Association's financial benchmark surveys--I realized that labor cost wasn’t really that dominant in this business anyway. It really is about managing material, including raw stock, work in process, and finished goods. In fact, according to FMA’s 2009 financial benchmark survey, material cost made up between 30 and 40 percent of overall sales; direct labor costs were only 18 to 20 percent. Meanwhile, a higher inventory turnover seemed to directly correlate with higher profits.

Yes, these are statistics, worse than damned lies. But we all know material costs a lot, and the faster a company can turn that material into cash, the better. It’s harder to do that with a long supply chain. Chinese companies may be able to produce quickly, but they can’t beam those products here in an instant. Even if a firm offers extremely long payment terms, that still doesn’t help matters when a last-minute design change comes in the door as a boatload of out-of-date (and now useless) parts make its way across the Pacific. Funny accounting can’t change geography.

When it comes to shortening the order to cash cycle, a local supply chain that’s close to consumers and a skilled workforce will have an advantage. Cash and quick response are certainly important to the employees of Horton Emergency Vehicles. Managers have cut the order-to-cash time in half, and are now looking to reduce that time even further.  Statistics may be lies, but cash helps people pay for food and mortgages. For me, that makes cash real--certainly more real than any abstract productivity measurement.