How manufacturers can thrive when prices rise

Prices are rising for everything from raw material to labor, all of which can put a serious cash drain on fabricating and manufacturing businesses. This makes cash flow more important than ever. Getty Images

Soaring material prices. Labor shortages. Stressed employees. Who thought exiting the pandemic would be as tough for fabricators as being in it? Compounding these headaches is the cash drain that comes with hectic schedules and price inflation. Squeezed between the material suppliers and customers, fabricators have to work extremely hard to maintain their cash flow.

Systems show stress when under pressure, and employees do too. The chaos companies are struggling with now is real and must be dealt with using a higher level of thinking than normal daily activities require. Present processes are sufficient for normal activities, but once a company gets behind, either from staffing problems or demand increases, strong leaders must sort through the issues and find solutions.

The improvements in material flow and machine uptime implemented last year are already built into the system, so new adjustments will have to be found to improve throughput and generate cash. What follows are several good practices that may be helpful, if they’re not already fully in place.

Look at Your Business Velocity

It is good to track key metrics like inventory turns and days in accounts receivable (AR), but to truly improve cash flow, you need to consider the total time it takes for an order to turn into cash. The basic measures of inventory and receivables miss the time required for engineering, purchasing, and programming. For many companies, the entire business cycle—starting with a request for quote (RFQ) from a repeat customer through the final payment—might take 150 to 180 days.

An important measure for companies is velocity, or the speed at which the business operates. One way to measure velocity is to compare the total days from the purchase order (PO) to customer payment with the amount of value-added time for the order. It is important to track the internal time separately from the AR payment days as each measure has different improvement processes.

A simple velocity measure is: Velocity = Value-added time / Total time × 100. For example, if the true value-added time for an order totals 144 hours (six days), and it takes 24 days to ship, the velocity would be 25—think MPH. Value-added time includes engineering and programming, machine time on the floor, and perhaps a final quality review.

The wait times between each value-added step can be surprising. You also need to include weekends because we are looking at the total timetable. It may feel great to get an order off the desk on Friday afternoon, but if it’s not touched by purchasing until next Tuesday, you still lost four days. Consider the idle wait time between operations and compare that to the total time for the order. Quite often entire days are lost between quick operations (see Figure 1).

Many companies spend most of their continuous improvement effort in improving pieces-per-hour throughput, or they buy new equipment that can put out more pieces per hour. True, a machine that can combine distinct operations is worth its weight in copper, but to truly improve operational velocity, you also need to reduce or eliminate the wait time between value-added steps. The time improvement can be shared with all customers via shorter lead times or reserved to take on short-notice jobs at premium prices.

Manage Constraints and Bottlenecks

Every company has constraints whereby resources are sufficient most of the time but still have a limited capacity. Constraint resources can range from estimating to shipping and maybe even sales. An overbooked constraint becomes a bottleneck, limiting the business flow at that point and creating chaos downstream in subsequent operations. A CNC programmer bottleneck means programs are late getting to the floor and jobs can’t run as scheduled.

The management team needs to work together to identify each of the current bottlenecks and help by flexing resources to that constraint now, then to subsequent operations as the bulge travels downstream. Cross-training is a great tool for you to use to move employees to where they’re needed most.

FIGURE 1 When you measure order velocity, you’ll find most orders spend most of their time waiting between operations.

Most important is for management to anticipate the bottlenecks and work quickly to minimize them. A great pile of new orders makes for an exciting day or two, but it will create bottlenecks in every area of the company. It is imperative to plan how those orders will hit the historically constrained areas. Working overtime in those areas immediately will reduce the chaos, and it’s far better than waiting for the tsunami to arrive. Chaos costs time and money, and managing constraints and bottlenecks reduces chaos.

Schedule Smartly

Most companies recognize the value of scheduling and thank their scheduler every day for coming to work. But few fully utilize the system capabilities to improve the planning process and its results, as it is truly hard work and more than schedulers can do themselves.

A process improvement team could help by comparing the actual performance to schedule and determining why most variances are occurring. Hourly piece rates are the easiest to check, but machine staffing, setup time, quality interruptions, and machine downtime need to be looked at also. This year material availability is a common issue affecting schedule attainment, especially if special components are used in an assembly process.

A simple whiteboard is one of the best tools on the floor. A large board can highlight department schedule priorities, staffing, and job timing expectations. The department whiteboard becomes the hub for production meetings at the start of a shift and also a spot to post quick updates during the shift.

You can use small whiteboards by each machine to communicate the progress and efficiency of a job in process. These machine-dedicated boards also can point out readiness for the next job. You should expect operators to know the status of programs, materials, and tooling for their next job, as well as the expected completion time for the current job so they can plan for the changeover.

Supervisors can scan the board while walking the floor and know quickly if there are issues with the current production or if the next job and changeover are ready. It’s much better to review a problem job while in process on a machine rather than in an efficiency report a few days later. Having metrics displayed on these boards takes some adjustment, but after a while machine operators will feel pride in posting their results and changeover plans.

Machine Uptime

Identifying production interruptions with job production reporting is a key step, not to punish the operators but to highlight machine time lost that needs to be corrected. One fabricator tracked “time waiting for crane,” as the cranes were required for both material movement and job setups.

It is a waste to have any machine down, especially a bottleneck process that will disrupt the schedule downstream. A company that tracks machine uptime, shares expectations, and works on improvements will have more success and realize greater benefits from new equipment.

We all know the importance of efficient job changeover, but it takes a very disciplined team to achieve it consistently. In this regard, whiteboard communication is greatly beneficial if used properly. Companies have implemented large monitors by machines that provide current production information, but not many also show the status of the next job to facilitate changeover.

A simple job changeover process should be established and become part of every operator’s training. There should be one summary that is usable as a check list, clearly showing the normal needs and required resources for setting up that machine, as well as (ideally) a custom version of the check list for specific jobs.

Changeover time should be tracked by step if possible and periodically reviewed for opportunities. For example, if materials for the next job can’t be staged next to the machine, it is critical that their status and location are known and that they will be delivered in time with the job setup.

Inventory Is Both Friend and Foe

It is a great feeling for a busy plant manager when an order can be pulled from the finished goods inventory. Purchasing is relieved when the steel is already in stock for a hot order. But accounting is queasy at year-end when they add up the excess raw materials and finished goods that have been gathering dust for the past year.

Joking aside, a proper amount of inventory helps you run efficiently and avoid premium freight on purchases and expedited shipments. But the definition of proper inventory fluctuates monthly and by job.

Because of the hyperinflation of raw materials in 2021, excessive inventory can be an even greater concern and risk. Raw materials prices are rising rapidly, and customers are reluctant to absorb the current price, much less any pending price increase. You need to assign a champion to work with purchasing, operations, and finance to assess the inflation risk for raw materials and customer orders, and eventually the deflation risk as prices stabilize and then drop to their long-term averages (they always have).

Again, the best tool available is to accelerate the production velocity, including preproduction time, to reduce the number of weeks each job is subjecting your company and customer to inflation risk on materials.

To monitor materials effectively, a team effort is needed with strong leadership, especially if formal processes are lacking. A team with operations, purchasing, and finance should review raw materials monthly to look for excess or obsolete inventory—it can’t be done just once a year.

Inventory issues may arise from damage, engineering changes, quality problems, or just a mistake. The sooner each issue is identified and acted upon, the greater the chance of cash recovery. It is embarrassing and fruitless to go back to a supplier or customer after nine months to try to recoup the inventory investment. Again, this is hard work, but it pays for itself in fewer inventory issues, fewer dollars tied up in inventory, and less floor space wasted.

Finished-good levels need to be monitored carefully as well. Over-production is a tempting way to get ahead of schedule but has an inherent obsolescence risk and ties up critical cash. Sometimes this happens unnoticed when customer releases are reduced but the standard production lot size is kept the same. Also, some customers may not honor releases of repetitive parts. Working at a fabricator that produced left- and right-hand components of an assembly, I learned that one customer had scrapped more “rights” than” lefts” in their plant. This meant we had excess lefts on our shelves. We learned to monitor that and resolved the issue with the customer promptly.

Reviewing inventories regularly is key to avoiding excess inventory. Accounting doesn’t reflect the real cost of inventory for a company with stressed manufacturing and tight cash flow. Using labor and machine time to build excess inventory if your plant is struggling to keep up means the real opportunity cost can be two to three times the book value, or even much greater.

Show Me the Money

Collecting receivables is the most visible step to improving cash flow for most companies. I had a client that felt they didn’t have to improve operations or inventory levels if they could just collect their receivables over 30 days. Unfortunately, the company’s two largest customers were European with plants in Europe, Mexico, and the U.S. The customer purchasing groups were not interested in improving their payment cycles, so the burden was back on us to manage inventories to improve cash flow.

Working with customers for timely payment is an essential process for any company extending credit (maybe we’ll all take credit cards one day). The “Financial Ratios & Operational Benchmarking Survey,” published annually by the Fabricators & Manufacturers Association, shows a consistent average of 45 days to collect receivables. A proper monthly review of AR aging with steady follow-up contact is needed to attain that level or better.

If your company is busy and has some pricing flexibility, try raising prices by 3%, then offer a 2% discount for payment in 10 days (2% 10 / net 30). All customers will be tempted to take the discount, and those that do will improve your cash flow. We all understand pricing sensitivity, but an additional $60 on a $2,000 order may be acceptable, especially if the customer gets $40 back for quick payment.

Leadership Leads

There are more ideas and opportunities for improvement than days in a year. The top role for company leadership is to prioritize projects and tasks so that the most beneficial ones have proper resources and attention.

Big plans should be driven by the strategic planning process, but operational improvements need to be implemented as the needs become apparent. Taking a pause to walk the shop floor, talk to customers, and listen to employees will help point out the greatest immediate needs, but only if you take an improvement mindset. Fighting fires can seem productive and worthy of leadership, but it is a costly and draining task.

True leadership is showing a clear path to a better, stronger company. A commitment to improving the company velocity is a major step in that direction that will pay dividends in customer satisfaction, employee morale, and cash.