Summary: One third of mid-size British manufacturers are underperforming in critical areas of inventory turns, Cash Flow and Working Capital Management, restricting their contribution to GDP growth and exports. Even though they survived the “great recession” their existence is still at risk over the coming 2 to 5 years. But, it doesn’t have to be that way.
Challenge: UK Manufacturing is barely 11% of GDP, but it drives approximately 60% of exports. The task ahead is to leverage our manufacturing capability in order to close our trade deficit by growing manufacturing’s share of both exports and GDP so we can pay our way in the world.
Problem: What follows examines the performance of mid-size British manufacturing using inventory turns as a Key Performance Indicator (KPI.)
Recent research shows:
- Two thirds of mid-size manufacturers average 13.6 inventory turns per year. This is equivalent to barely 3 week’s worth of stock, which is directly related to the speed of response to customer demand.
- Fully one third average only 3.6 inventory turns, equivalent to 3.3 month’s worth of stock, which is also directly related to their slower speed of response.
Implications: Many manufacturers find themselves in an inventory turns “slow-lane.” What are the implications of this?
- £100s millions cash embedded in In-Progress and Finished inventory which is irrelevant or “redundant” when compared with the other companies in the inventory-turns “fast lane.”
- Even with all that stock, they find they still have component shortages and can’t ship i.e. too much of what isn’t needed and not enough of what is needed to meet customer demand.
- They can feel “leaned-out,” trapped beneath “glass ceilings” left behind where traditional Lean 6-Sigma has yet to reach its full potential, as evidence shows it has with the other two-thirds.
- Many of them are suppliers to other UK manufacturers, on whom they can have an unknown negative impact.
- Manufacturers that are underperforming in this way are less competitive. Although having survived the worst of the recession, many of this one third of British manufacturers is potentially at risk over the coming 2 to 5 years.
Background: Our own personal buying experience demonstrates that customers tend to demand ever faster shipment/delivery of their products after placing their order. Better still, if it’s delivered on time and in full (OTIF) we are even more likely to buy more.
Many and varied KPIs are used to track overall business health. Meeting customer expectations, if not exceeding them, is assumed to be a key driving force behind most successful companies. But, if this does not occur on a sustainable basis other internal and shareholder facing metrics eventually become irrelevant
The faster a company responds to customer orders the less cash is invested in material inventory. The faster it turns over each year, the less cash is needed to fund the business. Inventory turns is therefore proposed as quite an objective measure of both customer and financial performance as measured by Cash-Flow and Working Capital Efficiency.
We define inventory turns, for comparison purposes, as being the annual Material Cost of Goods Sold (MCOGS) / Current or Average Inventory.
Far more than Raw material, In-Progress and Finished inventories have accrued the highest value. They are especially likely to tie up cash which could be invested elsewhere in the business e.g. growth, innovation, exports, job creation, R&D, M&As.
Where needed, cash must otherwise be sourced from profits, from shareholders or borrowed at a cost which is more – or less affordable – if it’s actually available.
Solutions: While the time taken to fulfill orders can run to days and weeks, the time taken to actually make most products, their work content time, usually runs to minutes and hours.
“Fast lane” manufacturers demonstrate that order lead-times can be brought in line with work content times. Their inventory turns are therefore competitively high. Manufacturers can be migrated into the fast lane by bringing lead times down in line with work content times.
The result is that:
- A significant proportion of their In-Progress and Finished inventory then becomes surplus to requirement, or redundant.
- When the response time to customer orders is significantly accelerated the “inventory investment pipeline” becomes much shorter. When much of these inventories are sold at full market (not discounted) rates the cash recovered need not be reinvested in inventory. It can instead be invested in growth, innovation, exports, job creation, debt retirement, M&As, MBOs, MBIs etc.
- Sales, profitability, cash-flow and Working Capital Efficiency are all improved.
- As a result of overall improvements in their overall business performance they become more attractive not only to customers, but also to lenders so matching funds can be brought in to do the heavy lifting
Background to Maestro Business & Academy Ltd:
Our legacy goes back to a founder who was nominated as a Nobel Laureate in Economics for Working Capital Management.
Fortune 500 companies as diverse as ABB, Atlas Copco, AGCO, AstraZeneca, Boeing, Flextronics, John Deere, SanDisk and many others have engaged successfully with a knowledge transfer process on how to do the above for themselves.
Maestro Business & Academy:
- Significant accelerates the response time to customer orders
- Makes the inventory investment pipeline much shorter
- Release quite large quantities of cash from irrelevant In Progress and Finished inventories
- Takes mid-size manufacturers to the next level of profitability and growth.
- Transfers knowledge of how to do this independently.
- Delivers big-corporate competence at mid-size company rates – self-funded from tangible, sustainable bottom-line benefits.