Lean Manufacturing Topic of the Day:  It’s All About Cash Flow!

Lean Manufacturing Topic of the Day:  It’s All About Cash Flow!

It’s All About Cash Flow!

Cash is King!

It’s a common expression, but it also extremely pertinent.
While profitability is a good long-term measure of success, many companies have shown a profit right up until the day they went belly-up!  Cash pays the bills.

What Ever Your Total Cycle Time Is, It’s Too Long!

Time is of the essence!  Another applicable cliché.

We call it the O-P cycle:  The total elapsed time from receipt of Order until receipt of Payment.
The length of the O-P cycle relates directly to your company’s cash flow.  And cash flow relates directly to company well being.

As a side note: The Boston Consulting Group did a major study comparing speed (the O-P cycle) with company profitability and rate of sales growth.  There was an astounding correlation between speed and the above measures of company success.  If you’d like more details, their results are explained in the book “Competing Against Time.”  It’s worth reading.

The Order through Payment cycle time will include your order entry process, design time if applicable, scheduling, procurement (if you are a buy and make to order producer), production, pack and ship, any inventory waiting time, transit time, and your payables cycle (the actual time for payables, not the terms on the invoice.)

If your company is like most, this cycle is 10 to 20 times longer than it should be!
Don’t believe me?  Try this simple experiment.  Expedite an order through your entire process.  Pay particular attention to the O-D cycle (Order through Delivery).  This is the portion over which you have the most control.

Now compare this expedited cycle time to your “normal” cycle time.  If you’re like most, there will be a glaring disparity.  And note that your “expedited” process still includes all sorts of non-value activities that can, and should, be eliminated.

Our current process requires 90 - 95% more time than required to make the product.

As a side note:   Your O-D cycle can be significantly reduced by extending your “available to work” hours.   This concept is more fully explained and graphically illustrated in our post “Making a Case for Multiple Shifts.”

If you are a “Make to Stock” / “Make to Forecast” operation, this same calculation applies.  The difference lies in the inventory cycle.  The cycle time of your inventory is a simple calculation:   How much inventory do I carry, divided by my average shipping rate.

Let’s say that we average 1000 widgets in stock, and we ship, on average, 10/day.  We therefore have an average cycle time of (1000 widgets / 10 widgets/day) = 100 days.  Note: The average daily shipping rate probably should be based on a seven day week (i.e. 70/week = 10/day).

The use of a seven day week can be debated, but in most instances, you have control over this parameter:  It is your company that decides whether it will run a 5, 6, or 7 day work week.  The clock, however, continues to run, 24 x 7, and so does the cost of capital.

We consistently see two major shortcomings in industry today:  A lack of a sense of urgency, and a similar lack of commitment to the company’s promises.

What should your O-P cycle be?

Less Than It Is!

What should your on-time delivery performance be (to your original promise)?

A consistent 100%!

How is this achieved?

The critical first step is to regularly measure these parameters and make the measurements public throughout your entire workforce.  Then set aggressive goals to improve both measurements.

Assign the appropriate managers to each segment of the O-P cycle, and then hold them accountable for achieving their cycle time reductions and on-time completions targets.

The methods and tools required to reduce the O-P cycle include cutting lead times and lot sizes in the system, and/or reducing kanban limits.

Note that this same process of driving down your total cycle time will also drive significant cost and quality improvements.   It is an extremely powerful elixir!

Flexible capacity is another ingredient required in your efforts to significantly cut your O-D cycle.   We call the strategy “The Rubber factory.”

NOTE:   If you are disappointed with your Lean Manufacturing results to date, you might want to check out our “Lean Bench Marking” article.   This is what you SHOULD EXPECT in the first 9-12 months!

We’ve got a track record of continuing dramatic bottom-line successes since 1988!   Drop us a note, or give us a call.   There is no charge for a discussion and I guarantee you won’t be disappointed!

Jack Harrison
Senior Partner
The Hands-On Group
www.handsonfroup.com

Comments

  • Robson macedo | August 23, 2012 | Reply

    Hi, After reading your articles about lean cash i still have many questions on this issue. For instance, what is the best practices to reduce the cycle time from sent of a invoice to the client until the receipt of the payment for the services IT industry ? Regards

  • Jack | August 23, 2012 | Reply

    Hi Robson, We've had some very big successes in this area. As with most objectives, it begins with measuring your current status, and then setting an objective to improve it. The accounts receivable department was involved in setting the goal and were the primary players in the improvements. The first thing we discovered was that many customers claimed the "early payment discount" but did not pay early! Others were perpetually late in paying. We began with a individual letter to the appropriate people within each customer company. We let them know the new "rules" that we would now be enforcing. We then enforced those rules. No discount if not paid within the prescribed 10 days. Late penalties if past the agreed upon 30 days. Withheld shipments on chronic offenders. It took a few months, but our clients all experienced a quantum improvement in days outstanding and cash flow. Let me know if you have more questions. Jack

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