How To Choose A Right-sized Manufacturing System

Chapter 3 - Identifying Specific Objectives

Back in Chapter 1 we posed the first great question you should ask when trying to choose a right-sized manufacturing system: “What do I want to accomplish?” As you ponder this question, you should be developing a list of specific objectives such as these:

  • Reduce my inventory holding costs by at least 10%
  • Organize my bills of material
  • Identify and eliminate obsolete raw materials
  • Establish multiple sources for critical components
  • Plan my production 3 to 6 months ahead
  • Coordinate production with Sales
  • Avoid late raw material deliveries
  • Avoid purchasing material before I need it
  • Know which vendors perform best
  • Build only as needed
  • Avoid critical item shortages
  • Ease the burden of performing an annual physical inventory
  • Include manufacturing activity in my company financial statements

The list of objectives won’t be the same for every type of manufacturer. For example, better coordination with Sales will be critical to a Make-To-Order manufacturer, less relevant to a Make-To-Stock manufacturer, and irrelevant to a Job Shop. Tracking vendor performance may be irrelevant to a Process manufacturer, but vital to a Make-To-Stock manufacturer.

Regardless, your list of objectives will fall into three categories: objectives that will immediately affect your company’s profitability, those that can affect changes that will ultimately produce measurable financial results, and those that have no financial measure but will improve your company’s operations in any case.

Immediately Measurable Objectives

When compiling your list of objectives, you may focus on things that can be measured in terms of the profitability of your company. If your CFO is involved in selecting a right-size manufacturing system (and he/she should be) then the question will invariably be asked “How long will it take to pay off a system like this?”

If a manufacturing control system can help you reduce your annual inventory financing costs by, say, $15,000, then any system costing $14,999.99 or less will make your CFO smile. Pay-back in less than one year is a lot to ask, but systems do exist in this price range.

If you wish to evaluate manufacturing software on this basis, make sure you have up-to-date and reliable information on 1) the value of your raw materials and WIP inventory (not counting your finished goods inventory) and 2) the interest rate you pay your lender to finance this inventory.

If, through careful control of purchasing and production activities, a manufacturing system can reduce your inventory holding costs by 25% (and knowing your lender’s interest rate) you should be able to quickly calculate the potential pay-back.

In my experience, systems offering a pay-back in less than 36 months are very attractive.

Indirectly Measurable Objectives

A manufacturing company assisted by a right-sized manufacturing control system can achieve better results in less time than any company operating by the seat of its pants. Many tasks can be accomplished by software in seconds that would require many hours to complete manually.

Consider updating the cost of finished goods whenever raw material costs change (aka cost roll-up). When several levels of sub-assembly exist, this task becomes so time consuming that it is often overlooked. And yet, accurate costing of finished goods is critical to your success as a company. Software can roll up your costs in moments -- and never make a mistake.

While it is tempting to focus on inventory reduction as a justification for a new manufacturing system, I believe these indirectly measurable objectives can be far more valuable in the long run.

Impossibly Measurable Objectives

Every manufacturer knows the pain of completing production after some critical customer ship date has passed. The blame goes around and around, but the damage is done. Could you place a dollar value on a planning tool that would help you avoid such unfortunate experiences in the future?

In addition, the act of acquiring a new manufacturing control system will require many people in your plant to re-examine, re-evaluate, and re-establish policies and procedures. This reorganization, in and of itself, will be reflected an increased efficiency and profitability.