How To Choose A Right-sized Manufacturing System
Chapter 7 - The Value of Avoiding Mistakes
Engage any manufacturing manager, any purchasing agent, or any production worker in conversation about how well their plant is functioning and the discussion will soon turn to some disastrous mistake that caused them to repurchase some material, rebuild some assembly, or miss some critical customer ship date.
Unfortunately, the benefit of avoiding these mistakes is almost always missing from my discussions with the management of the company about the cost of manufacturing software. As you address the idea of acquiring a new manufacturing management system, cost will inevitably come up as an issue. In your exploration of possible solutions, be sure to consider the value of avoiding mistakes.
Inventory control mistakes
As we've discussed in a previous chapter, maintain an inventory is a knee-jerk reaction to the lack of adequate control. Without sufficient ability predict the demand for raw materials, a manufacturer is inclined to load up on inventory – just in case it is needed. What a mistake!
In my experience, a manufacturer with $1million worth of raw materials can usually trim 25% off their inventory holding cost, freeing up $250,000 to invest in manufacturing software and other tools. If the inventory is financed at conventional rates, cash savings of over $12,000 per year can be realized. Assuming the software will last 5 years, you can afford any manufacturing system costing less than $62,000.
The system you eventually select should have specific functionality designed to help you reduce your inventory, not maintain it. Only then can you enjoy a positive ROI from your manufacturing software.
Purchasing mistakes
The value of avoiding purchasing mistakes is perhaps most obvious of all. No one wants to purchase the wrong item – or the right item at the wrong time. Most inventory control systems are able to create a list of items that are running short. Some even give you the ability to respond my creating corresponding purchase orders. But, in the world on purchasing it's all about timing.
Purchasing material too late seriously endangers your ability to deliver your finished product to your customers on time. You may have spent months building the world's fastest racing car, but you can't deliver it to the customer if the tires aren't due to be received until next month.
Purchasing too early will shift the burden to your company's finances. Material you acquired right away in order to avoid late customer delivery needs to be paid for much sooner, tying up financial resources needed elsewhere.
In order to avoid serious purchasing mistakes, make sure the system you select knows about multiple suppliers, item lead times by supplier and, most importantly is able to predict the optimum order date for any material you will need to complete future production.
Production mistakes
Generally, production mistakes occur in two areas:
- Failure to predict/control desired completion dates
- Failure to predict/account for actual production costs
A missed delivery date can be extremely expensive in terms of customer retention and corporate reputation. No one would argue that meeting customer ship dates is important, but few have policies and procedures in place to guard against such mistakes.
The manufacturing system you acquire should have the ability to create a manufacturing work order that corresponds to the customer sales order. Furthermore, the system should allow you to log work against the order so that progress (or more importantly, lack of progress) is obvious to management.
The system should also allow you to post any "extras" (extra material, labor, or overhead) incurred in the production process. That way, when the work is complete, an accurate analysis of the actual production cost can be delivered to management.
Summary
While these mistakes can never be totally eliminated, they can be dramatically reduced when sufficient controls on inventory, purchasing, and production are in place.
Few people can put a price on the damage incurred by missing a ship date and angering an important customer. But manufacturing companies without sufficient systems in place to avoid the most common purchasing and production mistakes pay the price over and over.
You will hear it from one; you will hear it from many: "If we only had a system that could help us avoid making these mistakes." The good news is that such systems are available, they cost far less than the mistakes they will help you avoid, and most of them work very well.