Are your business processes burning a hole in your bank account?

Do you know how much money you are losing due to inefficient business processes?

A manufacturing client called me to a meeting earlier this week. The main item on the agenda was his working capital management; he was struggling to keep himself cash-positive due to large swings in his customer orders and the resultant need to carry large amounts of raw materials as well as finished goods – an ongoing problem for most businesses at the best of times.

The company manufactures a relatively simple product. It procures specialised raw materials from a supplier, which the supplier then processes further for an additional fee. This product is processed in his factory to produce the finished item, which is sold to clients

During our discussion, I suggested working towards a Just-in-Time system to try to reduce his working capital requirements.

In simple terms, a JIT system is a system in which a company produces only enough to meet immediate demand and procures only enough at a time to meet immediate production. As a result, stock holding is reduced to emergency stock levels only, and working capital requirements is significantly reduced.

In theory, JIT is a simple process, but in practice it is extremely difficult to implement as it requires co-ordination across the supply chain, and internal business processes need to be re-designed to be as efficient as possible.

Back to our meeting; I found out after some digging that the single biggest impact on his cash-flow was the secondary processing by his supplier; as this was not his supplier’s core business, there were often backlogs in this processing, with timelines ranging from one to two weeks at the best of times. This played havoc with his planning, and he had to keep high levels of raw materials and finished goods just to keep up with day-to-day fluctuations in demand. This meant increased costs associated with high stock-holding and excessive over-time to meet even small increases in demand.

I suggested to him to bring the secondary processing of his raw materials in-house. Although this would require a significant amount of new equipment and staff retraining, the benefit was that this would improve his working capital requirements by reducing the need to hold high levels of raw materials (the primary raw material did not have a long lead time and could be ordered as required). He did a couple of back-of-the-envelope calculations, and estimated, based on current production this would save him close to R1,000,000 a year on processing costs alone!!! This is before we take into consideration savings in working capital, overtime and all other costs that come with an inefficient process.

Any capital equipment and related costs required to change to the new process would be comfortably covered by the savings in cost; any increase in production would mean that the savings would flow straight to the bottom line.

Moral of the story – your operational business processes could be burning a hole in your bank account!

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