Three Problems in Manufacturing that Impact Productivity and Profitability
Despite the advanced technology now available, there are still three key issues that adversely affect manufacturers of all types and sizes. They are data management, inventory, and gross margin. Although each has its own silo, they are also interrelated. For example, consider the use of data. The way data is gathered, analyzed, and understood can have a significant impact on the decisions made, inventory strategies that are established, and ultimately a firm’s profitability.
Data Management Matters
Data management is not for the cowardly. For middle- to large-sized firms, mounds of data are typically generated, which is great for those who know how to make sense of it. Unfortunately, very few know how to process this much data. This is the point where it can become problematic. The traditional process involves bringing a company’s data into a data eco-system, and then bringing in business intelligence hardware. Management then assigns a team of analysts to assess the information, and then—voila—the numbers are expected to reveal what needs to change in daily operations. However, it never works that smoothly. Instead, many companies fall victim to what the industry calls “analysis paralysis” or ending up with so much data that it’s hard to imagine knowing what to do with it. Once a company reaches a certain volume of information, evaluating findings, making observations, or picking up on patterns simply isn’t as easily approachable. Perhaps this is why it is no secret that the ability to make sense of data diminishes the faster a company’s data eco-system grows.
In an ideal world, data management would serve as an income generator. But, without access to someone who understands the what, why, when, and how behind the numbers, companies run a high risk of chasing misleading clues. How does a company learn to get a solid grasp of the data being generated? It begins with gaining visibility into the process—into everything occurring—in some cases down to the minute. A good starting point is to look at some of the questions associated with data management and what they represent:
How do you visualize the information that drives your business? (year-to-date profit/loss; pending orders; order fulfillment; customer satisfaction/score cards)
How do you make the right decisions required to grow your business? (goal creation and recognition; personnel effectiveness and performance; market awareness and trends;cohesiveness throughout the business)
What are the current sources of data you use to measure, analyze, and sustain a true business reality? (how much or volume of data; variety and type of data; velocity of data; value of data)
Utilizing current sources of data, what areas of rapid improvement will quickly affect changes in your business? (visualize effectiveness of people, processes, and machines; inventory management; response to changing priorities; ERP efficacies; EDI effectiveness)
What kind of data is available to an individual who understands how to read it? (missed opportunities; unseen gaps in critical information and data; external influencers such as changing global markets; unforeseen vulnerabilities in inventory cost and overall expenses)
The usual suspects that always trigger inventory problems are “too much inventory” and “not enough inventory.” Both typically result from mismanagement, and both have a far-reaching impact when it comes to greater profitability. Too much inventory means devoting space to store it, employees’ time to organize it, and added insurance costs. Some manufacturers have to worry about deterioration, especially with food products, while others face obsolescence, such as with electronic devices.
The other side—not enough inventory—isn’t any easier. This can be devastating to manufacturers because it means unfulfilled orders—translation: unhappy customers. Also, when a manufacturer runs out of one part, the whole production line is disrupted. Now the same operational costs are adding up without products being manufactured to offset them. Neither scenario is optimal, but many manufacturers have learned to live with the downside of both. Never underestimate the influence inventory has over profitability.
Gross Margin Management
Clearly, data management and inventory issues have an impact on a manufacturer’s profit and productivity, which eventually affects gross margin. The reality is that gross margin sits at the center of a manufacturer’s operation. It comes directly from sales and is a leading indicator of a firm’s profits and cash flow. Gross margin is the money that covers expenses, and it is a critical element when measuring how productive an inventory investment is.
A few words of advice when managing gross margin:
Practice vigilance with suppliers. To maintain strong margins, commit to cost control. Since strong margins come from the cost of materials, it is critical to evaluate how purchases are being made.
Find the balance. On the revenue side, a manufacturer’s buyer is usually a wholesaler. Here, it is vital for the manufacturer to find the balance between a lucrative markup and a practical cost. The answer for some manufacturers is to skip the wholesaler entirely and go directly to the retailer or end consumer. Either way—find the equilibrium.
Consider the industry. When interpreting a manufacturer’s margin, remember how averages vary widely across industries. When determining where a company stands, make sure to complete an intra-industry comparison.
Examining and scrutinizing data management, inventory, and gross margin results in a more reasoned picture about how the use of controls can generate greater productivity and profitability. Rather than allow data to overwhelm the management team, learn to use it as a tool to deal with operational issues more effectively. In other words, tap into the numbers to get closer to that sweet spot where inventory levels hover right where they should. It pays off because when inventory is under control, the positive impact on profitability is unmistakable.
Michael Mantzke, CEO and Robert Jonas, COO, are with Global Data Sciences, Inc. (GDS), headquartered in Aurora, Ill. GDS identifies and resolves known and unknown inventory problems that reduce customers’ headaches and increase their profits. Areas of expertise include global operations, inventory management, process and procedure optimization, systems integration and optimization, and cybersecurity and data forensics. For additional information, call 630-299-5196 or email firstname.lastname@example.org
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