The contemporary value chain in manufacturing is a fairly simple concept to describe: get the right products where they are supposed to go, as quickly as possible, and at the right price for yourself and your customer. It’s a set of activities wherein products pass through, gaining value at each step of the process. This is not to say that the actual cost of each step is assigned as a specific value to the products passing though the chain. Some processes may be low cost activities that add much greater value to the product than that cost amount incurred in the production step.

Take, for instance, the production of artificial heart motors. The motor itself is a relatively low cost production item that, when included in the whole package of the heart, adds a larger increased value to the finished good. Indeed, by definition value chain activities are designed to create value in a product that, hopefully, exceeds the cost of producing that value. The difference between the actual cost of producing the value and the added value amount itself is where profit is located.

Since the late 1980’s, these value-adding activities have included inbound logistics (receiving/warehousing/inventory), operations (production), outbound logistics (warehousing/fulfillment/shipping), marketing/sales (advertising/pricing), and service (customer support). For the manufacturer, any or all of the activities present opportunities for creating (more…)

It’s hot outside on a nice summer day along an oceanfront boardwalk, and you want some ice cream. Before you are two shops—on the left a convenience store stocked with very inexpensive, packaged ice cream confections, and on the right one of those pricey marble-slab places that practically makes the ice cream from scratch in a flurried and extravagant public production of custom “ice cream building”.

Seemingly, your choices are quite limited to either the one-flavor-fits-all blandness of cheap prepackaged ice cream products that fall short of your taste needs, and the other that, while bells-and-whistles impressive, is more cost than your budget allows and far too much product than you can possibly ever consume.

Then, you spot just a little bit farther down what is, do doubt, your solution to this conundrum of ice cream extremes. It is a (more…)

Odd as it may seem, as a financial concept the term bottom-line has only been around for about forty years or so. It’s genesis as a word (an adjective, really) was the result of the growing need to establish the ultimate benchmark for profitability in the post-World War II advanced corporate economy. That is to say, to find out more than a company’s profit and loss through simple financial accounting.

With the complexities introduced through a more mechanized, large scale, robotic global economy in the 1950’s and 1960’s, as well as mandates from stockholders for more stringent (i.e., realistic) profits reporting during this time, a new way of assessing profit was born. It was called, cost accounting.

Cost accounting differs from financial accounting insofar as it is largely a much more formal mechanism by which costs of products or services are determined and controlled for efficiencies. This is achieved by (more…)

The modus operandi of a fast-food hamburger joint is to have a burger already prepared and ready to go when or if a customer asks for it. The bad news here, of course, is that without some sense of how long a particular burger may have been in the “finished goods” inventory (i.e., under the red lamps), there is the distinct possibility that your product may be cold and obsolete by the time you receive and consume it.

On the other hand, at some fancy-schmancy gourmet-burger place, where all is custom and only made once the order is in and confirmed, you may have quite a wait between placing your purchase order and taking delivery of the product. In each operation, the inherent pitfalls of inventory management are factors of lead time—with fast food, too much of it, and gourmet not enough.

To bring a product or service to a customer requires not only the material in which to do it, but information that will give a sense of what and when that material will be needed. In short, efficient manufacturing requires that (more…)

Remember when it was just you, your garage, and a single fabricating job each week from that one company who saw potential in your work? Costing, for you then, was simply a matter of getting the work done as quickly as possible with the lowest investment in material and no inventory at all. Talk about “just in time” production. Often it was more like “just in in the nick of time” when it came to getting in another work order to keep the electricity on or bread on the table.

My, how things have changed as you’ve grown into a 60,000 square foot job shop with 80 employees, and dozens of work orders coming in each day. What used to be a simple costing formula (i.e., price charged – material cost = profit), involves so many variables it can make your head spin.

Of course, you wouldn’t have gotten to this point without a progressive improvement in the way you assigned costs to jobs. You came to understand that costs include more than just materials; they include (more…)

It seems to often be the case that as your manufacturing operation grows, the measurement of the efficiency of your performance becomes ever harder. When sales orders go up work in progress (WIP) increases, when inventory builds turnaround diminishes—all to the detriment of grasping how efficient or profitable each process is. To a certain degree, enterprise resource planning software (ERP) has helped in providing a continuous status assessment via the input of real time data from all operation aspects. ERP software, for this reason, is a valuable tool for the continuous improvement necessary for the modern lean manufacturer.

However, some assessment of financial, behavioral, and core process performances should be made on an on-going basis to provide mutually supporting testimony to the total continuous improvement ERP efforts of the company. For this reason, lean metrics have been established to allow a company to measure, evaluate, and respond to their performance in such a way that it does not sacrifice quality to satisfy quantity objectives, or increase inventory levels to achieve machine efficiencies. Often, these metrics are a means to discover (more…)

From the production of the smallest nut, to the development of massive rigging assemblies, all items and processes that go into the making of the part, piece, or assembly must be accounted for. Without this knowledge, margins are lost and profitability is a function of guesswork. In the past, the accounting of manpower, material, and machinery was the result of painstaking, though often erroneous, handwritten data in the form of charts and reports. The collection of this data would take days to complete and weeks to assess. In the age of massive batch (make-to-stock) inventory production, blunders in data tallies or the absence of complete information had only a rippling effect on what was largely the quantitative appreciation of manufacturing in the Industrial Revolution.

Today, however, with make-to-order and the job shop manufacturing environments, specialized and small batch production means more emphasis must be placed on margins—today, it is often quality over quantity. Quality control, in fact, is the name of the manufacturing game. For this reason, labor and resources must (more…)

The whole point of acquiring an ERP software system for your manufacturing operation is to improve productivity. Indeed, the whole reason for managing a manufacturing operation is to improve productivity wherever and whenever it can be improved. To this end, we expect the acquisition of an ERP software system to provide a continuous savings that results in a high ROI. In short: An ERP software system should not only do what its designed to do (plan the resources of an enterprise), but should do so at effective cost of ownership. Otherwise, what’s the point?

To ensure satisfying the ultimate ROI goals of ERP acquisition, manufacturers must understand that bringing any ERP system into their operation requires that every employee be invested in the success of the system. This investment is a result of what is called the implementation of the system throughout the operation. From the front office to the shop floor, from the president to the shipping packers, for an ERP system to work it must (more…)

When a manufacturer does that occasional bit of bottom-line soul searching, the most fundamental determination to consider is which parts, products, customers, projects, and/or jobs are profitable. To this end, Activity-Based Costing (ABC) is used to identify, assign costs to, and report on manufacturing operations.

 To a large degree, ABC is a more accurate cost management system than standard cost accounting in that it is able to identify places where the manufacturing process can be made more effective, essentially by determining the “true cost” of producing a product.

Shop floor work centers are particularly suitable for ABC because they produce identifiable and measurable units of output. With ABC, management can define processes, identify the cost drivers of those processes, and determine the unit costs of products for performance based budgets that (more…)

It should be the case that, in manufacturing, having an abundance of work is a good thing. Labor and machinery are running at full capacity, finished goods are moving through the plant as fast as new work orders are being generated, and production efficiencies are enhancing the bottom line.

However, when abundance turns to overloading, labor and machinery often have a hard time keeping up. Sure, fresh work orders are coming in fast, but the ability to produce product is exceeded by the time available to actually manufacture the goods and adhere to quality standards.

There is only so much time available in the day, and if machines are running full capacity all the time, then there will inevitably be (more…)