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Last Month we discussed the competitive advantages of building a value chain. This month we are going to look at the differences between the design flow and the manufacturing flow.
A lot has been written about lean manufacturing and the importance of balancing your manufacturing flow. But for many, the critical path involves design as in design to order, engineer to order, or build to order. So how do you apply lean in a design to order organization?
There are three core process flows within your company: your cash cycle, your manufacturing (or fulfillment) cycle, and some have a design cycle. What is the difference between these important cycles? Let’s see;
1. Cash Flows
Your cash cycle reflects how cash is coming into your organization. It is depicted in the green lines in the core process flows diagram and is comprised of your accounts receivable, inventory and accounts payable processes. Your cash cycle determines the health of your business.
A healthy business has a strong and positive cash cycle, which means that you are collecting money from accounts receivable faster than you are disbursing it through account payable and accumulating inventory. Your cash cycle also determines your working capital needs.
If your cash cycle is negative then you will need to finance your operations with debt or equity capital. How do you know how much your operations need? Just calculate your working capital.
- Accounts Payable
If you add the number of days of inventory to the number of days of receivables outstanding, and then subtract the number of days of payables outstanding then the result is the number of days of working capital your organization has tied up in managing your supply chain.
Your working capital is the investment you are making in the inefficiencies of your processes and procedures plus your investment in your suppliers’ and your customers’ inefficiencies too. The idea is to balance your cash process flows and drive down inventory to reduce your working capital needs. The closer you can get to zero working capital days the more efficient your processes are. Next, there is your manufacturing cycle.
2. Manufacturing Flows
The link between your supplier and purchasing determines your raw materials inventory needs. The link between sales and your customers determine your finished goods inventory. Your production process determines your work-in-process (WIP) inventory needs.
In traditional manufacturing organizations, the elements of the production process are separated into functional areas, each with individual goals to maximize their own functional output. Subassemblies or finished goods are built and held in inventory awaiting the next order.
Lean thinking is used to create a demand-based manufacturing flow. Demand-based flow is a form of build to order manufacturing that results in reductions of 50% to 80% in inventory, production cycle time and order lead time. How is this possible?
Balancing the purchasing, production and sales processes results in reduced inventory and its resulting waste. With cash flows, an unbalanced cash cycle produces negative cash flow and the need for increased financing. It is the same with the manufacturing flows. Unbalanced manufacturing flows require more inventory to compensate for all of the variation and unknowns, which increases your inventory, and in turn, your working capital needs.
Do you see how closely the manufacturing cycle is tied to your cash cycle. And yet some people believe more time, money, equipment or people is the answer. But I will let you in on a secret; You don’t need more resources. If you carry inventory then you already have plenty of capacity. Think about it, inventory comes from too much capacity not too little capacity.
Where else do you think it comes from? Raw materials: you bought too much. Work-in-process: your process batches are too big. And finished goods: your sales cycle is too long (probably because you don’t know your customers very well).
In manufacturing, it is all about replication. Increasing your cycle time and making your products faster will reduce inventory, increase quality and bring you closer to your customer. Just eliminate the delays in your processes.
3. Design Flows
Design flows are a little different than manufacturing flows. Design is about iteration, not replication. The dynamics are not the same. That is what we will discuss next week and compare it to the first two important cycles: cash and manufacturing. We have seen how similar they are yet so different. Next week we will also look at design to order, which is where service firms differ from manufacturing firms.
To learn more about implementing continuous process improvement within your organization, attend the next improvement class How to Align a System of People and Processes for Results . Learn How to Create Well-Defined Processes and to document processes.