I had a very interesting exchange with a friend last week who is working on a consulting project for a manufacturer. He reached out to ask for my thoughts, which are summarized below:

Here’s the fact pattern he shared:

1. My customer produces sophisticated precision machinery components using an aluminum casting process where the entire manufacturing process chain comprises more than 80+ production steps, which are very complex and sophisticated. The customers are mainly from the medical technology sector.

2. The production sequence takes place in a fixed order, and each manufacturing process has a particular process time. The product portfolio includes about 200+ very different products, each requiring a particular process time. The manufacturing portfolio is always a diverse product mix.

3. Due to this circumstance, bottlenecks always occur in production at different points. As a result, the OEE and capacity utilization are very volatile and very poor. My customer does not know how to solve the problem. Making matters worse is that production planning is done daily in spreadsheets.

4. A new ERP system is being planned for implementation. However, it is not hoped that this will solve the problem.

5. I have recommended my customer perform a process analysis in conjunction with data mining. With the help of this, a maximum sales volume can be defined and the necessary investments as well as an optimal production portfolio.

6. The goal is to increase the sales volume so that the additional investments generate a good return on investment. I assume that revenues can be improved by 30%. They currently make only 5% ROS. It should be at least 15%.

7. I cannot communicate with the finance department because managers and employees are already completely overwhelmed by day-to-day business.

He asked, “Do you have an idea how to solve the problem?”

Just by reading the above case study, you can tell common challenges and profitability drains exist.

In my review and analysis, I agree with my friend that profitability could and should improve. Below, you can read my recommendation as to what they do it to tackle each challenge and my friend’s corresponding responses shortly after.

1. "I have recommended my customer to do a process analysis in conjunction with data mining"

Me:

I agree the first step must be an end-to-end process map to fully understand the processes if one does not yet exist. 

2. "A new ERP system is being planned for implementation. However, it is not hoped that this will solve the problem."

Me:

With the ERP, I'd be interested to know which software has been selected. If the company knows now the software is not the right one and will not solve the problem, they should consider stopping and assessing what the right ERP is; I've consistently seen too many companies stick with legacy providers like SAP instead of cloud-based providers that are built to suit the business, not the other way around. This would be a tough discussion but potentially an important one. If they want to continue with the current software implementation, it seems this needs better scoping and project management- an observation you can share. The organization must detail what they need the software to do and have the implementation close the gap.

My Friend:

They selected XYZ ERP, which is made for discrete manufacturing. However, my customer also has process manufacturing (aluminum casting). Concerning project management and your recommendations in general, they are absolutely correct- I agree with you.

However, the company’s strategy is to implement a standard version of the software, and the organization just has to adapt to the processes the ERP system offers. I think this is not going to work.

3. "I cannot communicate with the finance department because managers and employees are already completely overwhelmed by day-to-day business."

Me:

Identical to the experience in the previous company you consulted for; fascinating. Maybe share this observation with management- "If they aren't helping to analyze the business and provide insights on performance, what is it they are doing?" They would be helpful, but not necessary to understand the problem and solutions. Perhaps you can summarize what info you need from the finance department and share it with the company contact so they can ensure it gets done- emphasizing the required info is key.

My friend:

I agree once again. The Managing Director hired me, and he has shared that, like in the previous company, they are stuck in Excel reporting. As a result, the finance department suffers from massive fluctuation due to the workload. They are required to complete and sent a package of 75+ reports to the shareholders, just as the previous customer did. I will share the reports with you; Otherwise, you will not believe me- It’s so bizarre. Worse, the request reports mean very little to anyone and are not used internally for decision-making or to run the organization.

4. Production planning is done daily in Excel

Me:

Ah, the classic  🚩🚩🚩 scenario. I'm sure this will be an undecipherable mess to understand, too. Perhaps ask whoever owns this process to spend some time preparing documentation so they can explain their process to you so you can understand what is happening here and identify where it is ineffective. 

My friend:

Yes, it is a complete mess. Worse, nobody has time for me to explain the files or how they are used. In the meantime, they have provided access to their controlling system, and another consultant is assisting me in finding the required information in the system. For now, that works.

5. Other thoughts on manufacturing profitability:

Me:

If they aren't doing this already, suggest they improve communication and collaboration between departments with a daily and weekly meeting between manufacturing, supply chain, sales, and procurement to ensure everyone is working towards the same goals and clearly understands what needs to be done and is being done each day- if expectations and results deviate, there must be a consensus as to why- and how to fix it tomorrow. This way, they can discuss the challenges and work to solve them or raise shared attention to them.

My friend:

I agree again. They told me they lack effective communication, which is not surprising given the other factors at play. The company is also organized in an unusual manner. They are missing key departments due to a previous reorganization, and production planning is done by various manufacturing departments. The head of production told me he wants and needs a production planning department, but this is not likely to happen.

Me:

Do they have any sort of system in place to collect data throughout the manufacturing process? Is the data good quality and sufficient to convey the end-to-end processes? Is machine/labor time captured? They will need to have this information, at a minimum. If they don't, I'd recommend building some sort of access database data collection process or using software to start collecting this information until the ERP is ready. The good news is there are many tools and ways today to build data collection solutions if a good one isn't in place and they need one quickly.

My friend:

I agree. I made the same proposal to the head of manufacturing. He agreed, but the shareholders insist the new ERP system should bring improvement eventually to solve this issue.

Me:

I'd also look to find a way to start with good data they hopefully have to get a KPI dashboard established to understand the operations if they don't have one in place already. Establishing targets for each metric will allow you to see performance trends and ask "why" to learn more about the business and deviations. 

My friend:

They don’t have KPI dashboards anywhere.

Hope this helps,

Ben

What you’ve read from our exchange above is very typical for many manufacturing organizations. We have seen the same issues repeatedly occur throughout my career and his.

These issues seem solvable. Someone could and should take action to fix them for good.

However, that isn’t how the world works. A few days later, my friend sent me a follow-up message after his week had wrapped up.

My friend:

My conclusion is that it’s likely a better use of my time to concentrate and focus on strategy consulting instead of Management Accounting and FP&A; One without the other is ineffective.

As a Management Accountant, you can understand the entire value-creation process of an enterprise to identify inefficiencies and their root cause and understand processes in relation to each other. Production Managers have that ability, too, but they lack a strong understanding of the financial impact.

However, as a management accountant or production expert, it is one thing to identify the issues and solutions and to bring attention to them. But, unless you can convince those who own and run the company to make these changes and make hard decisions, nothing will improve. The challenges just this one organization faces are serious, and often, the solution they want is a band-aid when, instead, these issues require major surgery to remediate. But, the alignment and will do not exist to take action. As a result, those tasked with running production face unrealistic targets and expectations, creating a vicious cycle and frustration for many.

Unless this work is taken seriously by the owners, little results, which is frustrating. The best way to handle these types of challenges is to tie them to the long-term strategy. These issues must be viewed and discussed holistically, not pushed down to departments and individuals who do not have the authority or ability to green-light solutions.

Solvable Problems- That Won’t Be Solved- Conclusion

The manufacturing and profitability issues I’ve shared in this article and exchange is common. Typically, organizations are held hostage by short-term targets and expectations that put profit first. If budgets are set and determined to ensure a certain profit level is achieved, without ensuring the organization has the systems, processes, and people to facilitate it, a downward cycle is perpetuated. When the systems and processes are lacking, the burden is then put on the people. People will only then take so much abuse and pressure for so long before they head elsewhere, further perpetuating the issues.

As we face a new digital age, organizations can’t try and scrape by on the bare minimum of investment for much-needed improvement, nor can they pretend they don’t have to pay for past errors and sins in how systems and organizational structures were developed. If you take a strategic approach to manufacturing, what matters is 10 years out, not the next quarter or two.

Rather than perpetuate more of the same, manufacturers need to adopt “day one” thinking to reinvent themselves and how they run. Using the wrong systems, uncomprehended processes, complexity, and a lack of integration and digitization results in long-term failure. To fix issues of the magnitude discussed here, organizations will likely need to forsake profitability for several quarters (minimum) so they can fully understand the challenges at hand, and the possible solutions, select the best one, and ensure it is fully implemented.

Otherwise, you can tell investors and the board that your strategy is based on wishful thinking.