Re-Opening Your Business Safe and Smart
During the current COVID-19 pandemic there will become a time when businesses will start to transition back to some sense of normalcy and will begin to re-open for business, or for businesses that have been utilizing a reduced workforce, will begin to amplify their workforce as demand begins to increase. This demand will not be like turning on a light switch but will be gradual and happen over a period of several weeks or months. Since this transition period comes with a high degree of uncertainty, it will be extremely important that companies make the right decisions and consider the critical factors necessary to achieve success, specifically:
- Ensure employee safety, and
- Maintain a positive cash position.
To ensure employee safety, we recommend that all organizations follow the CDC guidelines and utilize the “Safe Work Playbook” created by Lear Corporation. This interactive guide for COVID-19 Pandemic Preparedness and Response can be found at https://www.lear.com/safeworkplaybookfiles.
To maintain a positive cash position, we have developed a list of factors to consider in order to preserve as much cash as possible and to generate as much cash as quickly as possible, so the business does not become cash constrained. The list of factors to consider include:
- Minimize Operating Expenses
- Turn Inventory to Cash
- Minimize Risks
- Focus on the Capacity Constraint Resources
- Produce to Customer Demand
Minimize Operating Expenses
One of the operating expenses that organizations have the most control over is labor cost which is typically divided into two categories: direct labor and indirect labor. During the ramp up period, only bring back the employees necessary to establish flow of work within the organization. Any labor that is brought back that isn’t absolutely necessary to establish flow, will only create a drain on cash without contributing to the generation of cash. The key performance indicator that will determine if labor is being managed properly is the amount of work-in-process. If the amount of work-in-process sustains or declines, it is being managed correctly. If work-in-process increases, then too much labor was brought back, or the labor that was brought back is not working on the right jobs. It is important to understand that the measurement should only include the purchase value of the inventory, not the value-added portion of the inventory.
Turn Inventory to Cash
The second factor to consider in order to maintain a positive cash position is to turn inventory to cash. The quickest way to do this is to focus on the work in process that is closest to shipping and only produce what is needed to satisfy the short-term demand of the customer. Producing more than what the customer can consume within your replenishment cycle will only put a drain on your customer’s cash, a win-lose proposition. The goal is to convert inventory to cash for the supply chain, not only your organization. By producing only what the customer needs will accelerate work through your organization and will shorten both the lead-time and the cash conversion cycle. The key metric for this is the same metric for minimizing operating expense, the purchase value of work in process. Another consideration to turn inventory into cash is to substitute material that is on-hand verses purchasing new materials to process a job, even if the substituted material is more expensive, since the cash of the on-hand material is already committed.
The third factor to consider in order to maintain a positive cash position is risk mitigation. The risk that we are talking about is two-fold: one being internal risk, and the second being external risk. The internal risk that needs to be considered is the likeliness that something could go wrong with processing the job to completion. Therefore, if there are several jobs that could be worked on that meet the criteria mentioned above, choose the jobs that have the least likely chance of something going wrong. These considerations could include the chance of a quality issue, missing or incorrect information, missing materials, or a unique skill that is necessary to complete the work. The external risk that needs to be considered is the risk of collecting cash, which includes the number of outstanding receivables with each customer, the payment terms, and the payment history of the customers. Keep in mind, that the payment history may not follow past performance, but you can make one general assumption, that the future payments will not be better than past performance.
Focus on Capacity Constraint Resources
The fourth factor to consider in order to maintain positive cash position is the utilization of the capacity constraint resource(s) which is defined as the resource with the least amount of capacity within a given value stream. This resource determines the flow of the value stream. Therefore, by definition, all the other resources within the value stream have more capacity than the capacity constraint resource. Utilizing the non-capacity constraint resource more than the capacity constraint resource will consume cash at a faster rate than generating cash. The key is to match the output of the capacity constraint resource to the customer demand within the replenishment cycle. This may mean breaking jobs into smaller batches and only producing to the short-term demand of the customer. In addition, the other factor to take into consideration is the throughput value (selling price minus material cost) of the work flowing through the capacity constraint resource. Prioritize the sequence of work through the capacity constraint resources by the customer need by date and highest throughput value first.
Produce to Customer Demand
The fifth factor to consider in order to maintain a positive cash position is produce only to customer demand within the replenishment cycle. We mentioned this concept several times previously, and it is extremely important to maximize the cash flow across the supply chain. This requires a shift in thinking from minimizing cost to maximizing the generation of cash and constant communication with your customer. Within every organization there are three generic flows: information flow, product (or service) flow, and cash flow. To maximize cash flow, the information flow and product (or service) flow must be improved. Therefore, if the replenishment cycle for a product that your organization produces is two weeks, then the order size that should be produced is based on your customer’s consumption rate within that two weeks factored by uncertainty. By taking this action, two short term positive effects will happen:
- The variability in consumption will be reduced, and
- The cash conversion cycle will be shortened.
The re-opening of your organization is the perfect opportunity to shift the mindset within your establishment to rapid and remarkable improvement through the application of operational excellence practices and methodologies.
If you would like to schedule a free 1-hour consultation with Future State Engineering to explore options that organizations can implement to create remarkable improvements and generate cash, please contact us at firstname.lastname@example.org or email@example.com.
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