Unlock Capacity: Get More from Your Existing Assets

It’s no secret that today’s economic environment and consumer spending habits demand that manufacturers get more out of their facilities to help manage price pressures and supply chain disruptions.

For the first time in a few years, digital transformation isn’t the top priority topic among executive teams. Productivity improvement and cost cutting is now the most discussed topic, according to Source Global Research. In our conversations with clients, there are four reasons they are considering productivity improvement efforts. Two of the reasons focus on more production, one is focused on working capital, and one is simply about efficiency and COGS.

1. I need better throughput by getting more out of my equipment and labor.
2. I need more production capacity to produce a wider product mix.
3. I’m carrying too much finished goods inventory; it ties up too much of my working capital.
4. I have a complex product mix and frequent production break-ins due to labor shortages, customer demands, equipment breakdowns, and raw material shortages.

One lever companies are pulling to increase productivity is to invest in capital improvements. However, companies may want to reconsider capital investments as the first solution. Capital as a response has made sense for most of the last 15 years. It has been cheap, with the weighted-average cost of capital (WACC) for the average S&P 500 company just under 6 percent. But in the past year, between rises in the cost of debt and cost of equity capital, the WACC stands at nearly 9 percent. (Capital Is Expensive Again. Now What? hbr.org)

Optimize Before You Capitalize

Before investing in capital improvements, our clients are focused instead on getting more out of their existing equipment and team members. Naturally, improved throughput can lower COGS and even increase revenue if your plant is over-scheduled. What’s more, companies can unlock hidden capacity and improve working capital through some relatively small investments in time and expense:

• Map out your value stream. Better understand your processes and product bottlenecks.
• Determine your priorities. Companies have to assess, and sometimes re-assess, what they want to prioritize: productivity vs. capacity and customer demand vs. working capital (inventory).
• Explore new production scheduling methodologies (e.g., product wheels) and software optimization capabilities via advanced planning and scheduling (APS) in concert with your manufacturing execution system (MES).

Yes, you’ll probably need to invest in capital eventually. But the most competitive companies are first maximizing the combination of their existing assets, talent, best practice methodologies, and advanced software. Your board, executive team, and employees (your stakeholders) will appreciate the jump in profitability.

September 29, 2023