How to measure inventory and set the target?

One of the questions most of the business head used to ask is, " How do I know my inventory level is high or low? How can I measure Inventory and I track? What is the benchmark for the inventory level?


My answer would be as follows.

Comparing or benchmarking may not give the right approach. As we discussed in the Holistic approach to managing Inventory in small, emerging organizations, Inventory is a function of many factors like your business, trade type, supply chain factors, product mix, lead time, volume vs. variety.
The benchmarking may not give you clarity about all the elements in the benchmarking industry or organization.

Instead, understand your inventory metrics as on today, set a target to reduce it every year from now on.

How should I measure my Inventory?

There are different measures to measure Inventory.

For example, you can measure your inventory value as a % of sales. Every month, you can measure and track your inventory value regarding your sales value.

Another proven method of measuring Inventory is Inventory Turn, which implies your organizational capability of turning Inventory frequently to achieve the sales.

Inventory Turn = Cost of Goods sold / Avg Inventory.

Cost of goods sold = This is the cost to make the goods like raw material cost + manufacturing expenses + any other indirect expenses.

Average Inventory = In a given period, say in a month's time frame, you can take the average Inventory you are maintaining. For example, you can add up all the day's Inventory in a month and divide by the working days. That will give the average Inventory.

Some organization has a practice of taking closing stock or opening stock, but that will be skewed to an extraordinarily high or low value.

For example,

To make an annual sales turnover of 100 lakhs, if you have avg inventory 100 L, Your inventory turn would be 100/ 100 =1
alternatively, for the same sales turnover of 100 lakhs, if you have avg inventory 50 L, Your inventory turn would be 100 / 50 =2
In case, if your avg inventory is 10 L, your inventory turn would be =100/10 = 10

The higher the inventory turn, the more active you are.

If there is a higher inventory turn, that means, with minimal Inventory, you are turning many times to achieve the sales turnover, result in lesser working capital or better cash flow.

Hence, one of the practical measures of Inventory would be " Inventory Turn."

Increasing Inventory Turn is possible only when you look into the root causes of the symptoms and initiating strategic and tactic initiatives.

That is a continuous activity, and you need to benchmark yourself and continuously work on optimizing the Inventory without affecting the delivery performance.

Now the action for your organization is 

1. What is your organizational Inventory Turn?
2. What is the target you are setting for the next year to increase your Inventory Turn?

Step by step process in implementing organization wide performance management system

One of the dreams or visions for most of the business head of the small, merging organization is to make the organization a system driven and to implement performance-driven management.


As we discussed the need for an organization-wide performance management system, now let us learn the step by step implementation step to make the performance management throughout the organization.

Step1:

Implementing Business performance management, keeping the second level reportees as stakeholders.


Business  Level Performance Management :

When the organization is small, or the first time, the organization is getting into the performance management system, the logical step would be determining the important business key performance metrics along with some of the functional key performance metrics and start measuring. Key performance metrics can be measured and tracked by the business heads and his/ her second level reportees, mainly functional heads. 

For example, some of the business KPI's like sales turnover, inventory cost as a % of sales, Plant effectiveness, attrition rate, % of NPD contribution over sales can be measured and tracked. This set of performance metrics can be reviewed along with functional heads, and they can be encouraged to work on the action plan to improve the business performance.

This process implementation duration can be one year. 

Benefits of  business-level performance management :

1. Senior leadership team becomes familiar with the process of performance management even though they are not feeling fully accountable for the result and but they feel they are part of the process.

2. Enhances the engagement among functional heads or second level reportees o when the business head reviews along with them every month or weekly 


Step 2:

Implementing Business performance management as done in the first year and arriving suitable functional level performance management, keeping the second level reportees and their team as stakeholders.


Business +Functional Level Performance Management 

Since the organization already familiarizes itself with a business-level performance management system in the first year, now the organization can have Business performance metrics that can be set by the business head and tracked along with the functional head.

In the second level, detailed functional level performance metrics can be set and assigned to the second level or operational head level. The functional performance parameters can have more functional oriented and some of the business metrics as derived from business KPI's from the business head.

For example, the supply chain function can have more functional metrics like no of vendors developed, inventory level at different levels, freight cost as % of sales, and so on. Similarly, for all functions, we can have more functional level metrics which can be assigned to respective functional heads and their team.

The functional heads and teams can be encouraged to present the performance metrics trend and a detailed action plan for the business head every month.


This process implementation duration can be one year. 

Benefits of business + functional performance management :

1. The focus will be given in-depth to the functional effectiveness, by the way, measurements are extended to all functional key activities

2. Since we involve functional heads and their team, their involvement and focus is improved on functional effectiveness

3. Most of the organization covers under different functional metrics and performance measurement system, eventually, there will be an improvement in the communication process, visibility of issues and the solutions approach, understanding the pains of cross functions enhances significantly.

4. Eventually, engagement enhances across functions


Step 3 :

Implementing  Individual-level performance metrics which is derived from business and functional performance metrics 


Business Performance Management  + Functional Performance Management + Individual performance management :

Since the organization already familiarize itself with the business performance management system in the first year and the functional team engaged in the functional performance system in the second year, now the organization widens the performance management net to all the people in the organization. Ideally, it can be extended to executives, first-line supervisors level.

In this process, each individual is given a set of performance metrics that will have linkage with the functional parameters, which is derived from business metrics.

Each individual is accountable for improving their metrics and report the progress. The review period can be once every quarter or monthly basis, depending on the bandwidth of the organization. It is the responsibility of the functional head to review the progress of their team members. 

For example, the individual depending upon the level in the organization can be given performance metrics that are related to his/ her functions. Also, some of the development plans can be added.

By the way, almost the entire organization is governed by performance metrics related to business and functions.

Benefits of  organization-wide performance measurement system:

1. Since the direction is set for the organization at business, functional, and individual levels; it improves the focus and engagement.

2. Eventually, the organization gets clarity of performer and non-performer, and this will help to focus on people developmental efforts 

3. When the rewards and recognitions are based on the performance, it brings visibility, differentiates the performers and non-performers, improves the culture towards self and organizational performance improvement

Overall, performance management brings engagement among people, eases the communication, improves the focus on results or solutions, and thereby culture would become more of winning than blaming or complaining.

Implementing the organization-wide performance management system is a long process and needs to be implemented in a phased manner for sustaining the results and involving all the stakeholders to create performance-based culture!

Learn the art of conducting Business Review Meeting

In the organization, one of the effective forums for engagement or one of the time-waster can be  REVIEW MEETINGS !. The conclusion depends on the way the business head or the leaders conduct the meetings. 

Conducting a purposeful and Result driven review meeting is an art, and the business head and other leaders can learn with conscious effort.

Let us discuss some of the insights about the review meetings and the solutions approach to make it effective.

Mindset related to review meetings:

some people look at the meeting as wasting of time and believe that the meeting is not going to help. Eventually, they never conduct any meeting, and even if it requires some decision to be taken, they use to call the individuals over the phone or 1-1 conversation and again convey the discussion to someone else. In this process, actually, the business head or leader's personal productivity is getting affected.

I observe that the mindset behind this, the business head is not interested or has not learned the art of conducting review meetings. The reason can be fear of facing people in a forum, not able to hold the review meeting effectively. This root cause needs to be understood and challenged.

Hence, the mindset and belief about the meeting need to be changed. Meeting need to be seen as a forum of related people to discuss, take decision collectively, and in the process, communication issues, the time delay can be avoided. Once the mind shift happens, the leader is in a position to learn the art of conducting reviews.

Fixed Meeting Reviews as much as possible :

In a smart organization, one good pattern, we can see is the fixed meeting reviews on a daily / weekly basis. For example, the sales review meeting will be every Monday at 2pm, Production review meeting every day at 9.30 am, and so on.

When you have a habit of fixing the meeting reviews on a daily / weekly basis at a fixed time, it improves the planning process of all the stakeholders, and the accountability to the meeting outcome will improve eventually as the agenda, and people's responsibilities are almost fixed.

When you call for ad-hoc meetings, the people may not be prepared for the agenda, data may not be available; eventually, the effectiveness of the meeting will also be less. It does not mean that we should not have an Adhoc meeting, as it depends on the business situation. It needs to be understood from the right perspective.

Be clear on the meeting purpose - Business or Technical Review?

I have seen in many organizations, the business head diverts the review purpose by going in microanalysis or shifting the focus to technical aspects. For example, in one of the monthly P&L review meetings, the purpose of the review should be reviewing the previous month's sales performance, expenses, and profitability and to discuss the future action plan. The discussion calls for high-level decision making on specific business-related issues. Rather than focusing on the business issues, the business head and the engineer get into the details of rejections, tool design, and engineering dimensions, and the whole meeting purpose is defeated. The other people's time also was wasted. If the technical aspect is important and to be discussed, nothing wrong in that, that can be done offline along with the respective people in a detailed manner. The business head decision is essential in the business review meeting, and he must be conscious of his/her focus on business and technical aspects.

As a business head, you need to be conscious about working on macro and micro details and need to be aware of switching in and switching out.

The other disciplines of conducting review meetings:

• start on time and finish it on time
• Go by the data or fact, less on opinion and emotional aspects
• Respect each one to voice their concerns, ideas, and suggestions
• Focus more on the decision /actions
• Be patience when others are talking
• Learn the art of questioning and giving feedback with the intention of curiosity and improvements than finding fault and blaming.

The facilitation skill of the chair is important in making the meeting more effective or just time wasters. The good news is that facilitation skill can be learned through awareness and practice!

How do you measure your business or plant effectiveness as a Business Head?

As you are aware the famous quote, "what you measure is what you get."

Measuring is very significant for business performance, and what and how you measure is very critical. If you measure wrong or suboptimal or standalone, then your business performance will also be suboptimal.

Typically, we use to measure our business or plant in the following ways.

1. Utilization perspective :

2.Efficiency perspective :

3. Capacity perspective :

4.Machine hour rate perspective:

5. Yield performance perspective:

All those measures are right and serve the purpose to some extent for what it is intended. For example, you may be measuring capacity utilization as the ratio of production qty/capacity installed, which measures say, for example, 80 %, that means you may conclude that 80 % of the installed capacity is utilized. It may not give the other information like the efficiency during the production and how much actively passed through quality specification and how much cost you incurred and so on.

Likewise, all the above typical measurements will give you standalone, suboptimal information to you about each function, and you need to look at altogether to arrive at some common conclusion about your overall business or plant performance.

To overcome the above limitations only, smart organizations adopt one measure, which will give a holistic view of your plant or business effectiveness rather than standalone performance or utilization or yield performance.

Introduction to Overall Plant Effectiveness  or Overall Equipment Effectiveness :

OPE 

In case your plant is small, one or few lines is determining your business profitability. You can take that line for measurement, which will have a direct correlation with your business performance. You can measure as Overall Plant Effectiveness.

OEE:

In case your plant is relatively large and consists of many types of equipment and lines, you can identify the most critical or constraint equipment, which you can measure holistically. There you can measure as Overall Equipment Effectiveness

In a small, emerging organization, if we apply OPE or OEE rightly, this will have a direct correlation with delivery performance, sales turnover, and profitability, as I have seen in my client organizations irrespective of their manufacturing industry classification.

The measure either OPE or OEE will consider the importance of EFFECTIVENESS rather than any standalone measure like efficiency, utilization, or yield performance. 

Now let us discuss the elements of OPE or OEE :

It consists of 3 parts namely, Plant Utilization, Output efficiency, and product yield performance 

 detailed working is given in OEE Introduction to OPE / OEE measurement

In the picture above, 

the plant utilization is given as 75 % as it is derived from the ratio of working hrs ( 6 hrs)  to available hrs  ( 8hrs)

The output efficiency is given as 83 % as it is derived from utilization data. For example, in a given 6 hrs, the plant supposes to deliver 600 nos ( assume 100 per hour), whereas, the plant produces the actual output as 500 no's. hence plant efficiency is  500 / 600 equals to 83 %

the quality performance is given as 80 % as it is derived from efficiency data, For example, 500 no's produced and 400 no's only pass through the quality test, and the final yield is 400/ 500 equal to 80 %

Hence, Overall Plant Effectiveness (OPE) is a multiplication of Plant Utilization and Output efficiency and Yield improvement, ie, 49 %

So, instead of looking at standalone measure either 75 % plant utilization or 83% people or output efficiency or 80 % yield performance, we are getting a HOLISTIC MEASUREMENT to say  EFFECTIVENESS  as 49 %.

This measure will give you a HOLISTIC idea about your plant's Effectiveness at the end of the day.

Business Implication of EFFECTIVENESS measure:

what does 49 % OPE or OEE indicate?

Given your current sales turnover or profitability, whatever you achieve is due to operating the plant at 49 % effectiveness. If you want to improve sales turnover or profitability, it is only possible by enhancing plant effectiveness measures. Improvement of plant effectiveness measures can be working on plant utilization losses, people efficiency losses, and improving quality issues.

Benefits of Holistic measurement :

1. As this measure encompasses utilization, efficiency, and quality performance, you will get a holistic idea about your plant effectiveness at the end of the day

2. Easy to communicate to all FUNCTIONS 

3. Since all functions involved in the improvement of this measure, this measure enhances engagement

4.Helps to focus on the overall performance of the plant rather than standalone areas

5. It has a direct correlation with sales turnover, profitability 

The action point is to understand your current plant or equipment effectiveness and the reason for the losses and the improvement actions to improve the Effectiveness and, in turn, your business performance.

Enhance your Planning Window for Sustainable Growth

Most of the small, emerging organizations are working on the current month or week or day and may not have much clarity about the immediate medium term. This practice results in the scenario "always busy" or "firefighting" mode to serve the customers all the time. But as a business, it will lose the long sight vision or growth potential.

One of the ways to come out of firefighting mode is to enhance the planning window.

Planning Window :

Instead of planning for the current month, extend the planning horizon for the next 3 months so that the business head and the organization will have visibility about the sales potential, working capital requirement to buy Raw material, capacity availability vs. requirement. Also, this enhanced planning will give more time to RESPOND to uncertainty.

Tool for enhancing the planning window:

The simple, yet powerful tool is 1+3 planning format. This could be used for sales projection or forecasting, working capital planning, or even for profitability projection.

For example, let us take the case of sales projection into a 1+3 format.

In a 1+3 sales format, you need to fill the data with sales projection for 1+3 months timeframe.

1 - a month is the current month, mostly firm / confirmed order

3 months can be for the next 3 months projection with firm/ confirmed order and then tentative  orders

Advantages of extending planning horizon :

1. When you see your sales projection data down the line 3 months from now, you will come to know the order position vs. target gap. That will give you response time to reach out to existing customers for more orders or pitch-in new customers for new orders
2. Since any new order requires time for approaching the right customer- processing inquiry - price finalization- proto proving- getting bulk order, this 3 months time horizon will give the flexibility and sufficient response time

3. If you know the projection for the next 3 months with some level of accuracy, that will help you to utilize your capacity well, manage the cash flow proactively.


The thought process of the business head must be proactive and beyond the current day or month for sustainable growth. This 1+3 projection will help to stimulate your thought process!

Customer is not interested in your inventory

In one of the client organizations, the team has kept two months' inventory worth of say 20 Lakhs to service the customer as directed. The client organization is supplying to one of the reputed, large scale engineering organization. The monthly avg billing is around 10 Lakhs, and the customer insisted the client keep a minimum of 2 months FG stock at any point in time. The customer made it as one of the key performance metrics for the client organization and advised to keep the customer updated on the FG inventory status periodically.

As I diagnosed with the organization, their overall average delivery schedule actualization to the all the customers around 60 % only, and the manufacturing plan is usually based on the urgency or followup by the customers daily.

We worked with the organization and identified the constraints in the casting process, and their OEE was also low as 25 %. Eventually, within nine months, their OEE started rising to 60 %, and the business head is also working on machine maintenance improvements, technology up-gradation, daily planning based on capacity rather than urgency, and so on. 

The above said customer 's order was being fulfilled at a 100 % rate every month, and the organization's business head felt that there was no need for keeping two months FG stock as the production capacity increased to deliver the order commitment every month. So, they reduced the inventory to the safety level of 15 days, and the customers' also getting the KPI dashboard periodically as usual. 

Things were moving smoothly. During one of the conversations between the customer's representative and the business head, the customer said that they were not particularly interested in insisting on minimum FG stock. Since their history of delivery commitment was not so good, for safer side, they asked on maintaining minimum stock. They were ok with the reduction in inventory norm as long as delivering on time.

The moral of the incident :

The customer is not interested or does not want to penalize the supplier for insisting on keeping a minimum level of inventory in the name of vendor managed inventory or warehouse stock etc. as long as the supplier has the capability and flexibility to serve them. Keeping inventory is only to protect the variation in demand or supply, not to penalize the supplier.

It is up to the small organization to be smart in the manufacturing process, capacity, and planning to avoid or reduce the inventory and prevent the customer from imposing any rule on keeping inventory!

Pricing process and typical mistakes in pricing decision in small business

Below some of the pricing mistakes most of the business heads do in the small, emerging organizations as I came across in my client's business.

What is meant by " Pricing"?

Pricing is a process to determine the selling price for your product or service.

Pricing is not just a mathematical calculation of adding all your costs, then add your desirables profit and arriving some numeric value as a selling price.

Pricing process even though it looks straight forward, in reality, pricing decision is more of strategic to each customer or product or services. Pricing is a combination of science and art.

If you fix a higher price and your product is commodity nature, then you will lose it to your competition.

If you fix a lower price, then you may be losing your profitability. In the long run, your business may not be sustainable to run as the cost keeps going up.

Typical mistakes in pricing process :

1. Going by thumb rule, which was fixed a long time back. Thumb rule may not be relevant today.

For example, I had seen some people fix their process cost as 10 % of their material cost. In contrast, in reality, as per the latest P&L analysis, even the average variable price is more than 10 %. The point is the lack of relying on the newest cost details, and going by the thumb rule puts the organization in making the mistake of wrong pricing.

The organization can develop the process of checking the P&L value chain every month and can have an average value of each value chain once in a quarter. That will give the business heads or cost estimation team the realistic cost structure of the organization.

2. Not standardizing the costing process :

except for few organizations, most of the organizations, the process of pricing is being done by the business head based on his / her way of estimating the cost and finally arriving the price. One way, he/she mentally prepares the estimation based on the experience and the judgment about the product and customer. Still, when the organization is growing, a standardized process of evaluation is required. The estimation process may be customized with the template and having the process checklist like lot size, changeover time, cycle time, the weight of the component, rejection %, and typical other costs like inventory, freight cost, etc. Once the organization standardize the process, and it can be delegated to engineers to make the first level costing, and the business head can have a final decision on the pricing

3. Expecting the same profitability across product lines and customers:

as mentioned, some business head has a thumb rule of maintaining some profitability across all product lines and customers. Pricing is always strategic, and the decision will vary from customer to customer or product lines. The Business head must think about the short term and long term implications of the pricing decisions. For example, if the organization already achieved its breakeven point, it can consider any further volume or customer with less profitability than the usual profitability margin. This additional volume or new customer will bring down the cost of operation further down, and this is beneficial only for the organization.

The pricing is the combination of science and art. The decision must be taken by the business head, considering the short term and long term implications of the pricing sensitivity to the customer.

Key Drivers of your Business

As a business head, you may be spending your time, effort and energy in many activities of your business. The more you effectively spend your time in critical elements, more your business prospects.

You need to understand the fundamental of your business drivers and your awareness about those drivers and the depth of your management on those drivers will bring profitability and growth.

Key drivers of your business:

Employee:

As one of the appreciating assets in any organization is PEOPLE. However, one of the challenging area for most of the business head is managing people.

It involves 

Manpower Planning for existing and future 

Attracting Right People 

Engaging towards organizational goal and culture

Providing Growth opportunities and learning

When you are not spending your time on this "People" factor, it costs the organization regarding losing skill, high attrition, loss in delivery, quality and so on. 

From our experience with small, emerging organizations, most of the chronic problems in the organization are due to "non-availability of right people in the right positions."

Profit :

One of the critical aspect for sustaining any business for a long term is " Profitability."Only when the business generates a decent profit, the business can survive and look for growth opportunities. As a business head, you must know how the business does generate profits and the factors contributing to or affecting the profitability of the business.

To know the causes or sources of profitability, you must be aware and have depth understanding of the following factors

1. Understanding your value chain or cost stack up in your products

2. Your pricing methodology and relevance with reality

3. Product portfolio and margin in each segment

4. Buiding cost consciousness culture in the organization

5. Your sensitive analysis on volume and variety or product portfolio mix

Cashflow :

As we have observed in some organizations with high profitability, the organization struggles to meet the working capital requirements, and the business head spends most of the time in managing the cash flow issues. The reason is lack of understanding on the aspects of from where / when / how much money comes in where/ when/ how much money goes out from the business.

Business head needs to know the fundamentals of money flows irrespective of his background, financial illiteracy. He must know to balance the payables and receivables so that the business can run smoothly.

Growth :

Growth is essential to sustain and increase the profit. Beyond some point of effectiveness, increasing the profit is difficult. If a business wants to generate more profit, then one of the ways is looking for growth in business topline revenue.

This growth is possible in multiple ways as follows

1. Increasing share of business or volume from existing customer base or product lines

2. Expanding into new product lines  from existing customers

3. Expanding to new customers or new demographic locations

However, managing growth phase is more challenging rather than running the existing operations with effectiveness. It calls for the marketing effort, new product development capabilities, competency building inside the organization to cope with growth challanges regarding technology, infrastructure, maangement process or practices, people, and capital.

careful planning and execution is required to migrate the organization towards next level grwoth.

Operational effectiveness & Flexibility:

To ensure profitability and sustained growth, internal operational effectiveness has to be maximized.

When we say effectiveness, it is all about Equipment / Asset Utilization, People efficiency, development and product quality.

As operational effectiveness has a direct bearing on the profitability and flexibility to the customer's requirment, your time and drives the organization towards " Lean way of working " as a culture is critical. One of the differentiator among the competitors is your organizational culture on continuously improving your operational effectiveness.

Customer:

A customer is a center point of focus for any organization. The existence of a business is only due to the presence of market and customer to buy from your organizations.

You need to understand the real reason for the customer to come repetitively to you for doing business. The reason could be

your price

your attitude

your delivery flexibility

your locational advantage

your attitude and approach towards them

your service quality 

once if you understand the real reason of your customer comes to you , you need to think interms of 

1. sustaining those factors and its feasibility

2. leveraging those factors and sustain it

Maintaince of quality relationship with customers will help you on a long term.

To sum up, 

the above factors are key drivers of your business, and how much time you spend on nurturing those factors determine your business sustainability and growth on a long-term basis!

which is one performance measure (KPI) indicating your organizational strength?

As there are many methodologies and key performance metrics (KPI)  to assess the organization strength. In fact, no one measure does not indicate the complete picture of the organization.

However, as a business head, if you want to gauge quickly about your organizational capability, people working culture, communication process and likely future prospects of the business, one key performance indicator will show you the strength of the organization.

That is " Delivery Actualization"  or "Customer order fulfillment on time."

Given the order position, if your organization meets  "Delivery commitment 100 % every time and that too on time, then we can presume, the organization is built on people and process strength.

why we insist this measure is dipstick measurement to assess the organization strength :

Irrespective of each functional efficiency, only when there is a cohesive team, business process and daily management practices, and capability, then the organization can deliver on time with 100 % actualization. This KPI  indirectly measures the organizational strength.

Relook at your organizational performance on order fulfillment for last one year, and you can relatively understand your organization's strength!

Changeover time loss reduction is compelling need for organization- why?

When the manufacturing facility produces a different component of same of the different family, it needs time between one component to another component change in the equipment or facility. The time required between two components production is called change over time or setting time.

To be specific on the definition of changeover or setup time is the time elapsed between last good piece of component  A to the first good piece of component B.It comprises Preparation Time before setting + Actual setting in the equipment + Quality proving the new component as per specification.

Why is there a compelling need for changeover time loss reduction initiatives?

In external socio-environment, there had been a shift in customer's preference, lifestyle, affordability, and expectation of spot delivery or short lead time and so on. This change in external leads to the following challenges to the business internally.

1. Frequent new product launches and reduced shelf life  of the product

2. Increase in variety with moderate/high volume

3. Meeting delivery commitment  

How the external scenario affects the organization capability on changeover time loss reduction?

Unlike it is justifiable to have dedicated equipment/facilities, the organization has to produce all varieties of the same family group in the same equipment/ facilities. If the changeover time is high, it will affect the organization in the following ways

1.Utilization loss to the equipment/facilities

2.Loss of capacity

3.Increase in manufacturing cost as all the losses would be accounted as manufacturing overheads only

4.o counter high changeover, if the organization goes for higher lot sizes, it will affect regarding higher WIP / FG inventories, possible rejections/ rework/planning cumbersome and other communication issues.

on the contrary, if the organization is continuously working on reducing changeover or setup time loss, it will  help

1. Faster delivery leads to customer 's acceptance and possible sales volume growth

2. Better manufacturing cost, in turn, product price

3. Quality improvements due to coordinated and standardized work during setting 

4. Improves the morale of the working people as they are mostly affected due to unorganized changeover process.

5 Short changeover time brings flexibility to the organization to produce variety and at the same time, not losing the utilization and people efficiency loss.

Going forward, those organization who are specialized in variety handling with minimal production cost would be fittest to survival.

One of the competitive advantage for the organization is that developing the capability to reduce the changeover continuously and increase the flexibility in meeting the customer's requirement

Why must continuous Lead-Time reduction be the focus for a Business head?

From customer's perspective, Lead time is the time taken between customer placed the order for product/service and the time the customer received the product/service.

This lead time may be further broken down into supply lead time, manufacturing lead time, distribution lead time and so on.Those classifications are internal to the organization, and the business head must focus on to reduce the overall lead time continuously.

Why lead time reduction is an essential focus for the business/business head?

Lead time reduction is important from four perspectives.

1.Working capital & Finance perspective

2.Triggering sales & operations teams towards growth performance

3.Operational Efficiency perspective 

4. Customer's perspective

Let us understand from each perspective.

1.Working capital & finance perspective:

When the product/service order fulfillment lead time is more, the expenses incurred to cover the product/service till getting payment from the customer will also be more. The business gets the cash only when the product/service is sold to a customer and converted as cash.

For example, if the lead time is six months, business will get the cash only after six months. Till such time, the business has to fund for all the expenses like salary, material procurement, and other overheads, etc .that is working capital is required for six months..(Pl ignore, advance payment, credit times, payables, receivables, etc. as those are all tactic arrangements by the business)

If the business team reduces the lead time by three months, working capital required only to fund three months expenses.

Hence, if you have high working capital, one of the causes and solution approach would be a LEAD-TIME reduction of your order fulfillment.

2.Triggering sales & operations teams towards growth performance:

Typically entire organizations' speed depends on the PULL.For example, If lead time is six months and the order execution capability of 6 months, say one crore, then the organization can make only two cr as sales turnover annually. Based on the execution capability or capacity of the organization, the sales and marketing function also behaves and operates. Once the lead time is reduced by 50 %, say by three months, then organization capability is also increased to 4 cr as sales turnover. The point is when Operations engine pulls more, the other parts of the organization also pull more from the market or customer.

The business head responsibility is to understand this behavior and must focus on lead time reduction.If your organization sales turnover is stagnant, one of the reasons could be high lead time and complacent in the organization.

3.Operational Efficiency Improvement 

When the lead time is high compared to actual value addition time, it means, your product/ service is held up in the value chain as waiting or delay. This results in accumulation of inventory in the form of WIP, which sometimes leads to rejections/ rework, making the communication complex, storage, handling, manpower deployment and so on.

Also, your strategic decision on supply chain leads to high lead time in getting the raw materials and high lead time in reaching the customer .Typically when the lead time is high; it brings all the inefficiency or wastes in the system. When the lead time is low, it brings flexibility into your production system as you can move from " Build to stock" to "Build to order."Also, the change in your production system will reduce your inventory and its derivative wastes in the system.

If you are struggling with low efficiency in your operations, one of the causes could be high lead time

4.From customer's perspective :

In today's fast-moving lifestyle, the customer does not want to wait, and he is willing to pay more for quick delivery than negotiating and followup with your team on delivery dates.Less the lead time, more customer's satisfaction and there is possibilities of further business partnership.If the lead time is high and non-negotiable, there is a possibility of your customer move to the competitor.

In essence, as a business head, your continuous focus must be on reducing the lead-time either in supply chain or operations or distribution. 

This focus will give tremendous benefits in terms

1.Capability to increase sales turnover

2.Reducing the cost of the product

3.Reducing the working capital

F

What must every SME business head know about his business?

As we are working with more SME organizations, we are observing two kinds of business heads or owners.One type of business owners involves themselves almost full time on managing all aspects of operational activities on a daily basis and not giving much focus on the business aspects of profitability and growth.The other type of business owners or heads delegate entire activities to second levels and not much familiar with business aspects. In both types of personalities, we see benefits and drawbacks as well. Only a few smart business heads able to balance the priorities between survival and growth-related activities.

The point is irrespective of the personal style of management, the business head must know some of the aspects of the business at a macro level, and in a fixed interval he must review along with his team. His macro level business acumen and reviews will help the organization to prepare proactively for any uncertainties or opportunities which impact profitability and growth.

The following business aspects the business head must be familiar and review frequently.

1. Profitability
2. Cash flow
3. Capacity constraints 
4. People capability and development
5. Next level growth plan 

1. Profitability :

He must have a practice of reviewing P&L once in a month along with the team. Reviewing P&L will give a fair idea about the healthiness of the organization regarding cost, product mix, and pricing

Also, he must be aware of his cost structure or value chain and its impact on the profitability.

He must have a clear idea of the product mix or customer mix which gives maximum profitability. This clarity will help him to focus on customer or product rationalization

2. Cash flow : 

One of the pain areas for most of the SME organization is poor cash flow management result into affecting day to day operations, sometimes, finding difficult to pay even salaries on time. This delay seems to be a regular event from the management point of view as multiple transactions happening across the supply chain, but from an employee point of view, these delays some time affect the morale and engagement. Better cash flow management is required to avoid hand to mouth situation of cash flow.

The business head must know his breakeven point, cash flow transactions, and payables/ receivables outstanding in a regular frequency through MIS so that he can intervene at right time with right people to mitigate the risk before it occurs

3. Capacity constraints : 

One of the competitive edges for the organization is speed and delivery flexibility, and this is going to be a major expectation from customers. The business head must know his organization constraint points and work continuously on debottlenecking or improving the capacity to stay ahead of the competition. The constraints could be anywhere in his operational and business processes.

Meeting the customer’s expectation on time must be one of the key performance indicators of business head

4. People capability and development : 

Today one of the significant challenges for SME’s is people management. It includes selecting the right people, compensating them at par with industry and retaining them. As most of the organizations realize the cost of replacement and training the new entrants, it is one of the critical priorities for business head to identify the people talent on time and develop them for cost efficiency and future fit point of view.As a business head, he must continuously invest in people capability development initiatives. 

5. Next level growth plan  : 

Since most of the team members in SME’s are working on operational issues and someone must think about sustainability, the growth of the organization. It is the responsibility of the business head to think ahead and work on the growth opportunities. To work on growth, he must be aware of the external environment, trends, customer’s expectation.

Organizational profitability and growth depend on the amount of time, the energy the business head spends in all aspects of business !!!