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Inflation – A Business Owner’s Plan to Prepare

Inflation – A Business Owner’s Plan to Prepare

July 3, 2018

As published in Forefront

By Bill Fetterman, Founder and Managing Partner of Advanced Manufacturing Group, LLC

Inflationary pressures can be relentless on businesses and make owners feel powerless. Preparation for inflationary periods can be akin to preparing for any kind of volatility. To weather an inflationary storm, owners should commit to a business strategy that includes operational excellence as a competitive advantage – including three important pillars: flexibility, scalability, and reliability.

Flexibility: In this context, means the capability to adjust to changes in product mix with almost no change to the cost structure, and with minimal extra costs of changeover. Many businesses are excellent at execution once the production mix is established, but changing the mix late in the game is often catastrophic to the variable cost structure and subsequently to margins.

Flexibility can be established as a competitive advantage by focusing on the design of the production processes and asking key questions during the design phase. In equipment-intensive environments, ensuring that the equipment performance and changeover practices are benchmarked against industry leaders can help toward these goals. Maximizing inventory turns contributes toward the ability to pivot production when necessary. If processes are more labor-intensive, many options are available for process design that minimize costs and maximize flexibility – generally involving cross-trained teams that can perform functions based on demand.

Scalability: This means the capability to adjust to changes in volume with minimal change to cost structure. This sounds simple, but adding more volume usually exacerbates existing flow and process defect issues and will almost always cause other unexpected costs, from additional steps for quality assurance to buffer stocks to added labor necessary to move more product.

Production process design with a goal of scalability is key to achieving this goal, whether for existing production processes or for new processes. There are many options available to address these goals, such as modular cellular layouts that are easily replicated, cross-training of personnel to enable coverage across processes, and evolution toward smaller batches to minimize material risks.

Reliability: In a business operation, reliability means freedom from error whereby quality does not rely on detecting but rather preventing problems through process design. It stems from the philosophy of systems thinking and systems design, with an emphasis on designing production systems with error-prevention as a goal. There have been remarkable advances in this sub-science. Generally, the idea is that simple is better and defect and waste prevention is a primary system design objective.

Capital Expenditures and Uncovering Hidden Capacity: Expenditure decisions can impact cost structures and also impose constraints that work against the three goals of flexibility, scalability, and reliability. When facing decisions about adding additional capacity the primary objective is to uncover hidden capacity in current systems first. Most production systems have significant amounts of hidden capacity (capacity that can be had by executing differently, using different production flow practices, or scheduling). Typically this hidden capacity is free – and our experience demonstrates it’s often 20% or more of current capacity.

Business Owners Win Either Way. These operating strategies are powerful ways to prepare your company for volatility, including inflationary cycles. Whether inflation materializes in the future or not, owners and their businesses win. These strategies are great for building sustainability through any period of volatility and adopting operational excellence as an organizational goal.