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Health checkCash is still King...how TOC can help save your business from the credit crunch
With the recent events around the world, what does the credit crunch have in store for your business?
How can you make sure you take the right measures to protect your business in the current uncertain climate?
Absolutely not.
Cash is the lifeblood of a business. Without cash, despite making very good profits a business will no longer survive.
Many employees of businesses do not find it easy to distinguish a business being profitable from a business being successful.
Manufacturing businesses who find themselves susceptible to the credit crunch are those who either suffer from long lead times or have closed their own production facilities and now outsource to lower cost economies like China? Why?
Let’s take the first scenario. Where a business manufactures products, often bespoke, which are high precision and complex then often the lead times on these products are very long. What these long lead times do for cash flow can be devastating. Firstly these companies are forced to invest in materials and pay for these materials many months before they actually get paid themselves. Often the material supplier’s payment terms are thirty days, whilst the end customer’s payment terms can be as much as ninety to one hundred and twenty days. Immediately this puts a business in a position that it is forced into providing two to three months credit. In worst case scenarios add a manufacturing and transportation lead time of six months then suddenly the business is exposed to nine months of credit. This credit is provided interest free. In effect the business is not only providing products but offering a credit and warehouse facility to its customers.
Now Let’s take the second scenario. Where a business has pursued the policy of reducing costs and followed the well worn trail to lower cost economies. They have closed their own production facilities and are now buying in lower cost products. On the face of it this would seem like a sensible decision. The cost of producing the product in-house compared to overseas could be as much as double the price. Why then would this policy end up in causing a business to be forced into liquidation? If product cost reduces then surely this will translate to a business being more profitable? This appears true. However, the difference between selling price and purchased price is eroded and Throughput or margin reduces. This reduces dramatically the amount of money generated by the company forcing it to cut Operating expenses to maintain profits. Sometimes this cut in Operating expenses makes the business dysfunctional. Coupled with this, to get lower purchasing prices, the volume of products which must be purchased results in the amount of inventory bought – the size of the batch required – being very large. This inventory consumes huge amounts of cash. This results in businesses requiring large amounts of credit from financial institutions to operate. Hence in order to make profits on balance sheets the credit required in such businesses must be very high.
The implementation of Drum-Buffer-Rope and Pull Replenishment can overcome both of these problems. In the first scenario it is likely that Drum-Buffer-Rope will reduce the manufacturing lead times in half. This reduces the credit from nine months to six months. This could in many cases be enough to save a business. In the second scenario it is expected the company can reduce its stock in half by implementing Pull Replenishment which effectively results in halving the replenishment time. To learn more about how the implementation of these TOC applications could have a positive impact on your business in the current climate contact....
