5 proven methods manufacturers can use to fight inflation

Supply chain disruptions, tight labor market conditions, and unprecedented government stimulus have left us with persistent inflationary pressures. Should you care? From a consumer perspective you should be looking for ways to spend less or more responsibly.

If you are a manufacturer reducing spending is not so easy, but there are many actions you can take to fight back! Doing so may be the difference between your business becoming an industry leader or falling out of favor with your customers. So what are five ways manufacturers can fight inflation?

1) Measure Overall Equipment Effectiveness (OEE*)

First, make sure you can break down measurement of OEE into its three main components: Availability, Quality, and Speed/Performance. With good data and diligent analysis, unfold each of these components until you find the top three negative impacts on OEE which can be addressed with strong action plans to make incremental improvements.

While it takes time to break down these numbers, it will simplify and prioritize improvement plans at the appropriate level of granularity. Here are some examples:

• Low performance company: “We will improve OEE by 5%.”
• Average performance company: “We need to increase equipment availability by 12% by December 31st, 2024.
• High performance company: “Improve equipment availability of production line 2 by 8% by reducing unplanned downtime of equipment A by 6% and equipment D by 14% by Dec 31st, 2024.

IMPACT: If your facilities run 24/7, then cost impacts can be enormous. In one glass container manufacturer we calculated that for each 1% improvement in OEE, the operating profit of a single facility would increase by $2.5M! In addition, you may be able to fulfill more customer orders, increase sales, or reduce the number of overtime hours paid to catch up on delayed orders, reducing direct costs.

<< Read more: Benefits of digital transformation in manufacturing industry >>

2) Workforce productivity (focusing on direct labor)

First, understand the critical tasks they perform. Critical tasks are those that have a material impact on the quality, safety, and performance of the final product. Typically, 20-30% of all workers’ tasks can be considered ‘critical.’ Some good examples are boxes packaged per manhour, quality checks performed per manhour, cuts made per manhour.

Next compare workers with similar responsibilities to one another to determine what the benchmark productivity is. This typically will not be the highest number measured. Selected the top quartile (top 25%) performers is a good place to start.

Finally, use the knowledge of the best performers to develop work instructions which can be used to train low performers. This approach is equally effective for support processes like cleaning, maintenance tasks, and line changeovers.

IMPACT: We have seen companies achieve a 10-25% performance improvement with this simple approach. An additional benefit is increased stability of production performance due to critical task standardization’s effect of improving consistency in execution. Finally, overtime should also come down slightly due to fewer line stoppages, quality issues, and breakdowns.

3) SKU simplification

Simplifying product mix is a delicate but necessary exercise. On the one hand, we do not want to disappoint loyal customers; however, do we want to continue to please customers who do not pay a fair price? Complete product portfolio simplification is not necessarily a routine, annual exercise.

However, manufacturers should develop robust criteria to consistently re-evaluate individual products according to their strategic importance and contribution margin they bring to the business. This also leads offers an opportunity to re-focus on new market opportunities and product development, which may offer higher margins.

There are several ways to evaluate a product portfolio. They all come down to some form of cost-benefit tradeoffs. The simplest analysis would be: Do the margins generated from each product cover the total costs required to produce it and leave the business a reasonable contribution margin?

If not, arguments to justify the product’s existence must be extremely high (loss leaders, for example). If so, is the contribution higher than the overall contribution margin of the business?

IMPACTS: The average impact Falconi has seen from SKU simplification is an overall reduction of 5% – 15% of the overall product portfolio. Operationally, fewer raw materials are needed, fewer line changeovers occur, planning and scheduling production orders become simpler, production capacity can be dedicated to higher-margin products, less warehouse space is consumed, and fewer logistics assets are needed.

<< Read more: America’s (Other) Heroes: Manufacturers >>

4) Analytics

Predictive analytics have changed the game forever. Here are a few use cases from planning and production to distribution.

Planning: Still managing your demand forecast in excel, or static ERP (Enterprise Resource Planning) systems? Machine learning algorithms can not only provide you with a more accurate forecast, but they can also perceive unknown trends, learn, and improve in real-time, and do it all faster than any human could hope.

Scheduling & Maintenance: How about production scheduling? When customer orders pile up, or seasonal demand kicks in, you need to be sure that you do not over or under produce, but also that you produce the right product at the right time to satisfy the highest number of important customers.

Worried that old equipment will break down when you can least afford it? Predictive analytics can help you decide whether to perform preventive maintenance prior to or following a production run.

Warehouse & Distribution: How much inventory should I have, and in which warehouse should it be located to increase service levels? Machine learning can help you decide and show you a way to do so while maintaining lower overall inventory levels.

IMPACTS: Falconi has helped companies improve demand forecast accuracy by as much as 25%, reduced equipment-related downtime by an average of 10-15% and achieved a sales increase of 5% while simultaneously reducing inventory levels by 20% – 25%.

5) Continuous improvement  and excellence culture

There is no substitute for consistently pursuing incremental improvements. Continuous improvement begins with establishing performance gaps and prioritizing which gaps to attack and in what order. But it does not end there.

When improvements are achieved, new knowledge has been generated, and it is crucial to share learning takeaways across the business. One of the fastest ways to improve is an effective communication channel across all operations and subject matter experts throughout the business.

One-off cost-savings efforts can be appropriate, but they bring very few residual benefits. There is no substitution for small, consistent, incremental improvements which can be sustained and shared with others.

IMPACTS: Companies at world-class performance levels can usually deliver consistent unit cost savings of 3-5% every year!

How will you fight inflation?

Now that the U.S. economy is experiencing its first real bout with inflation in at least a generation, it’s easy to dismiss this experience as a once-in-a-generation phenomenon. Do not fall into this trap! There are hundreds of hungry competitors hoping you do.

Which of these five methods can help you stay competitive? Still unsure? Get in touch with Falconi, and we can help you decide. Contact us!

*OEE – Overall Equipment Effectiveness is measured by multiplying available production time by overall the overall quality index by the maximum standard speed/capacity of your operation. It can be measured at the production line and even equipment level as well.