Creativity Before Capital: Think Carefully Before Investing Capital To Increase Capacity
By Ken Gaunt & Dan Ploger
Planning & Operations
Universal Advisor , 2004 Issue No. 2


According to many economists, the days of cost cutting are over. Thanks to a slowly recovering economy, companies will soon begin investing in new equipment, replenished inventories, and new staff. But why? Companies taking this path without close assessment of their current situation run the risk of accumulating unnecessary assets. Instead, it’s important to proceed cautiously. Spend capital and add to headcount only after production processes are running as efficiently and effectively as possible. In other words, use creativity before capital to increase capacity.

New Equipment

Many businesses have put off equipment upgrades for too long and are now in desperate need of new technology to remain competitive. However, these purchases should be made only if justified by a life cycle cost benefit analysis; if not justified, companies run the risk of buying what they don’t need.

For example, one heavy equipment manufacturing company believed they’d outgrown their space and planned to build a new plant. Upon further analyses, we found that the company was using only 65 percent of the existing space due to poor product flow and excessive in-process inventory. By improving material flow and production scheduling, the company eliminated the need to spend $200 million on a new plant. Additionally, improved materials management allowed the company to discontinue leasing 1 million square feet of off-site warehousing, saving $1.6 million per year.

Inventory Replenishment

Investing in inventory replenishment can have even greater pitfalls. Certainly, companies that have yet to institute lean or just-in time production systems must have inventory on hand to meet customer demand, but consider the associated obvious and hidden costs: breakage, obsolescence, storage, salaries, interest, and more.

For each dollar value of material in storage, it costs about 38 cents a year to hold it. Inventory becomes a liability, creating a cash drain in organizations not yet lean enough to manage their production schedules efficiently.

Often, holding higher-than-necessary inventory levels masks underlying deficiencies, such as unproductive scheduling systems, ineffective preventive maintenance, and excessive change-over times. It’s important for companies to explore and address the underlying causes creating the need for elevated inventory levels. The strategy should be to produce what’s needed, when it’s needed, without excess.

New Staff

Before hiring additional people, management should challenge current staff to identify ways to produce more with less, by using creativity to identify waste. Organizations should consider training their staff in continuous improvement methodologies such as lean manufacturing, problem solving, kaizen, or rapid improvement. However, training alone is generally ineffective. To capitalize on creativity, there must be a system to channel the creative element of your management team and staff toward a consistent direction and focus. The goal should be focused improvement in the right areas, not generating random ideas.

A Systematic Approach to Operational Excellence

Consider investing in developing and deploying a systematic approach to operational excellence, where cost-cutting habits evolve into skills that allow staff to continually identify and eliminate waste. Once these skills and habits become institutionalized elements of the daily management systems and a way of life, improvements will accelerate.

If you anticipate increased demand that will require you to increase capacity, consider taking steps to identify “hidden capacity” before blindly investing capital on more assets. Establishing a system to drive organizational excellence is a long-term endeavor; however, there are short-term paybacks that can be realized. Consider the following actions:

• Establish and articulate a clear and elevated vision for the organization that establishes the direction for achieving operational excellence. Everyone in the organization must be able to relate to this vision and understand their contribution to achieving it.
• Create a business plan to support the vision that includes goals and objectives for improvement in all parts of the business. Organizations often ignore large sources of waste in administrative and support functions such as purchasing, preventive maintenance, engineering, quoting, sales, and quality.
• Implement a balanced compensation system that establishes performance expectations. The system should link directly to the business plan. A balanced compensation plan, based on valid measures of continuous improvement, true operational efficiency, teamwork, and short-term results, will promote a culture where continuous improvement initiatives can survive, thrive, and produce tremendous results.
• Implement a business operating system to monitor and measure company performance. This system should include performance measures that cascade to all levels of the organization.
• Invest in improving workforce skills in continuous improvement methodologies. Develop a training and education plan that supports the improvement strategies set in the business plan. Plans should be established to educate staff on a just-in-time basis, where they learn specific improvement techniques when the opportunities exist to apply those skills to a specific improvement objective.

For these measures to be successful, management must devote their complete commitment to continuous improvement — this means active participation. Too often, management participation and reviews only occur when results are less than optimal. In this environment, employees fear the boss and conceal problems; therefore, necessary resources aren’t provided for continuous improvement, and teamwork is nonexistent. Management must create a culture based on trust and open communication. True progress can only be accomplished and sustained in an environment where information and assistance flow freely through the organization.

The Choice Is Yours

Companies can either persist in the belief that the only way to increase capacity is to invest capital and human resources, or they can take a holistic approach — the preferred approach — to continuous improvement. The results will be measured not in terms of assets (equipment, inventory, and staff) but in continuing sustainable reductions in waste and non-value effort — as well as the dollars that return to the bottom line.