Supply Chain Productivity

Waste is something you do that the customer is not willing to pay for. Remove it.

The Industrial Production (IP) Index has averaged about three percent annual growth over the last five years. Gases and welding supply industry growth generally tracks local industrial production in the regions in which a business operates. While three percent volume growth doesn’t sound too bad, the problem comes when the cost inputs to a business are growing more than three percent.

Some key cost drivers to businesses have increased dramatically over the last seven years. Iron ore (an essential ingredient for steel) costs are up over ten percent per year. The price of diesel has increased 11.5 percent. Wages are up 2.5 percent. And the cost of healthcare employee benefits have increased dramatically, which should come as a surprise to no one.

When costs are growing at a faster rate than revenue, it leads to what I call “the squeeze.” Operating profit, net income and free cash flow generation shrink quite dramatically very quickly. Whether you are a small, family-owned business or a large publicly traded corporation, free cash flow deterioration is very bad and problematic.

While the macro-economic environment is not always controllable, the good news is that a huge component of a company’s operating profit or cash flow levels are within a manager’s span of control. An organization must acknowledge that “cost creep” exists. It comes in two forms: general inflation and process degeneration. Implementation of a “productivity” or “continuous improvement” program will help control the cost creep.

Controlling Cost Creep
The first step to controlling costs is to understand your cost stack. Simply put, this is a high-level analysis of where the money flows out of the organization. Categorize the outflows into logical buckets such as regular payroll, overtime, hardgoods, vehicle expenses, etc. If you know your business, something in the numbers will strike you as “odd.” Partner with one of your best people and dig into the numbers.

Instead of delivering ten cylinders three days a week to the same customer, could you only go twice a week and deliver 15 cylinders? Just because you’ve always gone three times per week doesn’t mean it’s the optimal way.

The process of understanding the outflows will lead you to improvement ideas. You must have the mindset that no current process is 100 percent optimized. From there, pick a process to improve. The key is to remove as much “waste” as possible in the process. Waste is something you do that the customer is not willing to pay for.

Additionally, you may select a process that is riddled with defects. A defect is a flaw in any process that requires adding additional steps to the process to overcome or the omission of the additional steps which leads to a failed outcome of that process. Either way, processes that are laden with defects inherently add significant cost to a business.

In the gases and welding supply business, several processes are ripe for improvement. Start with the filling process and distribution cycle. These are typically very people-intensive activities with a fair amount of cost creep. For example, how much time does a driver and filler spend on non-value-added activities like searching for cylinders, re-sorting, re-loading, etc.

Don’t forget the back office function. Who does the invoicing? What’s their process? How much does it cost?

Think about your supply chain in terms of getting the finished product from the manufacturer to your customer, which could be everything from a welder, wire, even gas molecules. All the activities to make that happen are ripe for examination as waste exists in them.

Some examples:

  • Hardgoods – How do the majority of the hardgoods get to the customer? Think of it this way – every “touch” from the manufacturer to your customer costs money. Every link in the distribution chain costs money. Can some of the items sold be shipped direct to the customer? Are there ways to reduce the number of “touches” within your organization?
  • Wasted inventory – While it has become cliché to preach about bloated inventories, excessive inventory holdings directly affect cash generation. The equation is simple: More inventory equals less free cash. Think of it this way – almost no households shop for groceries once per year. It seems ridiculous to do so. The amount of cash required is prohibitive to most families…the cash needed at one time for a year’s worth of food is a lot. Even if you have room for all the perishable goods, they would likely spoil before consumed. Products you have in the warehouse may not “spoil” per se, but they do run the risk of being damaged. And what if you buy a year’s worth of macaroni and cheese, only to find out you are sick of it after one month? This could certainly happen. Customers’ requirements change over time. While the packaged gas industry is not exactly like a household’s groceries, the conclusions drawn are exactly the same. Products that are just “sitting” in a warehouse are wasted cash.
  • Cylinder delivery frequency – Take a look at your customers that receive the most number of deliveries. Is there a way to “condense” the number of deliveries with the same volume? For example, instead of going three days a week delivering an average of ten cylinders each, could you only go twice a week and deliver 15 cylinders? Just because you’ve always gone three times per week doesn’t mean it’s the optimal way.
  • Fees – Delivery, freight, fuel recovery, etc. These fees are meant to recover, or at least partially offset, real and substantial costs your business incurs. What are your billing practices for these fees? How much is your standard? Is your exempt customer list in need of senior management review?

Once you’ve worked on something to improve…measure, measure, measure the results. That is how you will know your solutions are working.

Improvement is Ongoing
Recognize that there is currently waste in every activity, and that some portion of the waste can be eliminated or minimized. This will improve the performance and the costs of it. From there, you may want to introduce established programs to continuously improve, i.e., Lean or Six Sigma. While these methodologies are regimented and usually done by experts, you can implement pieces of them by someone who does this consulting service. They can help ease you into this new way of looking at things. While bringing in outside help may cost money, if you are committed to supporting it, you will usually find ten times the cost in productivity savings.

You can then continue to make continuous improvement an integral part of your company’s culture.

Gases and Welding Distributors Association
Meet the Author
Jason Moural is the director of productivity and process improvement at Praxair Distribution, Inc., headquartered in Danbury, Connecticut, and at www.praxair.com.