In a healthy product-driven business environment, value is created in the manufacturing process. In fact, the entire value chain lives within the manufacturing (and supply chain) process. Case in point, if you take the of raw materials, conversion (labor utilities, maintenance, etc.), and overhead and total that all up for one unit; then compare that value to the market price for one unit, the difference is the amount of value created. Now some of that value is real and some of it is perceived which is created by dynamics in the market such as scarcity and other factors. For the focus of this post, lets focus on the concept of real value.
For many people (depending on the product), its just more practical to go purchase something than it is to try to produce it themselves. Lets look at a car for example. If everyone had to build their own car from scratch, the road would be a much scarier place. Not everyone has the time, talent, resources, or desire to build their own car – and there’s nothing wrong with that. By having auto-makers that we can trust to deliver a quality vehicle at an affordable price gives us all the freedom to focus on the things that we are great at or love to do. In other words, having skilled mechanics / technicians, robust quality assurance, and reliable and scalable manufacturing processes to build our cars for us, they are creating value for our lives. And because of this, we are happily willing to pay them more than the combined cost of raw materials, conversion, and overhead for our car. This is the real value that is created by the manufacturing process.
By creating real value for the end user, the manufacturing process is also creating wealth for the company. One of the most important roles of marketing and sales and some of the other demand-side business functions are to transform the value created in manufacturing into cash.
In the previous post titled: Measuring Plant Performance by the Common Denominator in Business, we discussed the importance of measuring plant performance in terms of cash and then having the tools in place to communicate performance as frequently as possible, if not in real-time, down to the value creators themselves, the shop floor operator. In order to do this, you have to understand the value of finished working capital on a unit by unit basis (or series of value-added steps). This allows you to identify the amount of value created in real time, which can be measured against conversion costs in real time. The difference can be viewed as manufacturing profits. This creates the possibility of allowing the manufacturing executors to understand and share in the success of playing their role in driving wealth into the company. This also lays some of the ground work for a culture of continuous improvement since it enables greater financial incentives for increasing plant profitability, which we’ll dive into for our next post.
© Calvin L Williams blog at calvinlwilliams.com . Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.