Anyone involved in continuous improvement and lean transformation has heard that flow is important, but why? When we look at flow, it's not just about the materials in the manufacturing operation; it's also the flow of information through the support functions of your business. The flow of both information and materials is critical to reducing the time elapsed in the cash-to-cash cycle for your business. This time period from when you pay for expenses and materials related to an order until you collect on the invoice for the products produced is called the cash-to-cash cycle and is an indication of the amount of cash tied up in your business. Minimizing the amount of cash invested in the business can make the difference between survival or bankruptcy in the current economy.
When you look at your cash-to-cash cycle and the time elapsed in it, you need to go through your whole process from the point of order entry to actual collection of the invoice sent to your customer and do a current state value stream map of your process. In many organizations, the time consumed in the information flow, both pre-and post-production, can be longer than the material flow time through production and is also a cash drain on the business. While the pre-and post-production costs are generally payroll costs for the sales, customer service, engineering, production control, purchasing and accounting functions involved with placing and processing an order, they are a real cash outlay related to an order. When you go through your process and produce a current state value stream map, any inventory accumulation of paperwork or materials is an indication of a delay that increases the time lapse in the cash-to-cash cycle and increases the amount of cash invested. These are funds that can't be used for such things as investment in new products, capital equipment to reduce direct costs of goods sold or expansion of distribution channels at a time when credit markets have tightened up and made loans for these activities difficult to find.
Whether your business is a make-to-order or a make-to-stock operation, you have these inventory accumulations in both information flow and material flow that consume cash. What's critical is identifying them in your value stream map and then figuring out, with your team involved in each step of the process, how to minimize these delays in the information and material flow to reduce the time in your cash-to-cash cycle. Using the tools of lean, your teams can brainstorm process improvements to move from batch to continuous-flow operations everywhere in your business. Everyone can easily see the work-in-process inventory that accumulates in a batch production operation, but most of us don't equate the stack of orders waiting for order entry or the queue awaiting credit approval in accounting as inventory. Yet, that's just what it is.
Do you order unique materials for an order after order entry and release for production by accounting and engineering? Do you schedule that order for production based on the due date of the material, or does production control wait to schedule production until the material has been received and processed into stock? Does your MRP or ERP system process every night so you can react quickly to orders and production control scheduling or do you process weekly so everything sits until the next week? All of these interruptions to both information and material flow increase the elapsed time and the amount of cash invested in the business. While many companies have looked at continuous improvement and lean transformation as a way to improve quality, delivery, and to reduce the cost of goods sold, many of them have not looked at these methods as a way to improve cash flow.
When organizations embark on a continuous-improvement journey, they initially find that their balance sheets look worse as inventory is consumed and their assets decline, but they are pleasantly surprised at the increase in cash and the time reduction in their cash-to-cash cycle. Do your organization a favor and get with your CEO and CFO to start a program to speed up the flow of information and materials and eliminate the queues to reduce the time your cash is tied up in the business.
Ralph Keller is president of the Association for Manufacturing Excellence, an organization dedicated to cultivating understanding, analysis and exchange of productivity methods and their successful application in the pursuit of excellence. He has been an operations practitioner for the past 35 years.