by Max Krug, Future State Engineering

As we wind down from the COVID-19 pandemic, businesses are transitioning back to some sense of normalcy and beginning to re-open for business. This transition period comes with a high degree of uncertainty and it will be extremely important that companies make the right decisions and consider the factors necessary to achieve success, specifically: ensure employee safety, and maintain a positive cash position.

To maintain a positive cash position, we have developed a list of factors to consider to preserve as much cash as possible and to generate as much cash as quickly as possible, so the business does not become cash constrained. Below is the list of factors to consider:

Minimize Operating Expenses
During the ramp up period, only bring back the employees necessary to establish flow of work within the organization. Any labor that is brought back that isn’t absolutely necessary to establish flow, will only create a drain on cash without contributing to the generation of cash. The key performance indicator that will determine if labor is being managed properly is the amount of work-in-process. If the amount of work-in-process sustains or declines, it is being managed correctly. If work-in-process increases, then too much labor was brought back, or the labor that was brought back is not working on the right jobs.

Turn Inventory to Cash
The quickest way is to focus on the work-in-process that is closest to shipping and only produce what is needed to satisfy the short-term demand of the customer. By producing only what the customer needs will accelerate work through your organization and will shorten both the lead-time and the cash conversion cycle. Another consideration to turn inventory into cash is to substitute material that is on-hand verses purchasing new materials to process a job, even if the substitute material is more expensive.

Minimize Risks
The risks to consider are two-fold: one being internal risk and the second being external risk. The internal risk that needs to be considered is the likeliness that something could go wrong with processing the job to completion. The external risk that needs to be considered is the risk of collecting cash, which includes the number of outstanding receivables with each customer, the payment terms, and the payment history of customers.

Focus on Capacity Constraint Resources
To maintain positive cash position the focus needs to be on the utilization of the capacity constraint resource(s), which determines the flow of the value stream. Utilizing the non-capacity constraint resource more than the capacity constraint resource will consume cash at a faster rate than generating cash. This may mean breaking jobs into smaller batches and only producing to the short-term demand of the customer. Prioritize the sequence of work through the capacity constraint resources by the customer need by date and highest throughput value first.

Produce to Customer Demand
Producing only to customer demand (not forecasts) is extremely important to maximize the cash flow across the supply chain. This requires a shift in thinking from minimizing cost to maximizing the generation of cash. To maximize cash flow, the information flow and product (or service) flow must be improved. Therefore, if the replenishment cycle for a product that your organization produces is two weeks, then the order size that should be produced is based on your customer’s consumption rate within that two weeks factored by uncertainty.

The re-opening of your organization is the perfect opportunity to shift the mindset within your establishment to rapid and remarkable improvement through the application of operational excellence practices and methodologies.

Side Note: Max Krug will conduct an Operational Excellence Lunch n Learn Series starting on June 9th. This 3-part series will inspire you to open your mind to a new perspective. The session topics include: Foundations to Operational Excellence; Employee Engagement: How to Get Buy-In and Accountability; and Improving Organizational Productivity. Register for all three at once at www.nwirc.org/events.
Update: If registering after series has started, we can send you the recording(s) so you can catch up.