Expensive Capacities
Capacity as a resource has proven to be one of the main competitive advantages. Although the gap in operating costs between China and Western countries is slowly narrowing and even turning in favor of Western countries, it is unlikely that there will be any significant reversal in the global relocation of production destinations. One of the reasons for this is that so much capacity has been installed in China that after a certain point of production, everything beyond that is practically free (or costs the purchase price of raw materials).
What is the lesson here?
If you can increase your internal capacities by leveraging the internal capacity potential in production, logistics, and sales, then each additional product or service practically costs you no more than the raw material.
We worked on a project with a manufacturing company that had (and still has) a meteoric growth in the past few years. On the wave of joining the European Union and the funds that were available, this company invested significantly in its production and logistical capacities. We helped in business planning for sales and production and in the analysis of production costs. What the analysis of production processes showed is that their production of 25 working days worked effectively only 12 days, and 13 days were various planned and unplanned stoppages. If you stop at this and ask: What is the capacity of this company? The answer will probably be: Half of the installed capacity, and it is installed a lot.
Up to this point, there is no problem for this company and its growth. However, when the growth continues and the current level of production is no longer sufficient, it will need to increase capacities. Increasing capacities with cheap and partially non-refundable EU fund resources cannot last forever, so we have some less investment-based methods available to increase capacities. These are methods of process management and optimization. We said that the current process is such that more than half of the working time, production stands. This means, if production lines have an installed capacity of 2 million produced units, and you produce only 900,000 units, then you are working with less than fifty percent of capacity. All companies that buy additional production lines with fifty percent co-financing, and with a similar or similar arrangement of stoppages in production, are deceiving themselves if they think that these are cheap capacities. These are actually capacities that are twice as overpriced.
Three Solutions
A second example is from logistics. If your company receives and realizes one million transactions annually (one transaction is one item on a sales order that you received and shipped to the customer) and you have 20 workers in the warehouse, then your capacity is 50,000 transactions per worker/year (or approximately 4200 transactions per month, that is about 200 a day or 20-25 items per hour per person). If the number of transactions grows at a rate of 20% per year, you will double the number of transactions in five years. I just want to note that transactions do not grow linearly with revenue growth, but also grow by breaking down orders and ordered quantities per order and increasing the assortment and number of items. In order to compensate for this increase in the number of transactions, you have several options:
- To hire more people in the warehouse – this solution has a limit because after a certain point, additional employment has the opposite effect on productivity as congestion and confusion increase in the warehouse.
- To increase the warehouse – investment in the expansion of the existing or a completely new warehouse inevitably requires an increase in the number of people, which will give short-term results in the short term, but will also increase your costs and reduce competitiveness.
- To speed up operations in the warehouse – if you manage to increase the productivity of people who work in the warehouse, then you will be able to compensate for the increase in transactions and in this way, without large investments and with the same or slightly higher labor costs, achieve that you raise your capacity from one to two million transactions in the same warehouse with the same number of people, but much more productive people
If we consider the entire assets of the company as capacities or focus a bit more on the warehouse, we will find some more examples. For instance, assets come in various forms, and one of them is inventory of goods stored in the mentioned warehouse. Due to the constant pursuit of growth and revenue, inventory also tends to grow. This is easily explained because for revenue growth, we need a broader assortment and larger quantities to fulfill customer orders. Since inventory grows, the need for space to store it also increases. Logical thinking leads us to the conclusion: to continue growing, we must have larger inventory and a larger warehouse. However, that’s not true! The real truth is that the larger your inventory and other assets are, the more your growth is jeopardized because your investments increase, consuming your cash, and in the medium term, you will face problems, and in the long term, you may even fail.
What is the recipe then?
The recipe is simple: You can increase capacity by turning assets faster, not by increasing assets. In fact, assets multiply when you turn them faster. When you have 10 million euros in assets and turn them once a year with a profit rate of 10 percent, you will earn one million euros. However, if you turn that same asset five or ten times, you will earn five or ten million, and your asset will be multiplied.
According to the definition, economics is the science of managing scarce resources, and capacity is not only scarce but also expensive and an increasingly important resource. To optimize the use of this resource and to increase business capacity without significant investments in technology, at least three ways are available: eliminating excess from the process, productivity, and asset turnover.
If you want to increase logistics or production capacity, thus multiplying your assets and increasing profitability and cash flow without large investments in technology, feel free to contact us at info@logiko.hr and www.logiko.hr or simply call +385 91 222 0123.
“If you want to increase logistics or production capacity, thus multiplying your assets and increasing profitability and cash flow without large investments in technology, feel free to contact us at info@logiko.hr and www.logiko.hr or simply call on +385 91 222 0123.“
– LOGIKO TIM