The Covid-19 pandemic has had a fundamental effect on our world, and in order to survive and prosper in the new normal, we are going to need to approach life and business differently. The need for medicines and ultimately a vaccine for this virus is paramount. We’ve seen the majority of deaths in those groups who are reliant on chronic medicines, the aged and infirm, and those suffering from heart problems, cancer, HIV & Aids, Tuberculosis and Diabetes to name a few. The ability of Pharmaceutical manufacturers to deliver increased volumes on time and in full is key to how quickly we become economically active and competitive in the “New Normal”.
Over the years working in and around the Pharmaceutical industry, with major manufacturers and 3rd party contractors, I’ve noticed a number of common approaches, all of which add complexity to the business and make it more difficult to deliver product to market consistently, and profitably for the business. The result of these are listed below
#1 Overall performance is below standard; Customer Service levels are low; Working capital is tied up in excessive inventory; High Level of write-off and destruction costs; Lack of medium and long-term Planning
#2 A silo mentality resulting in decisions being made with local optima vs organizational goals.
# 3 Action plans change constantly within a cycle, Focus on Cost, then quality and then delivery in an attempt to make up the numbers (Hockey stick effect)
# 4 An acceptance that this is just the way of doing business in this industry.
All the points above rear their heads during the day to day running of operations, and lead to improvement drives when they become unbearable. When a drive to improve is launched, the points listed above are seen as the problems, and not symptoms of the problems. People are tasked to “fix” the problems, and they focus in the all the wrong areas, putting in hours of futile effort with little or no improvement. Teams become disillusioned and slip back into the old ways of working. The outcome is # 4, this is the way it has always been done. The more often the cycle repeats itself, the more outcome # 4 is reinforced.
The lack of understanding of the science behind operations management, resulting in the incorrect focus is a major cause of improvement intervention failures. This is an industry culture, where learners aren’t exposed to operations management science in any meaningful detail during their education or internship. Businesses end up with constant tension between quality and productivity and the resulting belief that these can’t be optimised together. This is compounded by the lack of knowledge of how to achieve them together and the result is a shortage of medicines in the market, quite often without available alternatives.
There are two important points to consider when looking at your operations, they come from different business disciplines and are key to understanding where to focus management and improvement efforts.
The First Law of Manufacturing
“All benefits are proportionate to the speed of flow of information and materials.”
The caveat is that the information and materials must be relevant.
A Fundamental of Management Accounting
“A company will profit maximize when it makes and sells the products with the highest contribution margin per unit of its scarce resource.”
Manufacturing and Supply Chain processes don’t function in only one direction. As systems, they are bi-directional and the flow of information is as important as the flow of product. Variation impacts on both equally, and they are interdependent. The caveat “Relevant” was introduced by Ptak and Smith in the 3rd edition of Orlicky’s Materials Requirements Planning, in order to deal with a world that is getting more and more complex with each passing day. We no longer have linear supply chains, they are now complex adaptive systems, so the many of the rules that applied in the past are no longer relevant.
Over the years, management accounting has been replaced by cost accounting and this is evident in the way that we cost our products to determine profitability, for budgeting purposes and the way we measure performance. Cost accounting is backward looking and was designed to measure how we performed in the last financial period. Management accounting is forward looking and sets the standards against which we are measured using cost accounting techniques.
Looking at the fundamentals of management accounting above, the scarcest resource is the one that sets the pace of any process, and should therefore be used as the basis for calculating the cost of manufacture and determining product contribution margin. As the scarcest resource, this step in the process should become the focus in managing FLOW and metrics must support and promote that flow. We must also understand the impact of variable vs fixed costs and at what levels they apply to a business.
Looking at the three levels of business, strategic, tactical and operational, variable costs can only be applied to the strategic level, because of the extended time frame it covers. At the operational level, all costs are actually fixed. You can’t increase or decrease staffing or reduce overhead costs during the tactical or operating cycles, moving staff around the factory to impact costs on a product has absolutely no impact on the overall business profitability and can be likened to rearranging the deck chairs on the Titanic.
This is a likely outcome for some businesses post Covid-19. The increased cost of operations, will have a negative impact on working capital, and because of historical ordering patterns Inventory levels will increase, placing more pressure on working capital and ultimately cash flow. Suppliers will find themselves in a similar position, and will start selecting preferred customers to supply. The result is a vicious ever diminishing spiral, until it becomes impossible to operate. Do you want to end up in this situation?
Now is the time to start thinking differently about how you are running your business. To do this, you need to question what you are doing and ask the correct questions. Guidance is an email away. Drop me a line at dave@sacoaching.co.za and we can schedule a FREE online session to discuss the topic.
To find my handbook laying out the first phase of the FLOW based approach, you can follow this link https://lnkd.in/gjBwmJm
Yours in Compliant Productivity
Dave
About the author
Dave Hudson is a supply chain and operations specialist and executive coach with over 30 years’ experience, and currently 1 of 5 endorsed Demand Driven instructors on the African continent.