In the current economic climate, many manufacturers are coming under continuous pressure to cut down on their costs from both the market and shareholders. In particular, shareholders expect them to maximize revenues at an absolute minimum of cost. Besides this, consumers (the market) expect to receive the best products with regard to quality, timely delivery and price.

All of these requirements then lead to several questions, particularly in the automotive manufacturing industry: How can car makers improve the efficiency of their operations and provide high quality products while optimizing their capital? How do they offer the maximum value possible to customers at a lower cost? How do they optimize cash flow while at the same time, continuing to pursue the objective of cost reduction?

Breaking Down WIP Inventory in the Automotive Industry

Management of inventory is one of the key areas that contribute to the enhancement of any manufacturer’s results. As a matter of fact, inventory levels are so essential to financial results in manufacturing that they are often quoted as a percentage of sales. If a manufacturing plant reports a high percentage of inventory when compared to sales, it is operating at low efficiency.

Within the automotive manufacturing sector, Work In Process (WIP) is one of the key inventory categories that affect efficiency. In this context, WIP refers to any materials, assemblies or partially completed automotive parts which are not yet considered finished goods, but no longer count as part of the raw materials inventory.

In the West, Lean manufacturing is a methodology that has become synonymous with efficient production. Toyota, which is arguably the most efficient car manufacturer today, is one of the best illustrations of the application of the Lean methodology used to improve the manufacturing process. The company strives to WIP in two major ways:

1. Just-In-Time Production

Efficient production based on lean processes stresses on suppliers to manufacture just enough parts that will enable every order from customers to be put on the assembly line when needed, hence the concept of Just-In-Time. It requires intense effort from Toyota and its major suppliers that they only manufacture what is needed at the same or lower cost than in mass production.

The prerequisites to achieving this goal are attention to detail when designing the processes required as well as the development of a collaborative environment with the company’s suppliers. The partnerships are not by accident they are necessary aspect of the idea of Just-In-Time manufacturing.

A JIT system of inventory control is popular with both smaller manufacturers and major players in the automotive industry as it lets them make more efficient use of capital while enhancing cash flow. Particularly in the case of smaller businesses which are just starting out in the automotive industry, this model not only reduces the amount of startup capital required, but helps them to avoid tying up resources in large amounts of unneeded WIP inventory.

2. Flexible, Reusable Processes

Before Toyota pioneered Lean manufacturing, traditional automotive manufacturing plants that produced body parts were dedicated to pressing one part for very long periods, since it could take several hours or even days to switch the tooling within the press to press a different part. In this case, changeovers were often resulted in extended periods where continuous production was interrupted.

To avoid this, each press had to produce massive quantities of each part at a time parts which then had to be stored until they were needed. As a result, capital needed to pay for steel, operator wages, and the storage space were tied up until the entire process of manufacturing a finished product was complete.

Toyota decided to manufacture vehicles in batches of one, where a press only needed to press a few copies of each part. This was made possible by clever design that meant the parts were shared across models. This also meant that, when building cars in batches of one, it was not necessary to make one pressing of each part at a time.

Conclusion

Once manufacturers visualize their work through the lens of Lean manufacturing processes, they can then take steps to optimize workflows and deliver value. As shown in the example of Toyota, an effective way to do this is limiting and controlling Work in Process in the automotive industry. Control of WIP lets teams work faster, deliver higher quality and enjoy a healthier work environment.

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Applying Six Sigma to Increase Cash Flow

Thanks to Six Sigma, companies around the world now operate at optimum efficiency. Six Sigma is a goldmine of innovative and effective strategies for continuous improvement and global market share. Evolving technologies and new markets mean there are plentiful opportunities to create innovative and customer-focused products. But, as with all businesses, issues like waste and variation slip through the cracks. None-value adding processes and over-processing are two of the main culprits of inefficiency. Consequently, they also increase costs, sapping your cash reserves. It’s important to maintain a strong cash flow for everything from the day-to-day running of your business to corporate expansion. If you wish to maximize profits and save money, you must first improve quality. Six Sigma can help.

Take Care in Selecting Projects

Simply applying a bit of Root Cause Analysis or some DMAIC won’t see any drastic improvements. If any. Improving processes, quality, cash flow, and so on, takes time. If you don’t put the effort in, you won’t see the results. Improvement projects are a cornerstone of Six Sigma work. It’s important to consider them carefully. Firstly, make sure you can link any potential cost savings to Six Sigma implementation. Secondly, be sure to analyze any potential projects for their financial benefits before pursuing them. Thirdly, techniques like Pareto analysis can help shed light on greater opportunities for investment return and cost savings.

Six Sigma tools allow you to analyze your current processes to see where inefficiencies and defect are holding you back. Factors like defect affect the quality of the products you produce, leading to losses further down the line. Similarly, over-processing (a Lean problem) and others wastes create unnecessary costs, bleeding your cash reserves. Once you remove these negative factors, however, you will start to see great increases in efficiency, profit, and overall cash flow.

Defining Your Project Selection Measures

It’s important to define, confirm, and observe strict financial guidelines throughout Six Sigma improvement efforts. This will help lay down any expectations you may have, as well as verify whether your plans are appropriate for an improvement project. Setting out your priorities early on will help allocate resources, maintaining strong cash reserves, while only spending when and where necessary.

Moreover, you could use financial guidelines if a manufacturer discontinues a low-cost part. The fact that the part is no longer available poses a problem. How are you to deliver a quality product, and generate high revenue, if you can’t replace the missing parts? You could launch an improvement project here to locate a new provider for the part, without affecting your gross margins or lead time. Six Sigma is a useful tool that can help you maintain strong cash flow for all your activities. Don’t underestimate what it can do for you!

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What is Your Working Capital Ratio?

In case you don’t know, your working capital ratio is a liquidity ratio. It measures whether your business can pay off its current liabilities using current assets. As such, your working capital ratio allows you to gain a deeper understanding of your company’s liquidity. It’s essential for business owners to understand the necessity of the working capital ratio. You can calculate your working capital ratio as follows:

Working Capital Ratio = Current Assets/Current Liabilities

But what are current assets and liabilities? Well, they are usually debts and other payments that you should make. It’s best to pay them using current assets such as cash, cash equivalents, or marketable securities. You can quickly convert current assets into cash. They are also more flexible than fixed ones. This means you are far more likely to have cash on hand to pay debts when you need to. We call it the working capital ratio as it relies on working capital calculation. As your current assets exceed your liabilities, your company will have enough cash to maintain everyday operations.

Improve Your Cash Flow with Six Sigma

Using Six Sigma and related methodologies like Kaizen, you can cultivate a culture of continuous improvement. It is this precise discipline that allows you to transform your business. You can apply Six Sigma ideas at just about any level of your organization. Six Sigma can also help where cash flow is concerned. Using Six Sigma ideas, you can drastically increase your cash flow so you can easily manage liabilities like debts and other costs. It’s important to note one of the most powerful driving factors behind strong cash flow.

Accounts Receivable and Revenue Growth

For accounts receivable, you should not consider the order completed until you have received payment. Your ultimate goal should be to receive payment as quickly as possible following a sale. But the perfect order can be a tricky thing to achieve. You must ensure the customer receives the right product at the right time, in the right quantity and condition. By consistently delivering perfect orders and reducing order-to-delivery lead times, you can receive payment quicker. Six Sigma will help you streamline this process so you can maximize customer satisfaction and your company’s success.

Similarly, using Six Sigma techniques, you can identify positive and negative customers. Base your assessment on how profitable their individual accounts are. This allows you to retain your good customers while developing new and profitable ones that increase cash flow. Then, reducing your inventories to become most cost-competitive helps pave the way for a Six Sigma level of quality.

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These very same tools can help us save on our shopping needs as well —whether it’s shopping for groceries, clothes or even a major appliance or car. Before we continue, let’s review some of the major causes of waste in business.

1. Excess inventory
2. Deviations
3. Poor quality

Mindful Spending

These same issues are the cause of our financial shortages. How many times have you bought something that you really don’t need? This creates too much personal “inventory,” which creates clutter. Now you can’t really see what you have and run the risk of buying the same items again, thus creating a vicious cycle.

Deviations, in what we buy, means purchasing something you wouldn’t really use or eat or wear under normal circumstances. Once again, this creates cash flow issues and waste, because you won’t use it.

In the hopes of saving money, you buy cheaply made products that will eventually fall apart. The number 1 rule is, what you buy must add value to your well-being in some way, otherwise do not buy it.

Lean Core Principles

Focus: On key issue(s) — in this case, your cash flow
Improve: By not purchasing anything that is not of value to you
Sustain: By monitoring how you spend and when you do most of your spending
Honor: Your commitment to the process, and to your goal of improving your cash flow

In business as in life, the principles are the same but the situation might be different. There are certain times when a well made expensive article of clothing is the right call, simply because it adds value to a given situation. Pick and choose your situations wisely.

For more information on our courses or services please visit 6sigma.com today!

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