This article discusses briefly the importance of feasibility studies before you embark on a large scale project. Project feasibility can be split in two parts: commercial viability and technical viability. The focus of this article is around commercial viability and in particular, the use of discounted cash flows to make a decision on a project.
The benefits of this exercise include:
- Confidence that you have made the right decision to continue with the project.
- A decision making tool to evaluate one project against another.
- An understanding of the profitability.
- Once complete, there will be a good understanding of market conditions and trends.
- A prediction when the project will pay back it’s investment.
At DBC, we advice our clients using three key variables to help decide if the project should be attain final investment decision or not. These are:
1. Net Present Value
Present Value is defines as the value in the present of a sum of money, in contrast to some future value it will have when it has been invested at compound interest. By converting all future cash flows to present values, we can start to compare apples to apples. The sum of these converted cash flows gives the net present value or NPV. From this one can conclude the feasibility of the project. As a general rule: NPV positive means the project is feasible.
2. Internal Rate of Return
As defined by wikipedia:
“The internal rate of return (IRR) on an investment or project is the “annualised effective compounded return rate”
rate of return that sets the net present value of all cash flows (both positive and negative) from the investment equal to zero. Equivalently, it is the discount rate at which the net present value of future cash flows is equal to the initial investment, and it is also the discount rate at which the total present value of costs (negative cash flows) equals the total present value of the benefits (positive cash flows).”
3. Profitability Index
As defined in Wikipedia:
The Profitability index (PI), also known as profit investment ratio (PIR) and value investment ratio (VIR), is the ratio of payoff to investment of a proposed project. It is a useful tool for ranking projects because it allows you to quantify the amount of value created per unit of investment.
Below is an example of the three variables completed for a client project which gave the following calculations:
|Payback Period||3.5 years|
|Decision||Accept the Project|
Besides looking at the commercial viability of the project, it is advisable to understand the technical feasibility. This may include aspects like:
- Development of Technology used
- Production Technique
- Complexity of the project
- Location of the project
- Ability for the system to solve the problem.
If you are interested in having your new project or investment opportunity analysed to asses feasibility, please reach out to us at firstname.lastname@example.org
This article briefly discusses the impact of stock outs in your business and how you can start to manage them based on the service level you want to offer your customers.
For any sales and marketing department within an organisation, stock outs are seen as a disaster. And there is good cause for that. Not only in terms of revenue loss but stock outs give loyal customers a chance to experience a competitor product. This may eventually cause them to switch away from their earlier choice.
However, moving back down the value chain, the supply chain department has to set it’s inventory levels to balance held up working capital, production output and storage space. And to do this, they must look to reduce costs and make the product price competitive. This almost always ends up in a heated discussion between production and sales blaming the other for stock outs.
To resolve this, you need to define the correct service level for which you will supply the product. A 99% service level means that there is a 1% chance of stock out. But this comes at a cost. Inventory costs will rise as you strive to meet that service level. However, depending on market conditions, most companies strive for a 97% service level i.e. 3% chance of stock out.
Once the service level is defined, we can work backwards looking at the variation of both delivery lead time and the customer demand. This allows production to set the following quantities:
- Maximum Stock Level
- Re-order Level/Point
- Safety Stock Level
- Minimum Stock Level
The benefits of this analysis include:
- Optimising your inventory levels.
- Confidence that your re-order point is correctly set.
- Ensure a good understanding between the trade-offs i.e. inventory costs vs. revenue loss
- Reduced friction between sales and production.
Are you interested in understanding more about this topic and how we can help you set the right inventory levels?
Drop us an email: email@example.com
This articles discusses the benefits of warehouse design using simple lean tools and techniques. It is important before you have built your facility to have thought through the process and potential areas of cost increase.
The example below is taken from a facility in Holland. It shows several cross-over points and a disconnect between the different spaces. This leads to confusion, an increase in costs, inability to deliver the product on time and poor expansion planning.
Applying lean tools and techniques during the design process can help get the most out of the space available. In recent weeks, we have been doing just that for a facility in Nairobi. By breaking down the manufacturing processes, we were able to identify process requirements, storage requirements, uncover organisational constraints and reduce non-value adding activities (waste).
Here are some of the benefits of doing this:
- Good understanding of dependencies in production process
- Most efficient use of space.
- Better planning to allow for expansion
- Cost effective layout of the facility by reduction of operating costs.
- Easy access and protection of materials and equipment.
- Improved production floor safety.
- Improved Ergonomics of the workplace.
The typical forms of waste to look out for include:
Transportation of raw materials, work in progress and finished goods costs money. Cost of the forklift, the driver’s salary and maintenance costs are just some of the savings when transportation is reduced. Furthermore, reducing excessive transportation reduces safety risks which could have led to a higher costs.
Inventory of materials is another waste generating form commonly seen in factories. Many factories because of poor layouts have to ensure that large piles of raw materials or work-in-progress are placed close to the machines to account for forklift breakdowns or shared resources. Subsequently, this leads to large piles of finished goods at the machine output. Therefore, when planning a facility look to reduce material build up given the constraints like night shift, security issues etc.
Excessive motion of your staff or machines is another form of waste. This could be excessive walking, bending or stretching. It also creates room for error during handling of either work in progress or finished goods. In some cases, this may have a direct impact in the defect rate at your facility. Limiting motion in the factory will also influence how you resource your production and manage the communication between operators.
Long waiting times for work-in-progress or finished goods has a direct impact on the ability for your facility to meet customer delivery times. For example, having only one lift to serve different floors creates waiting as it take time to load, lift and off-load. By introducing a continuous flow system in the facility, this will drastically reduce waiting time.
These are just a few of the examples of how you can improve layouts.
If you are looking to save costs, plan for expansion and get it right before you have set everything in stone? Drop us an email at firstname.lastname@example.org
When challenged with growth, some organisations tend to find themselves in a situation where they don’t really have the capacity to deliver. This articles discusses some of the few things an organisation can start to think about to create the space to grow.
Reducing the Product Options
This may sound strange but to a certain extent it may be applicable to your organisation. Many products these days are packed with features and options that manufacturers believe really differentiate their product. These features are additional to the core features of the product. Understanding what your customer really wants and removing some additional features creates space in the organisation.
Take a look at this world famous example, where World Foods was selling peeled oranges in plastic containers. Neglecting the fact that oranges already come with a natural container that keeps them fresh and juicy.
Secondly, you may want to reduce producing things that don’t deliver a business outcome or don’t align to your business strategy. These could be products or services that may have created you profit in the past but are just not applicable to current day demand.
Improve the Way You Do Things
From a lean perspective, this is really about focusing on value adding activities and reducing non-value adding processes. We have seen organisations that have several processes that are duplicated in different ways but still create the same result. You must spend time to identify these and immediately put a stop to them.
We have also seen organisations that have several different ways of doing the same processes in a business. This is where standardisation and operating procedures must be used.
Secondly, think about reducing the number of unnecessary sign-offs and controls in your business. There are many managers that throw unnecessary checks on a process to ensure accountability.
For example: an invoice check in an organisation we reviewed had to undergo six different checks before payout. When we interviewed the people checking the invoice, 4 out of 6 had no data to verify the goods and the amounts. They relied purely on the last person to have done his/her work properly.
Improve Efficiency in the Business
Work levelling is an important to creating capacity in your business. In lean production, Heijunka, removal of fluctuations in the production can be directly applied to your business process. To ensure this, everybody must maintain a good tempo of work within the business. Having people too busy while others are not, is a clear sign that you must address this. Sometimes this may be down to skills gap but smaller tasks can still be undertaken by junior staff.
Secondly, you want to limit very high peaks of work during some period and not having anything to do during the next. This is a big waste in the organisation. Resourcing correctly for the peak period also reduces stress on your staff. Thereafter maintaining other avenues of work during the low periods allows full utilisation of your resources.
Having a structured approach to these three key points is vital to you being able to create capacity for growth within your business. By mapping your processes in the organisation, assigning process owners and setting KPIs for each process allows you to have insight in where the capacity lies and when you can take advantage of it.
If you would like to hear more or continue this conversation, please send an email to email@example.com
This articles focuses on implementing four major changes to your organisation in order to enjoy long term growth.
Improve Accountability by Setting Proper Reporting Lines
An important element in a company when it begins to see growth prospects is transitioning the decision making from the founder to the relevant function heads. With this transition, comes an element of delegation and trust. It also allows people to take accountability of the decisions they make. In order to do this, an organisation must structure itself with the correct reporting lines.
In successful organisations, structure is given by dividing the organisations into different functions i.e. marketing, operations, sales, human resources, R&D etc. Depending on the size of the company the greater the number of different functions. Each function needs to be driven by a capable person. He/She will be accountable for the performance both within the function and the company as an entity. This is usually done by setting the right key performance indicators against a set of possible results.
For example, KPI: Profitability and the result is PBDIT of $100,000 after Year 1.
Driving the Strategy within the Organisation
An organisation’s strategy is realised by setting strategic goals and targets to ensure sustainable competitive advantage over the long term. Many companies which are beginning to see high growth patterns need to analyse both micro and macro business environment trends. Micro-environment being factors that you can influence: production, distribution, operations etc. Macro-environment being the factors that you cannot influence i.e. demographics, competition, social factors etc. By aligning the two environment trends, an organisation can create it’s strategy.
Driving the strategic goals in each business process allows them to be attained effectively. It also allows the company staff to align their daily work to these goals. A good lean tool that uses strategic business objectives to drive improvement is lean routines or KATA. These improvement routines can be implemented by:
- Identifying the Current Situation
- Determining the future state and
- Carrying out a series of experiments to reach the future state.
Below is an example of Coaching Cycle Demonstration
Restructuring Processes to be Lean and Efficient
Lean implementation allows you to view and improve processes by breaking them down into smaller steps. It allows a real change in mindset using a few very simple tools like quality in station, gold standard, KANBAN production, work levelling etc, to really drive continuous improvement.
A great example of Lean Implementation is given below:
Setting Priorities and End-to-end Thinking
This is one of the most important aspects to consider when encountering growth in the organisation. End-to-end thinking means that all decisions are based on a collective benefit to the company. For instance, if a company defines the priority to be profitability, then profitability must be viewed across the value chain from the supplier to customer.
In many organisation with an annual threshold turnover of $1 million, tend to have different functions with profit and loss accountability. Each function will compete to have the highest profitability. But this would end up over-pricing the product effectively becoming less competitive.
Setting priorities is also key to growth. Defining the priority and making sure every decision/task is aligned to this will ensure growth. A great example is the return of Steve Jobs to Apple in 1997 to save the company. At the time, Apple was creating a large range of computers. The priorities in the company were not defined or focused. By drawing a two by two matrix, he labelled the columns ‘consumer’ and ‘pro.’ And the rows he labelled ‘desktop’ and ‘portable.’ His aim was to focus the team on creating a great product for each quadrant. You can read more about it here.
Implementing these simple points in your business are valuable growth enablers. Define your growth strategy: restructure, redefine and prioritise your organisation and be set for long term growth.
For more information or if you would like to continue this conversation, please reach out to us at firstname.lastname@example.org