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 Volume 5 : Issue 1
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The High Cost of Inefficiency.
The Fallacy of Best Practices.
Inefficiency is rampant. While this isn't news, it is alarming how drastically it can drain organizations of profitability. This has prompted a growing number of companies to question the standard-issue response of best practices and seek out more successful approaches to optimize their manufacturing operations.
But how does a company begin developing and implementing the kind of manufacturing efficiencies that make it more competitive and capable of higher levels of growth? For most organizations, the first step is to adopt the latest industry best practices. However, some forward-thinking organizations have decided to do away with the concept of best practices in favor of an approach that utilizes leading practices - and it has made all the difference.
Of Best Practices and Best Intentions
In theory, a best practice is a great idea: An established way of achieving specific results under specific circumstances, it saves companies the work of reinventing the wheel. Instead, they can simply reference the hard-earned lessons within their own company or that of an industry or business benchmark. The goal is usually to save time and money and facilitate a more consistent set of results. There is nothing wrong with that.
However, in practice, the concept doesn't always play out that way. For one, many companies find that while the practices that were identified or developed were undoubtedly the best solution at one point in time, a method or technique that is accepted as the best one moment is easily dethroned by an even better process, a regulatory change, a new technology or simply the natural evolution of a company.
Furthermore, best practices tend to take a one-size-fits-all approach. They seldom accommodate for a company's structure or resource limitations and invariably need revising and adjusting. What ensues is a negotiation process to find a compromise between a company's current state and the best practice it aspires to but can't quite reach - and this can take a long time. It is almost always more advantageous - and efficient - to create leading practices for a company based on their actual capabilities. A leading practice is a 'living' practice; one that is reviewed and adjusted constantly to ensure it is performing as expected, or one that is quickly corrected or improved when it breaks.
Enter Enterprise Optimization
Situations like the ones mentioned above have driven many manufacturing companies to utilize UHY's Enterprise Optimization methodology to adopt a leading practices mindset. The result? More streamlined processes, increased productivity and higher profits as well as a higher adoption rate, higher morale and employees utilizing their skills for higher-value activities.
To improve any given process, it is best to look at the entire world of that process, examining every step to identify and eradicate inefficiency. UHY's Enterprise Optimization methodology can be used to assess processes including, but not limited to, manufacturing operations, supply chain, planning and scheduling and all the inputs and outputs that feed into a specific process and out of it.
Notably, UHY's Enterprise Optimization methodology garners input directly from employees instead of imposing a best practice on them. Involving the employees and using their input to develop new, optimized processes naturally leads to greater adoption and ultimately greater sustainability of the new processes. This, in turn, minimizes or eliminates the need for a separate change management initiative, thereby reducing the cost to implement.
To identify and articulate efficiency opportunities, UHY's Enterprise Optimization methodology looks for waste - activities that consume time and resources without providing adequate value to the customer. It is critical to have a formal system in place that not only identifies waste, but one that will help maintain the leading practices that have been implemented. One such system is UHY's Optimal Performance Management System (OPMS™), which is a set of informational and behavioral routines that enables client management to quickly recognize and execute effective corrective actions when actual conditions fall short of the objectives. OPMS™ also provides critical accountability and change-management tools, enabling clients to not only recognize the key performance information, but also identify how to change behaviors based on this information. Users of OPMS™ include all levels, from operators to managers and executives. OPMS™ allows leading practices to be sustained while also remaining flexible enough to adapt to a company's ever-changing environment.
The Root of the Cause
At the heart of this mindset is an all-encompassing view. Instead of just looking at a single process, it looks at the big picture. Clearly, no organization can afford to turn a blind eye to manufacturing operations. A well-executed Enterprise Optimization project utilizing leading practices will capture 80% of the waste, while cultural changes in the company and a sustainable continuous improvement program, such as OPMS™, will capture the remaining 20% over time.
But what is becoming just as clear is that the solution may not lie within traditional notions of best practices. More and more companies are now disregarding the belief that there is a single answer for every situation. Most successful companies are ultimately in favor of a leading practices approach combined with a sustainable continuous improvement environment. As many are finding out, there is a strong relationship between building a culture of continuous improvement with leading practices and producing a sustainable return on investment, regardless of changing market conditions and business requirements.
Article written by Frank J. Fenello, Managing Director, UHY Advisors (Atlanta, GA)
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Manufacturing Jobs: Lead, Follow or Get out of the Way!
The United States has been a leader in a number of areas throughout history. Early in our manufacturing history, the US had significant immigration that helped populate our factories with workers. Next, concerns regarding the factory owners taking advantage of workers were expressed including unsuitable working conditions, child labor and poor wages. These concerns led to the rise of Unions to protect workers' rights and US manufacturers focused on quality and working conditions for the US worker. When the great depression hit, many businesses were forced to either do more with less or close their doors. It was during this time, markets were expanded and some of the great technical advances were developed. Over time innovations in technology and education standards allowed manufacturers to be more efficient. This allowed US manufacturers to decrease the number of employees and increase wages for those remaining. As a result, there are fewer manufacturing jobs and people have turned to service industries, such as financial services and technology, for employment.
Other countries have watched and studied the US become a wealthy nation through manufacturing. Countries like Mexico and China have taken pages from our early playbook and have grown their economies through the exploitation of their cheap labor force. However, as noted on a recent trip to China, the manufacturers in these countries are finding it increasingly difficult to motivate younger workers to fill factory positions. To incentivize workers to continue working in the factories, pay scales have increased significantly over the years. However, the younger generations do not want to follow in their parents footsteps at the factory and many of the younger generation in these countries are looking to travel, obtain better educations, and earn a living in service industries. Consequently, many of the manufacturing jobs are now moving to smaller countries, such as Taiwan, Vietnam or the Philippines.
This cycle raises a number of questions. What happens when there is no longer a population within a country willing to work under poor labor conditions or for significantly lower wages? Can innovations in technology, updates in equipment and processes, reduce overall production costs to the point that finding a low cost workforce is no longer needed? Will, or has, the manufacturing industry gone the way of agriculture, in that the number of agriculture jobs has decreased significantly, even though food production has increased over the years due to Agri-businesses replacing family farms? Is tax policy the answer to bringing more manufacturing jobs back to the US?
Over the recent past, many foreign companies have been encouraged to establish manufacturing facilities throughout the US. Much of this encouragement has come in the form of tax benefits and various subsidies. These tax benefits and subsidies come in various forms, including the Domestic Production Activities Deduction, local real estate tax incentives, through the use of Payment in Lieu of Taxes (PILOT) agreements, sales and use tax exemptions for items used in manufacturing, Research and Development Tax Credits, Interest Charge Domestic International Sales Corporation (IC-DISC), and low interest loan programs for establishing manufacturing facilities in the United States.
Recently, some manufacturing facilities have shifted back to the United States. Some manufacturers have claimed savings from the depressed real estate market is making the move of operations back into the United States more affordable. Others are focused on customer service and the ability to put goods into the customers' hands quicker, by setting up manufacturing facilities closer to their customer base. Yet, a third group of manufacturers are looking to take advantage of closer fuel and energy sources by setting up manufacturing operations near hyrofracking sites.
However, there are major issues, both in the US and abroad, facing US multinational manufacturers in bringing the work back to the United States. Internationally, many countries have developed social programs that financially handcuff manufacturers into staying in their country. For example, to formally dissolve a company in countries such as China and many European countries, companies are required to pay severance to terminated employees, making the cost of leaving a foreign country prohibitive. On the domestic side there are also barriers from bringing capital into the US. Many multinational companies have earned profits over the years that have not been subjected to US taxation and these accumulated profits are not required to be taxed in the US unless the money is repatriated. Consequently, any company that does not need to repatriate funds will think twice before doing so. After all, why would they want to pay an additional 35% tax, if they can legally avoid paying the tax. With the focus on unemployment and job creation, unless the US government can find a way to get out of the way, this tax will significantly dampen the ability of multinational US companies to repatriate their earnings back to the US.
Article written by Michael F. Zovistoski, Partner, UHY LLP (Albany, NY)
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Manufacturing Industry Insight
UHY LLP recognizes that manufacturing companies require their auditors, tax specialists and business advisors to add value to financial reporting activities. That is why we combine the strength of business and financial expertise with a hands-on, "shop floor" approach to solving complex business decisions in these key segments:
� Aerospace & Defense
� Automotive Suppliers
� Consumer Products
� Distribution
� Industrial Manufacturing
Our professionals are leaders in the industry and take the steps necessary to ensure our client's future success by identifying and addressing new trends, accounting requirements and regulations. To learn more please contact a member of the firm's manufacturing practice in Farmington Hills 248 355 1040 or Sterling Heights 586 254 1040, or visit us on the Web at uhy-us.com.
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Published by UHY LLP News.
Copyright � 2011 UHY LLP. All rights reserved.
Our firm provides the information in this newsletter as tax information and general business or economic information or analysis for educational purposes, and none of the information contained herein is intended to serve as a solicitation of any service or product. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
UHY Advisors, Inc. provides tax and business consulting services through wholly owned subsidiary entities that operate under the name of "UHY Advisors." UHY Advisors, Inc. and its subsidiary entities are not licensed CPA firms. UHY LLP is a licensed independent CPA firm that performs attest services in an alternative practice structure with UHY Advisors, Inc. and its subsidiary entities. UHY Advisors, Inc. and UHY LLP are U.S. members of Urbach Hacker Young International Limited, a UK company, and form part of the international UHY network of legally independent accounting and consulting firms. "UHY" is the brand name for the UHY international network. Any services described herein are provided by UHY Advisors and/or UHY LLP (as the case may be) and not by UHY or any other member firm of UHY. Neither UHY nor any member of UHY has any liability for services provided by other members.
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