A basic lesson in management trainings is that a true first-line manager does not get involved in operational issues. This statement cannot be argued with. Even if we know full well that a crisis – especially if we are talking about a global economic downturn – must override certain management principles. Although the COVID-19 crisis did not change the success rate of the strategic versus operational division of labour, the need for strategic control of operational decisions by owners has increased considerably. One of the very massive cost items in this area is the cost of materials, where the crisis is creating new principles for decision-making.
Control of petty cash
When we talk about the importance of the cost of materials, we are generally looking at the impact of materials that are more familiar to the public and more visible to the eye, and it is, of course, understandable that in times of crisis, controlling this leads to cost reduction. But when there is a real crisis – and COVID clearly led to such a crisis – it is not only the control of materials that are more visible to the eye that comes to the fore. If we want to show the level of operational control that has been triggered by the pandemic, it is easiest to focus on the changes in the production of parts and equipment. After all, parts manufacturing is typically in the “small change” category. At least, that is what the average businessperson thinks. It is certainly not a segment that even the top managers of manufacturing and production companies would consider to be an important element of their company’s image and profitability. Even those who are more deeply involved in the subject are not able to make a clear assessment of the specific areas where substantial savings can be made. Although this has been an area of increasing concern for decision-makers since the global crisis of 2008, the focus is mainly on the need for procurement to drive down prices and negotiate ever-greater concessions. And since the manufacturing side wants to get as many orders as possible, it is perfectly adapted to the game. You give the procurement people the price they want, you give them the concessions they can show management, and everyone is happy. This is typically the phenomenon that doesn’t need to be pushed, that works well the way it has traditionally worked out. But the situation is different in places where, in the latest crisis, the top decision-making position in the production company has been filled by a manager who understands the processes, has seen them, and has perhaps been part of the game that has been played out during their career. Well, there, a profoundly serious internal control system was set up years ago, the essence of which is that internal designers and engineers – tools, components – are checked to see whether they really pay attention to the feasibility of the plans and, if they are feasible, whether they really meet the cost-effectiveness criteria for production. Can significant savings be made by a possible “more rational” design? Those factories that have started to undertake such audits have been shocked to find that there are “gaps” in the process, which, if filled, could give them a very significant competitive advantage in their own sector. New control processes usually create new principles, and this is no different now, and no different in the parts and tools industry.
The “still sufficient material” principle
The first of these principles focuses on the cost of materials. The choice of material to be used in the production process is a major factor in achieving cost-effectiveness in the manufacturing process, as for some sub-components, the increase in raw material prices can add up to 70-80% of the cost of the final product. The main concern is which material is the one that can provide the “still sufficient” quality. In many cases, even with the best of intentions, in-house engineers design in devices that are often several times more expensive in terms of material price, and which can be produced from much cheaper materials, while still offering the same functionality and lifetime as the much more expensive material. Or it may be the case that, for example, a component made from a cheaper material may indeed give a slightly inferior end result, but the difference is insignificant in the end-use. And as anyone working in this industry knows, this is mainly the area of “still sufficient but cheapest” solutions. Even for small batches there can be a significant cost difference, but for larger batches, the savings can be significant even on this factor alone. Moving the cost of materials in this direction is, of course, not only necessary in this industry. Rather, we would say that if it is worth paying attention to this in the area of parts manufacturing, it is certainly a topic of modern post-pandemic crisis management work that is worth paying attention to on the front-line management front. True, we usually have the internal experts to do this, but we should be aware that this is an area where employees, even managers, typically like tradition. And even if there is a demand for major change from the owners, which of course lands on the top manager, they still envision a solution within the familiar channels. But the managers who know the situation are well aware of this. It is no coincidence that there is a growing demand for an external expert to audit internal processes, clearly pointing out these problems and suggesting solutions. Since, in the production of parts and tools, we can often talk of multiples of 4-5 times for materials not chosen on the basis of the “still sufficient material” principle, and since the cost of materials is a major factor in the cost structure of companies, it has a major impact on their ability to generate profits. So, it is clear that getting this under control at the highest level is no longer a diversion, but an expectation, if you are planning a long and successful career as a business leader.