By Corey Pappel
Manufacturing is expected to grow over the next few years in the US. A recent MAPI foundation report predicts US manufacturing growth will outpace GDP growth in 2015 and 2016. Industry growth is a great opportunity but doesn’t guarantee one’s success.
We believe efficiently meeting growth goals will be a real challenge for most organizations. Unclear economic times and increased capital spending requirements will make committing future capital a greater challenge than it has been historically. The winners will be innovative leaders who can confidently add “as-needed” capacity by unlocking hidden opportunity in their existing assets and investing in high impact, low-cost capital.
Many Demands for Capital
A recent survey of US manufacturing executives showed that 57% believe their current assets are at “near full” capacity. Conversely, only 7% of executives felt their assets had significant unused growth capacity. This “near full” perception is understandable given the investments leaders have made in tools like Lean and Six Sigma which are designed to get the most out of their capacity. Because leaders perceive a lack of capacity in their existing assets, they will turn to capital intensive options when large-scale growth is required.
Unfortunately, cash to fund growth may not be as readily available as it has been in the past. Data shows capital spending is already growing faster than sales (figure 1), which means additional capital spending will face higher scrutiny.
Capital budgets will also be strained by increased demand for spending to sustain existing equipment. US assets are the oldest they’ve been in over 50 years, and leaders with limited budgets will have to choose between upgrading existing assets and creating new capacity.
Lastly, committing capital to growth will be challenging for leaders because of the uncertainty surrounding future economic conditions. Confidence in one’s growth plan will be lessened by the decline in oil prices, European and emerging market uncertainty, and currency fluctuations. Layer on top of this the worry that more than half of all major capital projects miss their cost, production, and/or schedule targets. Heavy capital investments will be a risky cornerstone for growth given an unknown market future and the typical under performance of major projects.
Overall, growth opportunities may exist for manufacturers, but capitalizing on them will be more complex than in the past because of limits on the amount of capital available to commit to this growth. What we will discuss next is a unique approach that a few organizations are following to grow with significantly less capital.
Growing Companies Can Take a Different Approach
A small group of manufacturing leaders are capitalizing on growth in the face of uncertainty by looking at opportunities and investments differently. These leaders are utilizing an approach we are calling Zero Based Growth to create low-cost, low-risk capacity growth. Through this approach they are:
- Realizing 10-100% more capital-free capacity in their existing assets
- Delivering 50+% capacity gains from minor capital investments at a fraction of the cost of their major project alternatives
- Reducing capacity growth planning horizons from years to weeks
We call this approach Zero Based Growth because it builds on Zero Based Analysis (ZBA), a methodology for finding all of the theoretical opportunity in a process. Zero Based Growth uses a rigorous technical understanding of asset capabilities to find rapidly deployable, low-cost growth options. Where traditional approaches usually increase investment proportionally to growth goals, Zero Based Growth-minded leaders achieve higher growth with a lower relative investment (figure 2).
Rapid capital-free improvement can be achieved when traditional limits and constraints are challenged to expose new opportunities. Leaders generally find 3-4 times more opportunity than they had previously by utilizing ZBA as a foundation for growth planning.
In one example, one leading biological products manufacturer was able to realize an 80% capacity increase in a matter of weeks without capital investment. They initially believed their existing plant was nearing full capacity and were considering a multi-million dollar capital expansion. Using ZBA, they discovered the plant actually had over 130% in untapped capacity potential. They quickly grew capacity without capital by first making this magnitude of opportunity visible.
In situations where additional capacity is required, Zero Based Growth-minded leaders are able to identify focused minor investments that unlock significantly more capacity at a fraction of the cost. This offers a much more attractive investment when compared to the traditional approach of building a new line or the entire facility.
A leading food company had a new product with rapidly growing demand and planned to invest in another production line that would cost millions and take a year to build. By systematically challenging technical process limitations leaders were able to create additional capacity in all but one piece of equipment. Instead of major capital, leaders re-purposed an idle machine and placed it in parallel to the current line and increased output 50% in one tenth of the time and cost of the proposed expansion line.
Zero Based Growth-minded leaders shorten their response time to add capacity. This allows them to reduce their planning horizons to a period where forecasts are more accurate. Maximizing growth from quick-to-implement improvements ensures leaders can grow capacity and allocate capital with more certainty while avoiding or deferring major capital investments.
Capital planning and growth investments will become increasingly important as leaders look to capitalize on growth and expansion in the upcoming years. Innovative leaders will use a Zero Based Growth approach to stretching capital budgets and efficiently meet growth projections with confidence.
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