It may not be unusual for CFOs of manufacturing companies to have a strong focus on operations. After all, shop-floor efficiencies can play a big role in financial success. But just how strong should that focus be?
At Thyssenkrupp Aerospace North America, CFO Doug Penner says he spends at least half of his time on what he considers operationally oriented activities. It’s easy to see the value. More than half of the company’s bottom-line profit over the past four years has been directly attributable to new operational efficiencies and cost improvements, Penner says.
Spending much of his time traveling to the company’s 11 plants in North America, Penner visits the larger ones three to four times a year and the smaller ones once, touring each plant and talking with the plant manager. “I’m able to pick up on opportunities or issues they’re having,” Penner says. “You can’t get that if you don’t get out on the floor. Then I can relay what I’ve learned to my staff in order to quantify the issues and their solutions.”
Part of the German conglomerate Thyssenkrup AG, the company supplies processed metal materials and supply-chain management services to aerospace companies and their suppliers. Penner’s operational attention tends to fall into five buckets: machine utilization, space utilization, labor productivity, vendor costs, and packaging and shipping costs.
For a manufacturer, the “run time” of its equipment is vital to financial health. “The more metal a machine cuts, the more we’re going to get paid,” Penner notes. “So getting the run time up is both an efficiency measure and a way to meet revenue objectives.” It’s important to understand why machines are down, and how productivity can be improved through materials staging, process flows, equipment staffing, and trying out different shift arrangements and floor layouts.
Visiting plants is also important for understanding the financial impact of incoming supplies. “Sometimes we don’t have control over what we get from raw materials suppliers,” Penner says. “When a lot of material comes in that wasn’t planned for, it takes a lot of labor to receive it, tag it, move it, and store it, and it takes up space, which is money.”
That’s a frequent topic of discussion with the plant managers. Penner asks them for a few different ideas and solutions for material storage and crating, then has his team analyze their relative effectiveness.
Sometimes space issues get so pressing that the only answer is to add space. “I’ve made a lot of investments in real estate in the last three years,” Penner says, “and I never would have been able to get in front of that if I had not been out there talking to plant managers and understanding the business volume that was coming.”
Penner also has overseen an operational initiative this year aimed at reducing working capital through more efficient use of raw materials. In some cases, the company had been seeing increased holding costs for materials inventory, driving up working capital.
The company receives different-sized shipments of titanium and aluminum. It assigns to the materials “part numbers” (which other companies often call stock-keeping units, SKUs) depending, in the case of aluminum for example, on whether the metal is in plate or sheet form and its temper, alloy, and gauge.
A key financial metric is how fast such shipments can be converted to revenue. “Replenishing a low-demand part number with, say, a 16-month supply based on the supplier’s minimum-order requirements does not help us meet our working capital targets,” Penner says.
So the company has been looking for – and finding – ways to produce more “customer parts numbers” (i.e., finished products ready for shipment) out of single raw-materials shipments. “Having the right amount of inventory at the right time is crucial for us,” Penner says. “We cannot have a supply-chain disruption stop an aircraft manufacturer from building airplanes. At the same time, it’s costly to have excess or slow-moving inventory levels in order to ensure that supply. It’s a very delicate balance.”
Even CFOs of service companies should pay close attention to operations, Penner counsels. It’s probably harder to have a major impact there, he acknowledges. But “it’s about the basics. As the CFO, you have to understand how the business processes work and how that translates into the company making money. If you don’t, I don’t know how you’re going to understand your cost issues, margin issues, or financial statements.”