In today’s competitive environment, it is imperative that manufacturing companies (and, frankly, all companies) are operating effectively in all key areas. In assessing your operation’s effectiveness, questions you should ask about your business include:
- Are you efficient in your manufacturing process?
- Are your purchasing procedures effective in reducing the cost of materials and services?
- Do you have policies in place for analyzing and establishing the best sales price for your products?
Policies and Procedures
Do you have documented policies and procedures in place in all key areas? Your policies describe what you want to do, while your procedures provide the details of how you will accomplish them. These procedures should be designed to be both efficient and effective. You must also assess your adherence to your documented policies and the results of performing required procedures.
Control policies and procedures include functions designed to provide internal control over financial transactions.
- Control procedures are important to limit fraud, reduce internal errors and identify external mistakes.
- Examples include traditional control procedures for purchasing such as the three-way match for goods received.
- Both policies and procedures are often documented in detail in the company’s accounting manual.
Business policies and procedures are used to describe processes addressing the financial aspect rather than the control aspect of certain functions.
- In purchasing, an example would include obtaining competitive quotes from alternative vendors.
- Companies may have specific business policies, but these are often not assembled in an overall document like an accounting manual.
- Of even more significance, detailed procedures often do not accompany the business policies.
Purchasing or Procurement
Management focus in this area is often on control procedures. While purchasing control procedures are essential as they can save real dollars, business procedures surrounding the purchasing function can be even more crucial and are often overlooked.
Most companies have policies in place for basic control procedures, such as the use of purchase orders, approval at the proper level, prenumbered receiving reports and three-way match. While basic protocol, you should still follow these common best practices, and management must also assess adherence to these control policies and procedures.
It is also critical to consider business procedures in the Purchase area. Hopefully, your company is performing procedures that would be considered “Best Practices” in the Purchasing and Procurement area such as:
- Purchasing is tied into the overall planning and production schedule.
- Purchased materials are available when needed by production.
- Specific procedures exist for initial vendor selection and ongoing evaluation of suppliers.
- Economic order quantities are utilized.
- Carrying cost of inventory calculated and used to manage inventory levels.
- Costs include finance costs, insurance, property tax, storage and warehouse and handling costs.
- Ongoing due diligence is performed in obtaining the best price.
- Price comparisons are regularly performed, and competitive bids are obtained.
- Consider if locking in prices might be beneficial.
- Compare pricing of related commodities and the impact on the cost of key materials.
- Evaluate specifications for materials.
- Consider other non-traditional purchasing methods.
- Use of commodity futures and hedging.
- Reverse auctions and other online sourcing tools.
- Shopping globally.
Evaluating Your Sales Functions
Everyone wants more revenue—but will increased revenue always translate to more profitability? It is critical to assess your company’s methods for developing sales, and, more importantly, to make certain that procedures are in place to focus on profitable sales. You should also consider whether there is appropriate effort in maintaining current customer relationships.
Manufacturing companies must have written policies and procedures for how sales prices are set, and proper approvals and reviews are needed. It is paramount that you use internal data related to your manufactured costs and external data documenting what your competitors are doing. You should also record customer reactions to price changes so that you can better anticipate the impact of future pricing decisions.
The company’s philosophy for customer service must be translated to a detailed plan. Procedures should be in place, and management should assess the adherence to these procedures. Metrics should be established to determine the rate at which procedures are followed. Also, track external data on customer service such as returns, complaints and canceled orders. Customer satisfaction surveys should also be considered.
Generating new sales is possibly the most difficult area to determine effectiveness. It is hard to quantify which sales you are not getting. An increase is good but could be a function of other factors. A decrease is bad, but you could be doing well to maintain market share in a declining market. It is important to understand your market and have data showing industry performance. By comparing your results with the industry, you can better determine your effectiveness in generating sales.
Improve the Effectiveness of Your Manufacturing Process
Many companies do not really know if they are manufacturing effectively and efficiently. While most manufacturers are testing the outcomes of their manufacturing process, few are testing their adherence to policies and procedures and the effect this has on results.
There are numerous quality programs that can provide a framework for assessment of effectiveness of your manufacturing, including Lean Manufacturing and Six Sigma. Even if you don’t use an established quality program, you must assess the effectiveness of your manufacturing process. Features from established quality programs can be utilized, or a company can design its own measures. In general, you need to consider these five parameters:
- Timing, and
- Cost, which is a product of the other four components.
In any company, there are opportunities to unlock additional profitability. Take the time to consider your operational effectiveness and make sure you have the right policies and procedures in place. Determine which projects to undertake and perform ongoing assessments of performance.
Victor W. Vaccaro, Jr., CPA/ABV, CFF, CDA, is an audit partner with Dannible & McKee, LLP, a Syracuse, New York based public accounting firm. If you have questions about improving operational effectiveness, contact Vic at email@example.com or visit us online at www.dmcpas.com.
To learn more manufacturing industry best practices and insights, register for Dannible & McKee’s Virtual Manufacturing Conference on October 22, 2020. To learn more, visit www.dmcpas.com/events.