Industry Focus: Cabinet Makers Part 1

Cabinet Maker

(picture from His Life Woodworks)

Focus on Cabinet Makers and Their Unique Concerns

At Master Solutions, we have a lot of experience working with organizations in the "Secondary Wood Products Industry" (as opposed to the "Primary Wood Products Industry"?) . The Genesis of our Software Toolkit was in a Custom Cabinet Operation.

At the time we started working with them, they were growing fast, and were hitting all the normal walls that businesses hit with high growth rate. These are just some of the real, daily issues:

  • Cash Flow Crunch: Every payday was a "fire drill". The nature of being a subcontractor to residential construction simply creates a cash flow problem. Most builders are taking monthly draws at best, and yet the Cabinet Makers are paying out payroll and materials weekly. In essence, the operation is a bank, lending their customers capital for weeks, even months at a time before truly getting paid. Add growth to that equation, and the problem is even worse.
  • Administrative/Overhead Issues: There were 2 full time people (out of 5-7 non production people, and 15-20 other production staff) who didn't "make sawdust", yet it was never enough. Just importing the time punches from their time collection systems and calculating payroll took 2 days. The rest of the time was Accounting, Writing Bids for Sales, Answering Phones, and managing the office and Human Resources.
  • Critical Data Access: Each Job was a large folder, which go handed around to different key people. The folder held critical information, however wasn't accessible to anyone else. It was not uncommon for someone to go desk to desk looking for important details about a job several times a day.
  • Data Integration: The key data elements were in folders, and there was no comprehensive view of data. For instance, all open jobs and their status was on a wall, rarely updated, and had no ability to compare key data to each other. If it was in some software based form, it was an excel spreadsheet someone wrote, and it was always unclear if it was up to date, it was single user, and would occasionally get contaminated or even get corrupted forcing a rebuild.

The 3 key elements of the organizational problems were Efficiency, Data Accessibility, Data Integrity


Lets look at each element a little more in depth, and subsequent articles will detail how we addressed Business Processes to improve these 3 key elements.

Efficiency

This term has several different aspects, but the main idea is using any resource (employee time, machine time, capital/cash, materials etc...) as effectively and minimally as possible while not compromising on speed or quality. It's not just getting more done faster, because doing the wrong thing or the unprofitable thing faster just increases failure. So it is striking the right balance between doing the right things (or doing things right), as quickly as possible.

Do the math: 5 employees, 5 days a week, 50 weeks a year.

Wasted Minutes

Data Accessibility

This concept means simply getting information to the right people.  Just a simple piece of information like a contact (phone number, email, correct spelling of a name etc...) which can be very critical, is a prefect example. Or the last vendor used to purchase the melamine. Or the status of that hot job you promised would go out Friday.

The main point is for the right people, to have the right data, when THEY need it. This is an Efficiency issue certainly, but it also supports user effectiveness, and accuracy.

It's not uncommon for employees to avoid doing things that are hard or frustrating, or leave them incomplete if it is too difficult to get the right data.

This puts an emphasis on Centralizing. Data needs to be accessible centrally, meaning in one easy to reach place. Having the ability to share information, but having data scattered about in 50 different users computers, sub folders, and formats won't work. Data needs to have a central location, with clear and simple paths.

Data Integrity

Just getting Data to the right people, as quickly as possible, isn't enough if the Data itself is inconsistent, out of date, or cannot be maintained easily. The accuracy of the data, as well as its stability, and its structure is critical.

The Great Spreadsheet Trap

A classic technique is for a user to make spreadsheets, with ever increasing levels of automation (macros) and formatting. This data might even live on a centralized server. However, a spreadsheet isn't built to handle data that changes often. It is a fantastic tool for analysis, charting, calculations etc... but is a snapshot of data. And it is all one file, that must be saved all at once. As well, a spreadsheet isn't multi-user. Multiple users can VIEW, but they cannot interact with it.

If key data is stored in an individual users spreadsheet, there are too many opportunities for the data to be out of date, mis-managed, corrupted, or isolated.

The Out of Date Trap

Even within database systems, data that isn't current can be very problematic. It is vital that all data be accurate and current. It is even better when the data is getting updated from the system rather than waiting on a user to go in and take an action.

The Duplication Trap

A problem with poorly designed systems (and processes) is the ability to create duplication of key data. This can be simply poor design, or it can be from a user not being able to find key data, and assuming it is not there and entering it a second (or third or fourth) time. Classic examples of this are Contacts, Items, Sales Orders, and Purchase Orders.

The Formatting Trap

Many database systems use key data elements and sort on them for reporting or display. Punctuation sorts very differently than text. Text sorts very differently than numeric values. Without proper formatting, many lists of data become hard to manage, and lead to duplication, or out of date scenarios.


We will look at each of these issues above, and put them into context for the common cabinet maker, and walk through how to address them in a series of in depth articles to come.

Want to know more?

We are very interested in talking with you about your needs. We want to make sure we are a good fit, and understand what you are trying to accomplish, and the best way we know how is some quick discussion. Please contact us via the link to get the process started.

Let's schedule a demo of our awesome Small Business Software Toolkit while we are at it!

Cabinet Makers, Small Business Cash Flow and Inventory

cashflow

Cabinet Makers and Small Business Cash Flow

We mentioned in our first article, our roots are deep in a few industries, and woodworking, specifically cabinet making, is one of them. Cabinet makers are simply some of the most resourceful, hard working groups of small business owners out there. And their industry has some unique challenges,. However the primary one isn't unique to their industry, it is common to all small businesses. The flow of cash in, through, and out of the company is critical to the health and success of the organization, but it is very hard to manage without the right mindset and tools.

We want to expand on this and discuss the basic steps that organizations can take to improve cash flow. Here is our quote from the previous article:


 Cash Flow Crunch: Every payday was a "fire drill". The nature of being a subcontractor to residential construction simply creates a cash flow problem. Most builders are taking monthly draws at best, and yet the Cabinet Makers are paying out payroll and materials weekly. In essence, the operation is a bank, lending their customers capital for weeks, even months at a time before truly getting paid. Add growth to that equation, and the problem is even worse.


Where does the cash flow in a small business?

Clearly cash comes in from SALES, and goes out on EXPENSES. That's the most basic element to cash flow. So the conclusion to most businesses is that as long as what goes out is less than what comes in, things are good. Right?

In some sense, that may be true, but what gets overlooked is how much cash is tied up in the operation itself, and the timing of how the cash moves around. Let's take a little deeper look at this, and describe some tools to help address the problem.

You have a secret bank account, hidden in (mostly) plain sight.

If you can state with any decent level of accuracy the value of inventory you have on hand right now, skip this section. You already know the problem, and have a solution. While it might take a few days of work a month to get the number, if that number is close to accurate, you have a key element in solving this problem.

Inventory, essentially the raw materials, in process work, and the finished goods laying around waiting for someone to buy them, is essentially CASH. And it is CASH you DON'T have in your bank because you already spent it. When you purchased more materials, or paid your team, overhead, machine payments etc... and/or converted it into something else, you simply took cash and transformed it into something else. Because you haven't received any cash for it (in hopefully it's new, more valuable form!), a huge portion of your organizations cash is "tied up" in a form you cant do anything with.

Managing Inventory is a constantly changing game for most manufacturers, and for any group doing custom or semi-custom work, it can be a lot harder. While there certainly are multiple facets, in a small business Inventory Flow is essentially small business cash flow.


The #1 rule of Inventory Management

Never run out of inventory


Why? The problem is usually 2 fold:

  1. If you don't have raw materials, your labor force (which is typically a bigger piece of the costs/more expensive than the materials in cabinet making) will be standing around with nothing productive to do.
  2. If you have no finished goods to sell when your customer wants it, you cant convert all your hard work into more cash than you paid.

Running out of inventory (at the right time, but more on that later) is a big problem, and one that must be avoided at almost any cost.


The #2 rule of Inventory Management

Never have more inventory than you absolutely need


Why? This problem is essentially what we discussed at the beginning. Inventory is cash you don't have in your bank. Holding any more inventory than you absolutely need is keeping cash out of your bank account, and therefore out of your pocket!

How to manage inventory

Inventory is the result of transactions. This means that it is dynamic, and must be calculated. The historical counting it once a year and leaving it at that doesn't help you understand what is going on right now. Stopping everything and counting inventory right now is also prohibitively expensive.

The solution is having a system of tracking the "ins and outs" of your inventory, and attaching a value to those transactions.

The IN: Purchasing and Manufacturing

When you purchase something, you essentially commit to paying for something. When it is received, that product is part of your inventory. Normally, you pay the bill within a fixed amount of time, in some cases you pay immediately. But for arguments sake, let us assume we have classic "Net 30" terms. We pay for the goods within 30 days of receiving them.

We need to track when this product is received. When did it join your inventory? How much? At what cost to you?

1st Gear

If you aren't using a database system like our Software Toolkit, you will quickly figure out this is almost impossible. You can make lists, spreadsheets, even marks on a wall or pallet rack, but it is prone to error and labor intensive to maintain. Writing Purchase Orders, and Receiving them is the fundamental step to Inventory.

2nd Gear

Assigning a vendor promise date to each item on a Purchase Order begins to develop a key practice that will take the idea of managing inventory even further, not just counting but Inventory Planning. Knowing not only WHAT you ordered, but looking ahead at How Much and By When materials will come in opens up a tremendous opportunity to manage inventory.

On the manufacturing end, you also add to your inventory by making something. You basically add value to something through labor, and now have something new. For Project based manufacturers (think custom), they don't really have Finished Goods with part numbers, but the products ready for a project have essentially become a value of inventory until sold.

The Out: Sales and Manufacturing

When you ship something, you "relieve" inventory. You exchange the inventory you have for the customers commitment to pay you. This inventory is either a bunch of part numbers, quantities, and prices or could be a project representing many items that are not treated as part numbers. Either way, until it is sold, this is inventory.

When you manufacture goods, you relieve the inventory of the raw materials as you make them into new things.

Add it up.... and then adjust

Simply adding the ins and the outs gives you an approximate number of inventory. If you were to take that amount and then go out to your shop floor and count an item, you might see that what you count is not what your system shows you. This can be from errors, scrap/quality issues, work flow, and theft.

Errors: Did someone order 100, received 100, and really only got 85? These errors can happen, and most systems have elements in place to minimize  them.

Scrap/Quality: Was there a problem in manufacturing that required someone to use more than what was originally determined? Did you receive product from the manufacturer, but it wasn't acceptable?

Work Flow: Did you pull inventory off a shelf, but didn't report it to the system yet? This is normally called Work In Process (WIP), and requires some kind of Work Order step in your system. Think of this as a Purchase Order to yourself for goods. We will address this more in depth in another article.

Theft: Is product moving out the back door for someones side jobs? Does someone have a "special arrangement" with the delivery person or vendor and you are paying for it?

Most systems have the ability to adjust the inventory when something like this happens. As well, regular counting allows you to make these adjustments and see if problems are happening. There are strategies for counting,a s it can be very costly to have everyone stop and count. One great way is to simply identify the materials that cost the most, and the materials that you use the most, and count them. Combining the 2 elements, and only counting the high turnover, high dollar materials should happen most often, and then as materials represent less and less of the value and activity, they get counted less often.

Basic Inventory Summary

So knowing how much Inventory you have is the best foundation for looking at where cash got "trapped" inside your organization. If you have inordinate amounts of a material, you need to examine why. Did someone purchase a whole lift because they were afraid of running out, only to find out you wont use it  all for another 6 months? Are you switching to a new hinge, and have a lot of the old one left over? Do you not have enough of the new one for upcoming orders?

Tackling Inventory at the basic level can be hard work, but it sets the stage for cash flow management. Next we will talk about how to take that information, and supercharge it.

Inventory Planning.... the next frontier...

 

Want to know more?

We are very interested in talking with you about your needs. We want to make sure we are a good fit, and understand what you are trying to accomplish, and the best way we know how is some quick discussion. Please contact us via the link to get the process started.

Let's schedule a demo of our awesome Small Business Software Toolkit while we are at it!

Cabinet Makers, Cash Flow, and Small Business Inventory Planning

Inventory Planning

Cabinet Makers and Small Business Inventory Planning

We mentioned in our first article, our roots are deep in a few industries, and woodworking, specifically cabinet making, is one of them. We then looked in the second article that cash flow is key, and one of the most direct elements of cash flow is Inventory. We discussed some basic elements of Inventory, and how powerful it is to get a picture of how much capital you really have located outside your bank account.

We want to expand on this and look at how much more power you can have when you grasp the idea of Inventory Planning. These fundamentals don't apply just to Cabinet Makers obviously, we are just using them as a great example.


So let us assume you have worked through a process to get your current Inventory amounts accessible. You can find out with fairly good accuracy how much you have on hand of a given material right now. You know how much value it has, and how many. You soon find out that while you have some great information about where you are at now, you don't know much more than that.

Just knowing you have x amount of a product doesn't tell what you need to do ABOUT it. Do you have enough? Do you need more? Do you have too much?

 The main problem here is you don't know how TO PLAN your Inventory.


Inventory Planning Basics

Inventory Planning thinks about Inventory OVER TIME. Not just what you have now, but how much will you need..And we need to keep in mind the 2 Rules of Inventory

The #1 rule of Inventory Management

Never run out of inventory

The #2 rule of Inventory Management

Never have more inventory than you absolutely need


Get your Demand Together

Demand is the amount of product you need to consume. Here is an example of a Raw Material (Red Birch plywood) We see here a basic summary of an MRP (Materials Resource Planning) report in our Software Toolkit. We will break down each piece as we go.

 

 

MRP-Summary

 

 

Inventory: You have 18 of this part currently in stock. If you have no demand, you have product you don't need.

MRP-Current Inventory

 

 

The next section is the DEMAND, or the amount you need. In this case we have details about which job (called a PhaseMat) they come from. The Left column, represented by a negative number is how much of this part the Job needs. For the moment, let's disregard the dates that normally occur on the left. We will get to those later.

What we see is that we need 29 units of the part. The second column shows a running total of the first line (Current Inventory) and then includes each demand from the jobs. So the starting amount (18) will only allow you to get through 3 jobs at best if you use the inventory for Job 151890, 151720, 152700 but you do not have enough to make job 152550

Inventory Planning Demand

  • If you were to look at any one job demand without knowing the current inventory, you would now now how much to order. You would run out of Inventory.
  • If you look at the sum of all demands, without knowing the current Inventory, you would buy too much because you already have Inventory on hand.

The next piece of the puzzle is Safety Stock. How much of this product do you need on hand even when there isn't a demand? Do you need some extra in case someone scraps some material? How about if the product has a long lead time and you need some buffer? What if it is used often and you want to accommodate last minute orders?

In this case we have 18 on hand, but only want 10 in safety stock. Somewhere in history, we have bought more than we need, and it resulted in us carrying more on the shelf than we had to have, tying up captial.

Inventory Planning Safety Stock

We need to make sure we have an extra 10 left over AFTER we fulfill the demands. From above, we know we have 18, we need 29, so we are 11 short. In addition, we need to have 10 remaining on hand, so we actually need 21 units to fix Inventory. 

Inventory Planning Whole Picture


Think about how often this situation occurs with all the materials you use.

Knowing the current inventory is good. Knowing how much you will need for upcoming jobs is even better. Knowing how much you need to have on hand is good.

Knowing all these factors at the same time is GREAT


Looking at the By When

Now that we see total quantity is important, along with the other factors, we need to look at one more factor. Timing.... Lets look at the whole picture WITH DATES

Inventory Planning Whole Picture

 

 

 

 

 

 

 

 

Now we see an even more profound picture. We obviously have to use historical dates so just look at the sequence, and assume it is 7/1/14 and you run this report.

  • Current Inventory is what you have NOW.
  • By 7/21/2014 you have completed 2 jobs, and have 1 unit of stock remaining.
  • You do not need any more product (outside of the Safety Stock you want to have on hand all the time) until 8/4/2014
  • By 8/4/2014 you will need 10 units for Job 152550
  • By 1/19/2016 you need 1 more for Job 152700. This date essentially means it is not scheduled seriously or confidently.
  • From a basic planning standpoint, we have more than we need right now, and run down to 1 unit and hold it for 2-3 weeks. Then we run out, and have nothing on order to let us complete the jobs we have scheduled.

If we then respond and go place a Purchase Order int he system to plan perfectly, it will then look like this.

Inventory Planning Updated

 

While this isn't 100% perfect, perfect isn't a real goal. The main thing is we aren't running out of Inventory (the #1 Rule) and we are minimizing the amount we have on hand going further (the #2 Rule).

How does this affect Cash Flow?

The simplest way to think about this is Inventory is cash not in the bank. The ability to reduce the inventory on hand results directly in cash in your bank (unless you spend it somewhere else!). By minimizing Inventory, we keep the cash where it can be used best.... IN THE BANK! 

Looking at Inventory totals is good, but not great. Unless you have very, very simple dynamics you typically need to know WHEN you need materials, and if the date is valid. You also need to know about what you want left over in case you have to use this material in other situations.

The elements to track this kind of information is all in our Software Toolkit: Current Inventory, Demands on Inventory (from sales and/or manufacturing), Future incoming (Purchase Orders), and Safety Stock.

Want to know more?

We are very interested in talking with you about your needs. We want to make sure we are a good fit, and understand what you are trying to accomplish, and the best way we know how is some quick discussion. Please contact us via the link to get the process started.

Let's schedule a demo of our awesome Small Business Software Toolkit while we are at it!