This is the 2nd part of "How to Increase EBITDA in Manufacturing: A 6 Part Guide". If you'd like to view other posts in the series, the links are available on the right side menu of this post (desktop) or at the end (mobile).
Increasing EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) in the manufacturing sector is a critical objective for businesses aiming to enhance their financial health and operational efficiency. A key strategy for achieving this goal lies in optimizing supply chains, which can significantly impact cost control, operational efficiency, and ultimately, profitability. This article explores practical approaches to supply chain optimization that can lead to increased EBITDA in manufacturing.
Understanding Supply Chain's Role in EBITDA Improvement
The supply chain encompasses all aspects of producing and delivering products to customers, including sourcing raw materials, manufacturing, inventory management, and distribution. Its efficiency directly affects the costs and speed with which a company operates, making it a pivotal area for EBITDA improvement. By optimizing supply chain processes, manufacturers can reduce waste, lower costs, improve customer satisfaction, and increase their competitive edge.
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Lean Inventory Management
Adopting lean inventory techniques minimizes waste and reduces unnecessary costs associated with overstocking or stockouts. Just-In-Time (JIT) inventory management, for example, aims to have materials arrive only as they are needed in the production process, reducing holding costs and freeing up capital for other uses. Effective inventory management improves cash flow, a key component of EBITDA.
Nearly every factory MTG visits has significant problems with inventory. Most factories have walls of excessive inventory (One factory referred to this as the “wall of shame”) that they are afraid to remove because it is value on the books. Removing the inventory may be painful but it is better for the long-term health of the company.
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Supplier Relationship Management
Building strong relationships with suppliers can lead to cost savings, improved quality, and better lead times. Negotiating better terms, collaborating on product design for ease of manufacturing, and ensuring reliability in the supply chain can reduce direct and indirect costs. Implementing supplier performance metrics can help identify areas for improvement and strengthen these relationships over time.
2024 s a good time to improve supplier relationships. Cooperation can reduce costs and also make the process of collaboration easier so both organizations can share both cost saving and cost increases. Too often, MTG has seen companies dictate to their suppliers which builds distrust that often negatively impacts cost, quality, and delivery.
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Technology Integration
Technology plays a critical role in supply chain optimization. Solutions like Enterprise Resource Planning (ERP) systems, Supply Chain Management (SCM) software, and advanced analytics can provide real-time visibility into the supply chain, enabling better decision-making and efficiency improvements. Technologies such as blockchain can enhance transparency and trust in supply chains, while IoT (Internet of Things) devices can monitor conditions and track products throughout the supply chain, reducing losses and improving quality.
Technological integration is vital to modern manufacturing, but most companies struggle to implement it effectively. It is quite common to find companies that have paid for top-tier systems and use them for selective functions and with other software it does not interact with. Also, companies will put ERP over poor processes leading to more, rather than less, waste. The most effective ways to use the system are to fix the underlying processes, train and enforce the use of the ERP, and provide an overarching program pulls together all the programs in an easy-to-use interface.
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Process Automation
Automating repetitive and manual supply chain processes can significantly reduce labor costs and errors while improving speed and efficiency. Automation technologies can range from robotic process automation (RPA) in administrative tasks to advanced robotics in warehousing and logistics. This not only lowers operational costs but also allows human resources to focus on more strategic tasks, contributing to EBITDA growth.
Automation is a tool and can be incredibly advantageous in any manufacturing operation if used correctly. However, a tool is only effective is used on the right problem. Poorly implemented automation leads to more failure than if it was not used at all. For example, MTG worked with a company that had 42% first pass yield (FPY) on its manual line but 27% FPY on its automatic line. Why is that? The processes were so poor that manual intervention was able to help mitigate some of the failures that made it through the automated line.
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Risk Management
Supply chain disruptions can have a significant negative impact on EBITDA. Identifying potential risks, such as supplier instability or geopolitical issues, and developing contingency plans can mitigate these risks. Diversifying suppliers, creating safety stocks, and flexible manufacturing processes are strategies that can enhance supply chain resilience.
Turning Supply Chains into Strategic EBITDA Drivers
Anyone who has lived through COVID will understand the need for effective risk management in supply chains.
Optimizing the supply chain is a multifaceted approach that requires attention to detail, strategic planning, and the integration of technology. It involves not just reducing costs but improving relationships, processes, and resilience against disruptions. By focusing on these areas, manufacturers can achieve a leaner, more efficient supply chain that significantly contributes to increased EBITDA. This not only ensures short-term profitability but also positions the company for long-term success in a competitive marketplace. In the journey towards operational excellence, the supply chain is not just a cost center but a strategic asset that, when optimized, can drive significant financial gains.
Ready to drive up EBITDA at your manufacturing investments with our proven “Your Way” lean blueprint? Contact us to learn more about how we can help you.
