How to Manage Costs in the Manufacturing Process

Riordan Manufacturing, a company that is wholly owned by Riordan Industries, a Fortune 1000 enterprise specializes in the field of plastic injection molding. The business is unique due primarily to Riordan extensive knowledge and expertise with plastic moldings. Innovations in plastic and its uses have created greater demand for Riordan products. Namely, innovations in bottling, auto manufacturing, and National Defense have created an environment for robust growth. Its products currently include plastic beverage containers produced at its plant in Albany, Georgia, custom plastic parts produced at its plant in Pontiac, Michigan, and plastic fan parts produced at its facilities in Hangzhou, China. Riordan's major customers are automotive parts manufacturers, aircraft manufacturers, the Department of Defense, beverage makers and bottlers, and appliance manufacturers.

Riordan's Manufacturing Initiatives

Riordan forecasts production using an average of the past three years sales. The average is used to help eliminate excessively low or high volumes of sales. In particular, the industry's in which Riordan operates are cyclical. They are characterized by both excessive optimism and mass pessimism. Due to these swings in production volumes and demand, an adjustment to smooth results is required. A three average helps to eliminate market extremes while arriving at a much more accurate production forecast. Riordan is also participating in the make to stock system. This system provides flexibility for consumers who require a quick production solution that minimizes turnover times. The companies manufacturing strategy is predicated on a stable workflow that maximizes the cash conversion cycle or CCC. A stable workflow is primarily concerned with lowering employee turnover. Longer tenured associates are often the most productive as they have product and assembly expertise. They also have established strong relationships with customers that can endure for years. Likewise, as plastics become more sophisticated, the workforce must be better trained to properly leverage advances in technology. A hire turnover can therefore be costly, as specialized labor takes long periods of time to cultivate. Through accurate forecasting and low turnover, the company hopes to maintain a very robust cash conversion cycle.

Two metrics that are particularly useful in evaluating performance of the electric fan supply chain is the Cash Conversion Cycle and profit margin. The cash conversion cycle is a widely utilized metric that attempts to measure the amount of time each net input dollar is tied up in the production process before it is converted to cash. This metric is critical for high fixed costs businesses. The production of electrics fans is predicated on high fixed costs associated with machinery, property, plant, and other equipment. No matter what is produced, this equipment will cost the company. Therefore the cash conversion cycle can help management better ascertain how long it takes for a fan to be produced before it is converted into cash. Particularly for capital-intensive businesses, a portion of this cash must be invested back in the business to maintain or enhance machinery and equipment. If the cash conversion cycle is too long, a company may run the risk of becoming insolvent, as it is unable to cover immediate costs that are required to run the business. Diagram 1 indicates Riordan's supply chain operations. The company must ensure that the operation is efficient and that cash is received promptly from sales.

Chart 1. Electric Fan Supply Chain Flow

Profit margin is also very important. Again, because Riordan's operations are fixed, it will need to earn a high enough margins to cover both fixed and variable costs associated with production. If the production process proves too costly, the company man need to close operations altogether. This is particularly true if the sales prices are not enough to cover the fixed costs associated with production. Therefore profit margin must therefore be a critical component of the evaluation process. Chart 2 below provides a Process Flow Diagram for the Electric Fan Supply Chain. Management must make sure that the process is created in such a way as to maximize profit margins to cover fixed costs.