Six Dysfunctions of a Manufacturing Business | OnActuate
 In Business, Manufacturing, Trending Insights

If your company is a manufacturer or distributor, there are six types of business problems you are likely to face at any time. How your organization addresses these are can be the difference between profit and growth or loss and decline.

In his outstanding book, Solving Business Problems with MRP II, Alan Luber identified the problems as follow:

  1. Material Shortages
  2. High Inventory
  3. Poor Quality
  4. Poor Customer Service
  5. Poor Productivity
  6. Poor Cash Management

In this blog we will delve into each of these areas, exploring the root causes and the role ERP systems play in helping your company improve in these six areas.

It’s Complicated

Manufacturing and distribution companies are the most complex of all business types. No other business type must manage the range of products, costs, prices, and product definitions. Even a small manufacturer or distributor can have hundreds of vendors, thousands of inventory items and frequently changing product designs affecting both of the former.

The business problems manufacturers face are integrated and can cascade through the organization. The failure to plan and source a single component within a product can result in missed shipments and revenue—even the loss of a key customer.

Most manufacturing and distribution companies have an ERP system of some type in place, but as we explore the six key business problems, we will explore what ERP system capabilities are needed to support solving these problems. We leave it to you to assess whether your current system has these capabilities or if your organization uses them effectively.

How is it Integrated?

Again, relying on Luber’s book, below is a schematic illustrating how each of the main business problems link together and ultimately affect company profits.

Eroding profits are due to one or a combination of reduced sales, rising costs, or poor cash flow. Poor cash flow can affect profits by requiring more business financing, resulting in higher interest expense or the lost opportunity cost of investable cash. For each of the three contributors to eroding profits, there are categories of business problems affecting them. For example, here is a schematic for reduced sales:

Reduced sales are a cumulative result of poor customer service. Certainly, reduced sales are a direct consequence of missed shipments—we can’t invoice for a non-shipment. Poor quality can affect customer satisfaction, resulting in reduced orders. Both business problems have underlying causes. Finally, there may be very specific company issues (lack of sales training, cumbersome order processes, payment terms, etc.) directly affecting customer service. These are grouped under root causes.

Here is a representation for rising costs:

As above, each of the contributing business problems will have underlying causes but note the shared cause (poor quality) affecting rising costs and reduced sales.

Finally, here is the representation for poor cash flow:

Once again, there is a shared business problem (high inventory) contributing to reduced business performance.

Contact us for more information about how OnActuate can support your manufacturing or distribution business.