Capacity Utilization Research Report
Background
At the beginning of 2016, AMark Consulting began a research project, in close cooperation with the Technology and Manufacturing Association (TMA). The premise of the project was to identify areas of latent or unused capacity and assign a general dollar value to the unmet market demand (in terms of delivery, price, quality, or capabilities). The concept of latent capacity refers to manipulating variable inputs to maximize efficiency without increasing fixed costs. In short, how to maximize output without increasing costs. We also wanted to determine whether latent capacity was a derivative of operational constraint (machines running) or sales constraint (poor sales force performance). Across the US manufacturing industry, capacity utilization averages about 78%, meaning that at full capacity, the bottleneck will be performing at 78% utilization. Based on former client engagements and related discussions, we estimated latent capacity to be between 10% and 25% on average, which presents a significant opportunity to improve profitability and/or market share.
Methodology
The project began in the first quarter of 2016, and participants were gathered from the TMA CMS special interest group, AMark network, and by word of mouth. Participants were offered a free 2-4 hour long assessment, whereby AMark partners would interview senior leadership with a structured questionnaire and would typically follow-up with a quick tour of the facility. As a token of appreciation, AMark provided all participants a brief report of findings in addition to short to medium-term recommendations for improvement. Companies were given the option whether or not to share confidential information, and all participants were provided with a non-disclosure agreement.
The Data
Participants
13 companies participated in the study over a 24-month period. The smallest company had under $1 mil. in annual revenue, while the largest was over $500 million. Removing these two outliers, the average revenue was around $17 mil., 50 employees, and 40 years in operation. On average, the companies separated work into 5 distinct departments – typically a combination of Sales, Marketing, HR/Finance, Production, Supply Chain, Quality, etc. All participants were non-union. One quarter of participants were women-owned manufacturing companies, however only one of these participants had applied for and received Women-Owned Small Business (WOSB) designation.
Only one third of participants reported having any significant domestic market share – between 5% and 20% (with supporting data to validate assumptions). The same third reported a negligible international market share. Active customers (sales within the past 12 months) averaged around 75 individual customers, with significantly more within the high-revenue participant company (outlier).
Lead times, WIP, and OTD
Quoted lead times averaged 3 weeks (15 business days), and the majority of companies (90%) reported being the same or better than their competitors. Work in Progress averaged 3 days, and was typically a result of a decision or design requirement rather than the speed, uptime, or batch capacity of a machine. On-time delivery was overwhelmingly high at an average of 95%.
Manufacturing Hours and Capacity Utilization
Half of participants ran 1 shift (40-hour work week) with minimal overtime. Capacity utilization for these companies averaged around 25% - a 53% difference in the national benchmark. The remaining half of companies ran an average of 2 shifts (80-hour work week) with minimal overtime. Overall capacity utilization for these companies averaged around 70% - leaving around 8% of operational capacity available.
Meeting Market Demand
Participants reported the ability meet market demand in the below categories:
Delivery: 60% of participants
Price: 30% of participants
Quality: 100% of participants
Capabilities: 50% of participants
Many participants were not sure if they could meet market demand in terms of price, and many expressed a concern that they were either losing orders due to being overpriced or “leaving money on the table.” In many of these cases, the participant felt that the industry was too fragmented (too many different competitors) to conduct a cost-effective in-house pricing analysis.
When asked, what would be the financial impact of being able to meet market demand (in terms of the above categories), participants reported an average of between $6 and $7 mil. in revenue which would be operationally feasible within the same facility/current footprint.
Constraints
All of participants reported sales as the largest barrier to growth. Half of participants also felt like they could sell more with the addition of a specific operational investment (enabling faster machining, adjacent technology capabilities, tighter tolerances, etc.). In the majority of cases, participants were unwilling to take on a large operational expense without having the customer contracts and pipeline to justify the investment.
Key findings
Whether the participating company employed a direct sales force or a network of distributors, the biggest barrier to sales growth was lack of active sales management. Often times when the market experiences rapid growth, many companies place less importance on proactive sales efforts. Success comes (over a long timeframe) from simply answering the phone and taking the order. However, in times of stagnant or slow economic growth, a proactive sales approach is critically necessary for success. The most important thing to remember in a slow-growing market is that competitors are dealing with stagnant growth as well. Many competitors will fail to innovate – they will not prove flexible or agile enough to weather the storm. The more proactive a company’s sales activities, the better chance they have to steal customers from their competition.
Mom and Pop Shops
Many of the participants in this study were too small to employ a direct sales force. In these cases, usually the owner and one other person reported sharing the majority of sales responsibilities. In this case there is very little accountability for structured sales activity.
3rd Party Distributors
Many of these companies reported using a distribution network to sell their product. In 100% of cases, they reported being disappointed with the performance of their distributor. It is important to note that the average participant hadn’t spoken to the distributor within the past month. Additionally, none of the companies in this study had set goals with their distribution partners.
Direct Sales Force
In around half of cases, the company employed a direct sales force (typically a team of 2-5 sales/customer service representatives). In these cases, less than 10% of participants reported having specific sales goals and initiatives in place for their sales resources.
Close Ratios and Reason for Loss
Only half of participants could provide an estimated close ratio for sales. Of the half who had an idea of their average close ratio, only two participants had a process in place to record why a sale had been lost. In a nutshell: the majority of the companies who participated in this study do not know (in many cases) why they have lost a sale.
Conclusion
Overall, our study found low capacity utilization to be driven primarily by sales barriers rather than operational constraints. In the group we surveyed, inadequate sales strategies and lack of sales management processes artificially restricted output, resulting in sub-par capacity utilization rates. As latent capacity is a function of output, customer demand ultimately drives production. Throughout the study, it was clear that the customer demand exists, but our participants struggled to meet customer needs, as evidenced by low close ratios. While often times we see a push to cut costs in order to drive operational efficiency, this study highlighted the degree to which top-line strategy impacts overall growth. A mismatch in channel strategy and lack of effective sales management processes can easily set manufacturers down the wrong path, leading to cost cutting measures which further limit an organization’s ability to meet customer demands. Rather, a focus on developing a sales and marketing strategy which is aligned with operational goals is what sets manufacturers apart from the competition.
For more information on addressing your company’s growth barriers, or if you have any questions related to the study, please feel free to email me at kellylusson@amarkconsulting.com.