As operations and manufacturing professionals, we understand the standard supply chain errors such as running too lean, lack of transparency or failing to plan for business disruption. However, there is one, often-overlooked, killer of supply chain competitiveness and it is self-inflicted.
Most companies have an annual corporate ritual where the capital committee reviews the forecasted capital-spending plan submitted by various elements of the business. And in my experience, every year the amount of capital requested inevitably exceeds the amount allocated to capital expansion as different visions and competing alignments are proposed. A poor decision (or two ) on capital investment can significantly damage overhead competitiveness to the point that it will dwarf any other process improvements the team can implement.
For example, take a company that has had tremendous success in their products. There are lofty projections for continued success from new product lines. The capital expenditure team approves a significant capital expenditure in automation to launch the product and fulfill forecasted demand. Unfortunately, two years later the expectations don’t come to pass and instead the new products have lackluster sales. Suddenly, you have a depreciating asset sitting on the books for 5-10 years. This depreciation becomes the silent killer of your supply chain effectiveness and until these capital expenses are fully utilized, they will continue to impact and add to bloated overhead rates.
The silent killer of supply chains has the effect of pushing leverage any company would want from operations farther and farther away. Of course, there are always obvious capital expansion requests and these are easy to justify. The danger is when the case for capital expansion is strategic in nature, often tied to optimistic forecasts for growth or new capabilities, and in the end that become underutilized assets.
In the past, the solutions to this challenge in reagent manufacturing were very limited. However today, utilizing leveraged supply chains with contract manufacturers can neutralize this silent killer. Using a contract manufacturer avoids fixed costs, making manufacturing a variable cost and can significantly de-risk new product launches. It allows safer capital investments to keep the supply chain efficient and focused on core activities. When the forecasted demand materializes, then investing in capital equipment is warranted and it is far easier to gain approval from the capital committee.
A good partnership with a contract manufacturer can bring other significant advantages as it allows growing companies to stay focused while decreasing risk and quite possibly getting to market faster. Most importantly though, using a contract manufacturer avoids the silent killer of capital depreciation and keeps supply chains efficient.
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