In the wood truss component industry, we have those who are owned by lumberyards, and then we have the independents, who are not associated with lumberyards. What I found striking is that far too many of the lumberyard-owned and -operated component manufacturers (CMs) are unsuccessful and consistently make less money than the independently-owned and -operated CMs. These operations usually have a single-digit net profit and are often considered to be a problem area for their company.
The CM division should be a huge cash cow. When it comes to the CM net profit averages, it is common to make up 15%+ EBITDA in normal markets, in which the sales exceed a two-week lead time. Many independents garner in the 20%+ EBITDA in good years. The main difference between the two is management philosophies and culture. If you want to garner better net profits, the best route is to embrace the lean manufacturing (LM) practices to create the environment that will result in better net profits.
LM practices should be thought of like a big tool box filled with different tools to uncover and fix problem areas in your company. Better yet, LM helps you improve areas you did not know could be improved upon. These important tools have names: 5S, just-in-time, kaizen (continuous improvement), and many more. What is more important is the philosophy and culture change that happens within every organization. Most companies that fail to embrace LM do so because they truly cannot let go of their ingrained ways of thinking and management practices. Failure of implementing LM principles to garner real, positive results starts at the top and ends at the very bottom of the organization.
LM principles are more than your tools. LM changes the culture of the company because management and the employees are embracing continuous improvement in every area beyond the manufacturing. Every area such as employee retention, communication, management, training, sales and project processes are all constantly refined and improved for the company. In other words, you may not be able to use one of the coined LM terms, such as 5S, but your company can refine and improve a previously problematic area. A common example is when a company human resource department stands in the way of a needed pay scale change for the manufacturing group. Too often a lumberyard's company policy may somehow be keeping the CM division from offering a pay scale adjustment or an incentive program. LM does not allow such short-sighted rulemaking to affect needed improvements.
Here is something that is not often stated openly about LM or the application of Six Sigma (an offshoot of LM). These LM philosophies and practices, which include Six Sigma, apply common sense to overcome the egos that have been preventing needed changes. Six Sigma allows companies to display statistical data to prove or disprove a given idea for a particular area. One example is from the PROSALES article "2015 Dealer of the Year: US LBM:" “US LBM uses technology and training to blaze its growth path.” The article shows how this company had great results because their mindsets were changed by LM. One example is rearranging the lumberyard so that trucks could be loaded quicker: “A redesign of facilities according to lean management techniques that, at one yard, have reduced forklift driving distances by 30% for most loads, improved traffic flow, and cut labor distribution costs as a percentage of yard revenue by 23%.” Does this seem like common sense?
Component manufacturing should be a cash cow, making lumberyards increased net profits – unfortunately most fall short. The failing net profits for most CMs are due primarily to company culture and management routines that inhibit the adoption of improved practices for that type of business. Embracing lean manufacturing philosophy and practices can help your company overcome common cultural and management routines and thereby help your group achieve much better returns.
This article first appeared in The Component Advertiser. It is reprinted by permission.