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Ever wonder how factories keep the appropriate inventory levels in manufacturing to run things smoothly and make a profit? That’s where Material Requirement Planning (MRP) comes in. However, optimizing MRP can be challenging, especially in complex manufacturing environments with many moving parts. In this podcast, we explore the world of MRP with industry expert Marcia Williams. Her insights will shed light on the unique aspect of MRP and further emphasize its vital role in successful manufacturing.

What is Material Requirement Planning (MRP)?

MRP serves as the foundation for keeping appropriate inventory levels in manufacturing. By ensuring the timely procurement of essential materials, MRP eliminates disruptions caused by excess inventory or stockouts. This translates to a streamlined production process, ultimately contributing to increased revenue and reduced costs, thereby enhancing a company’s overall profitability.

Components of MRP

Material Requirements Planning (MRP) at its core, is about planning for materials needed in production. It involves thorough forecasting, master production scheduling, and inventory control to balance production with demand. The components are:

• Bill of Materials (BOM): A crucial part of MRP, it lists components and quantities needed for making a product. Even though MRPs manage complicated BOMs, thorough attention ensures proper planning.
• Master Production Schedule (MSP): MRP employs an MPS, taking into account production plans, transfers, and lead times.
• Capacity Planning: This involves evaluating production capacity to match schedules with available resources and prevent overloading.
• Existing Inventory: MRP helps factories keep track of their supplies (inventory) to avoid buying too much of the same thing and improve ordering. It needs accurate information to make the best decisions

Challenges and Implementation

Implementing MRP poses multifaceted challenges, including:

• Data Integrity: Incorrect product information or different part numbers in different locations can lead to buying too much or having the wrong things in stock.
• Up-to-date Bills of Materials (BOMs): Outdated or incomplete BOMs can mess up MRP results, thus affecting production schedules and what materials are ordered.
• Consistent Unit of Measurements (UOM): If different warehouses use different ways to measure things (like meters vs. feet), it can make it difficult to order and manage inventory.

• Communication Silos: Different departments using different terms and having separate goals can make MRP planning difficult, therefore highlighting the importance of a clear communication plan across all departments.
• Change Management: Employees might resist new ways of working or struggle to understand them. Training and clear explanations can help overcome these challenges, making it easier for everyone to adopt the new MRP system and ensure its success.

MRP in Multi-Entity and Multi-Warehouse Scenarios

• Distribution Requirements Planning (DRP): While MRP focuses on production planning, DRP manages product distribution across multiple warehouses or entities.
• Communication Challenges: Managing MRP across diverse locations requires a comprehensive approach and clear communication channels to prevent mismatch and optimize utilization.
• ERP Integration: Seamless integration between ERP and MRP systems facilitates data exchange, enabling informed decisions and enhancing overall supply chain efficiency.

Best Practices for MRP Optimization

• Data Management: Ensure consistent data across systems for reliable MRP results.
• Interdepartmental Collaboration: Foster collaboration to harmonize goals and optimize MRP processes.

• Continuous Monitoring and Improvement: Regular checkups to find and fix weaknesses in MRP planning, making sure it can adapt to changing business needs
• Take Advantage of Analytics and Predictive Modeling: Use data analysis and forecasting techniques to improve MRP decision-making by looking at past data and market trends.

Conclusion

There’s more to mastering Material Requirement Planning (MRP) than just buying new software. To truly benefit from MRP, companies need to take a big-picture approach. This includes understanding the key parts of MRP, figuring out how to overcome challenges when setting it up, and following best practices. By doing all these things, organizations can unlock the full potential of MRP and streamline their operations

However, achieving MRP excellence doesn’t stop at implementation. It needs ongoing adaptation and innovation. As markets change and technology advances, staying flexible is crucial. Embracing trends like Industry 4.0, automation, and AI can boost MRP effectiveness, keeping businesses ahead.

While MRP implementation can be challenging, proper preparation, accurate data, and clear communication across departments lead to significant benefits.

In this episode, we have our guest Kevin Mako. He discusses how experimental design and additive manufacturing can help mitigate financial risks with innovative projects. He also discusses several technologies and trends that have been driving faster innovation in the manufacturing sector. Finally, he discusses what financial executives look for in a pitch and how engineering workflow changes with additive manufacturing methodology.

Chapter Markers

• [0:22] Intro
• [2:47] Personal journey and current focus
• [4:37] Perspective on Growth
• [6:08] Risk mitigation opportunities with additive manufacturing
• [8:56] Experimental design with additive manufacturing
• [21:19] Technical underpinnings of additive manufacturing
• [24:58] How additive manufacturing can help expedite business case development and innovation
• [27:46] Additive manufacturing workflow
• [34:34] Closing thoughts
• [35:38] Outro

Key Takeaways

• Traditional manufacturers have exponentially more weight behind a new product than any startup out there. So in terms of their access to resoures and funding, you could go on with a long list of advantages.
• Something really interesting that traditional manufacturers can look at while building their next product or even improve what they have. Ninety-nine plus percent of patents today are not novel.
• You don’t have to be coming up with something that is so revolutionary like a teleportation machine to be innovative. It’s taking innovation truly, especially at the mass manufacturer level. It’s to do what you have and leveraging it based on the data. The data you’re able to collect in those first phases, small, incremental improvements.
• If you’re a manufacturer, you have to look at your product line and say how is this going to evolve? How is the market going to evolve over the next 10 to 30 years? And how am I going to be sure that I’m on that ride?
• Let somebody build the next great thing. And then you swoop in and acquire. You also leverage your history and connections and manufacturing experience. And you do all that to make them 100 times or 1000 times the size that they could have been.
• With additive manufacturing, you can now go to your executive and say. For that same million dollars, we’re going to try six products this year to test market. And obviously, that’s much more appetizing.

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About Kevin

Kevin Mako is the Founder and President of MAKO Design + Invent, the pioneer firm for providing world-class end-to-end physical consumer product development tailored to inventors, product startups, and small manufacturers. Est 1999, Mako Design is a 30-person team with offices in Austin, Miami, San Francisco, & Toronto. They have developed over 1,000 products for clients and has earned over 20 design. And business awards including Red Dot, Inc5000, Entrepreneur360, Indigo Gold, Creative Pool Gold, Best Places to Work, Lux Magazine Best Design Firm in North America, and many others.

Kevin lectures at the Masters of Engineering program at Ryerson University. He sits on a number of entrepreneurship and education boards. He invests in small service-based businesses and holds the Duke of Edinburgh Gold Award designation. Kevin has over 100,000 followers on social media. He does keynote speaking all over the world for audiences between 100 and 1,500 people. He is also the host of The Product Startup Podcast.

Resources

• Connect with Kevin
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• Connect with MAKO Design + Invent
  • Website | LinkedIn | YouTube | Twitter

Full Transcript

Kevin Mako 0:00  

Well, what features do we think could be revolutionary? What could be the next hot product that’s really going to put us back into the light. Or help us just shore up the fact that we are a leader in this market vertical, and you’d be amazed at how much information if you do this process properly, how much information you can gather right there.

Intro 0:22  

Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.

Sam Gupta 0:57  

Hey everyone, welcome back to another episode of The WBS podcast. I’m Sam Gupta, your host, and principal consultant at a digital transformation consulting firm, ElevatIQ.

With new trends such as additive manufacturing and experimental design, it’s never been this easy. It’s never been easier to launch and disrupt our hardware product category. The traditional manufacturers that are slow and are not taking advantage of these trends run a risk of being disrupted. And becoming irrelevant in their market. The new trends require manufacturers to get inspired by the newer disruptive companies from their markets. And corporate intrapreneurs by changing their internal R&D, workflows, and capabilities. 

In today’s episode, we have our guest, Kevin Mako. He discusses how experimental design and additive manufacturing can help mitigate financial risks with innovative projects. He also discusses several technologies and trends that have been driving faster innovation in the manufacturing sector. Finally, he discusses what financial executives look for in a pitch and how engineering workflow changes with additive manufacturing methodology. 

Let me introduce Kevin to you.

Sam Gupta 2:04  

Kevin Mako is the Founder and President of MAKO Design + Invent, the pioneer firm for providing world-class end-to-end physical consumer product development tailored to inventors, product startups, and small manufacturers. Est 1999, Mako Design is a 30-person team with offices in Austin, Miami, San Francisco, & Toronto. He has developed over 1,000 products for clients. And has earned over 20 design and business awards including Red Dot, Inc5000, Entrepreneur360, Indigo Gold, Creative Pool Gold, Best Places to Work, Lux Magazine Best Design Firm in North America, and many others.

Kevin lectures at the Masters of Engineering program at Ryerson University. He sits on a number of entrepreneurship and education boards, invests in small service-based businesses. And holds the Duke of Edinburgh Gold Award designation. Kevin has over 100,000 followers on social media, does keynote speaking all over the world for audiences between 100 and 1,500 people, and is the host of The Product Startup Podcast.

With that, let’s get to the conversation. 

Hey, Kevin, welcome to the show.

Kevin Mako 3:15  

Sam. Great to be here. Thanks for having me

Sam Gupta 3:18  

It’s my pleasure. And I am super excited to dig into your background. But before we do that, do you want to kick things off with your personal story and your current focus?

Kevin Mako 3:31  

Sure, happy to. My quick story here is that today we do essentially high-end product development, world-class physical product development for inventions and gadgets. But tailored to small manufacturers and small businesses. So generally, companies under 100 employees, for the most part, and all of that started when I was in high school or 20 years ago, with that very concept. 

I’m one of those businesses that didn’t really ever pivot the same goal then was the goal that we have now. And it was obviously very difficult, and being started in high school incorporated in university to two degrees, went to business school, and then the other at Hong Kong University. 

After that, I went full time into this and turned down the investment banking management consulting jobs to take the long shot at this. But well, begging them to keep the door cracked open, crashed, and burned, which was likely probably back in 2007. I did this full time, and the market just collapsed around us. But anyway, one way or the other, here we are now today with 30 designers across four offices from coast to coast in the US and Canada.

Sam Gupta 4:37  

So that is a very interesting and crazy background. In my opinion, because typically, when I look at the engineers and the people who are involved in the product development, they don’t necessarily have as much financial literacy, to be honest in terms of doing the product costing and in terms of understanding what the needs are going to be of a CFO. 

So this is going to be great in terms of understanding your experience and how your experiences when collaborating with CFOs, but before we do that, we have one of the standard questions that we ask every single guest that come on the show. And that is going to be your perspective on business growth. When you think of the word growth, what does it mean to you?

Kevin Mako 5:14  

Well, I come from an interesting perspective on growth because in order for me to have grown in the early days, especially my 20s, essentially, I had to risk it all. I was one of those businesses that are completely organically grown from just myself to the 30 people that we are today. 

So never had any investors, never had any debt, never had any financing. So for me, growth comes with it a very kind of crazy secondary fear, which is very motivational, which is if you’re trying to double up an organic growth company, essentially, you have to risk it all. 

Because every time you start making money, and you really want to grow to the next level, you have to put it all on the line in order to get to the next level after that, and so on. So I basically played that game, going from $0 to profit back to zero to profit every time I wanted to scale five or six times throughout the first ten years of building this business. 

Risk mitigation opportunities with additive manufacturing

Sam Gupta 6:08  

Okay, amazing, So one of the things that I would like to mention here, as I’m pretty sure you have worked with a lot of different CFOs and finance folks, they don’t like to hear the word risk. Risk is for engineers and product developers. What we want to see is how we can mitigate that risk. 

So do you have any specific strategies, from your perspective, because you are saying that if you want to grow, you definitely have to take risks? But that risk has to be manageable. We should be able to mitigate the risk. So from your perspective, let’s say if we talk about our traditional manufacturers and distributors, they are not going to have as much experience and or appetite in taking those risks. So what will be your advice or recommendation in terms of taking enough risk so that we can grow the way you are growing right now.

Kevin Mako 7:01  

The interesting thing is when you have a career story and entrepreneurial story like mine, and you have danced very delicately with risk, right, you become very, very acutely aware of what those risks are. I would say if you looked at the way that an entrepreneur, especially a high growth, especially one who’s relying on internal financing, essentially financing by clients, you can’t just take bold or aggressive risks. 

And one of the big things that we did in order to scale without collapsing, and to be able to do that over and over and over again, is just like a relentless appetite for experimentation. Very small, very calculated tests, no matter what that would be, whether it’s new marketing programs, new advertising avenues, new website, new methodologies, new client base, whatever it might be when you’re trying to scale and grow, and you are very risk-averse, it’s far easier to take a little bite-sized chunk, and then start to see what works and then slowly start to develop the ones that seem to be working, and let go with the losers.

Kevin Mako 8:06  

And that is one of the things that some entrepreneurs and some CFOs. And some companies will say that we really want to focus on one big thing and put our eggs in one basket. But if you have to be risk-averse, okay, if you have to be very careful about the financing, if it’s not an option to fail, which isn’t for most people, then the easiest way that you can kind of be creative about that without losing potential opportunities, is just to relentlessly focus every month, what are you trying this month? 

And how are you benchmarking that? What sort of key metrics are you using to test whether or not that seems to have any flavor to it, or whether or not that’s something that should just be tossed to the side, shiny object syndrome, versus something that actually is quantifiably valuable to your business as long as you’re trying to scale it?

In terms of their #distribution network, #manufacturing, #supplyChain, funding, internal resources, the executive committee, etc., you could go on with a long list of advantages that traditional manufacturers have compared to #startups.

Experimental design with additive manufacturing

Sam Gupta 8:56  

Okay, amazing. There’s a lot of insight there. But in my experience, working in manufacturing and working with CFOs, I’m still trying to connect the dots here, right? So typically, when you look at the experimentation or the R&D phase, my experience talking to a lot of different manufacturers, it’s very hard to sort of template the risk and budget, the experimentation project, and that is sort of the fear majority of the manufacturers have because they don’t know how to plan for these projects, how to assess the risk of these projects, so they are not going over budget, and they are getting the ROI from these projects. 

And the second thing that you mentioned is bite-size, which is very interesting because as far as my experience with manufacturing goes and my experience working with manufacturers goes bite-size and manufacturing, they don’t go hand in hand. So help us understand a bit bite-size and experimentation can work together while mitigating the risk while not committing for this bloated amount of funds and budget and doing in a manageable way, the way you are doing?

Kevin Mako 10:02  

Absolutely. A good question, by the way, and we’ve worked with hundreds of companies over the years and exactly what you’re saying here in terms of how do you and let’s get specific here, how do you develop your next hot physical product, your next consumer product? And how do you do that in a bite-size manner? 

How do you take a stepping stone approach to it? And it depends obviously on the size and the scale. The bigger an entity, the further you could push a product down the development line, the more information you can actually get back from potential users or test groups or whatever else. 

But let’s look at something I’ll talk about one client, in particular, reliable products, we redesigned something called Uber light for them. It’s, basically, a multi-use light. It started as a showing light.

Kevin Mako 10:47  

But now it can be used in all these sorts of things, a very high-end light, great feature, the easiest ways that you can start on kind of simple experimentation is just really professionally and smartly redeveloped just the conceptual design and feature sets of that product. 

One of the first exercises we generally go through with the company is there’s a lot of data when you’re looking at your organization around your next product. And you may even not know just how much data there actually is, you’ve got sales reps, who are getting feedback from customers, you have customers themselves, which are posting reviews online about your products, you have engineers who are coming up with ideas, you have just random staff members, right, you might have a front desk person who has a great idea for a product.

Kevin Mako 11:32  

So one of the first things we like to put together when we’re looking at, whether it’s a small or medium-sized Corporation, it’s going to be all done all the way up to the large levels. But you build out the kind of like an innovation schedule to ensure that you’re able to collect all of those innovative ideas from within your team at a start because that’s the easiest, most accessible people, you can get this stuff done in no time, right? 

Once you’ve actually built out the plan, figure out how you’re going to serve and collect that data. It’s relatively easy to start surveying these organizations and trying to figure out okay, well, what features do we think could be revolutionary, what could be the next hot product that’s really going to put us back into the light or help us just shore up the fact that we are a leader in this market vertical.

Kevin Mako 12:13  

And you’d be amazed at how much information if you do this process properly, how much information you can gather, right there, you’ve already tremendously mitigated a bunch of, a whole bunch of your risk, because now you’ve got all of the potential stakeholders weighing in on what they think is good, and the bad ideas and whatever else. 

And that is an incredible starting point to really use all of that knowledge base before you’ve ever even started designing your next version of the product, especially before you’ve started engineering or tooling or anything else, right. That’s the first step.

Sam Gupta 12:46  

Okay, I could not agree more. I think involving everyone from the get-go is definitely going to hold the manufacturers in mitigating this risk from the get-go. But in our experience, and let’s go back to the traditional manufacturing and the distribution, they are not necessarily as innovative as some of these startups are. 

And if I look at some of these products, it’s not that these products are something brand new, that nobody was doing this functionally before. I mean, let’s look at some of the products. Let’s say if you guys are developing, maybe you guys are developing some sort of camera that’s going to be underwater, right. And again, the utility is not new. It’s not that people weren’t utilizing these products before. They had their own ways of managing things. 

But somehow, you guys are able to disrupt the space or ability to be successful in that space with these products. But traditional manufacturers are not able to do that. In fact, you are actually disrupting their market. You are taking market share from the traditional manufacturer. So what are some of the things the traditional manufacturers might be able to do the way you guys are doing these things? Because obviously, not as innovative as you guys are. 

Kevin Mako 13:58  

It always comes down to that first thing that is how do you actually be innovative. The amazing thing is a traditional manufacturer is you have exponentially more weight behind a new product than any startup out there. So in terms of your distribution network, your manufacturing, supply chain, your funding, let alone other things like internal resources, the executive committee, etc. right, you could go on with a long list of advantages. 

Of course, the disadvantages, you don’t have boots on the ground, you don’t have the hundreds of 1000s of people out there coming up with ideas or whatnot, potentially in your vertical or in your space or whatever else. So that innovation, it’s difficult to get that same on-the-ground feedback. 

But you can actually hybrid those two with some of the things I said before. That’s taking it one step further. Something really interesting that traditional manufacturers can look at when they’re looking to either build out their next product or even just improve what they have. First things first. Ninety-nine plus percent of patents today are not novel.

Kevin Mako 15:00  

They are integrations of two or more things that make that patent product novel that So first, you don’t have to be coming up with something that is so revolutionary like a teleportation machine to be innovative. It’s taking innovation truly, especially at the mass manufacturer level, big producers, midsize producers, that is taking what you have and leveraging it based on the data that you’re able to collect in those first phases, small, incremental improvements. 

What I think is very interesting to your listeners especially is looking at, and we could go into the Sam if you’d like but looking at the future of how to go from that innovation stage that we talked to earlier. Getting to the point where you’re actually testing certain marketing things to see in a very cost-effective way, what may or may not be those small, incremental improvements that will really improve your bottom line are really enhanced your revenue stream going forward. 

There are some tremendous things happening in the physical hardware space over the next 10 to 20 years that are going to leave certain manufacturers that are stuck in their ways in the dust.

Kevin Mako 16:08  

But for those who are willing to look forward and understand that, like a new future is coming, you’ve got a front-row seat of opportunity there to these things. There’s a number of things happening there. I would say five or six key things. First and foremost, Now this doesn’t affect everybody. This is going to affect everybody in the near future, depending on how you think of this, either directly or indirectly. 

But first and foremost, over the next 20 to 30 years. And look around the room right now that your wherever you’re sitting in or look around your car, whatever else, every single thing that you touch and feel around you in that room that is manufactured will have a microchip in it. It will be connected in some way or another. It can be something more complicated. 

Like we’re already seeing something like the NEST thermostat or whatnot, or it’ll be something very simple like the seat you’re sitting on to say, hey, look, you’re using the cushioning. Is that 50% efficiency, right? Now you need to replace that couch cushion and tap here, and we’ll get a new one order to your house. Right? 

It’d be very simple to very complex. But all of that is getting redesigned. Right now, there’s an entire lesson, as the Industrial Revolution, let’s call this the connected revolution. This is an entire revolution of things happening right now, which is redesigning everything around us.

Kevin Mako 17:19  

So that is something that, first and foremost, if you’re a manufacturer, you have to look at your product line and say how is this going to evolve? How is the market going to evolve over the next 10 to 30 years? And how am I going to be sure that I’m on that ride? 

Second of all, product design tools, software, prototyping techniques, materials, design, etc., are making product design or product innovation or incremental improvements to products easier and faster than ever, right? 

We all use SolidWorks design software for mass-manufactured products. You’re using FDA tools for simulations. Every year, those tools are getting exponentially better, right, and as other players come in, I like Autodesk fusion, 360, and such. And then you’re able to actually draw your tool line straight from your CAD model, all automatically organic shaping done automatically.

Kevin Mako 18:07  

All these sorts of tools and resources are making it exponentially faster for a manufacturer to make those improvements not only faster but far, far cheaper, especially when you start looking at some of these advanced prototyping techniques that are out there, not just 3d printing. Obviously, that’s the start of this pyramid. 

But you get into much more advanced technologies that are even Reverse Silicone Casting and all these sorts of 3d Printed metals and this sort of stuff. So really being able to get good quality test prototypes to market groups to say, hey, is this great or not right? Again, you’re mitigating your risk and actually going to full-scale production. Three big companies are spending less on R&D but much more money on the acquisition of small startups. So, Sam, you mentioned it earlier, it’s hard to compete with the sheer innovation and risk-taking and whatever else of the small folks. Well, here’s the beautiful cherry on top of that whole thing.

Kevin Mako 19:00  

You don’t need to compete with them, let them prove the market, and this is happening with companies all over the world. Right? Yeah, the NEST thermostats are a great example, right? Let somebody build the next great thing, and then you swoop in and acquire and then leverage your history and connections and manufacturing experience and all that to make them 100 times or 1000 times the size that they could have been right. 

We’re seeing this happening at all the high levels, but this kind of logic is trickling down most of our clients that are really startup clients almost all of them when they proved the market and they get to like a reasonable level of sales and not a big deal maybe six figures in sales right even low six figures they get acquired somebody says that’s a great technology.

Kevin Mako 19:48  

So what’s something to really keep your radar out is how you can acquire companies before they become big, and that’s a critical thing. Hit them when they’re just starting to make sales so that you don’t have to pay ten times the price. Price a year later when they really start to catch on. And in fact, you can be a big part of that growth story. 

So it’s a very inexpensive way to get a great new technology added to your line, either white-labeled with your brand or whatever else, and then scale from there right now, big one coming in here, talk about risk mitigation, additive manufacturing, this will change the game over the next 10 to 20 years manufacturing 50-100-200 units of a product, getting it out to the market, getting feedback, and then making small iterative changes, doing it over and over until you say, Okay, I think we’re ready to do 5000-10,000 units tooled up and going to market.

Kevin Mako 20:34  

So you now actually are able to test run your product to the market, for a fraction of the cost, you won’t be making any money because this is high-cost production per unit. But it’s a very cheap and easy way to test before you spend the big bucks on a full production line and marketing campaign and all the rest, right. And then you’ve got other things like crowdsourcing, and direct to consumer and all this other stuff, too, which is all kicking into it, right? 

But if you look at all these things put together, it really is, it is an incredible ecosystem of opportunity for those kinds of executives and CFOs that are looking to either acquire or develop in a smart way, small, iterative improvements to their products so that they are at the front line of that revenue growth, or that profit improvement over the years to come.

Something really interesting that traditional manufacturers can look at when they’re looking to either build out their next product or even just improve what they have: ninety-nine plus percent of patents today are not novel.

Technical underpinnings of additive manufacturing

Sam Gupta 21:19  

Okay, so let’s talk about additive manufacturing a bit more. So the way you are describing it, I don’t know if there is a real technology that has changed. And because of that, now additive manufacturing is possible. So let’s say CFOs may not be aware of the data in manufacturing. 

So how would you decide what has been the changes in the technology that is allowing manufacturers to be able to produce these goods and short runs and test out in the market before they can do the full production? Well, so tell us a little bit more in terms of what has changed. And what is changing?

Kevin Mako 21:53  

So is you know the way the big picture, the way to look at is you look at it like inkjet printers, right? It was incredibly expensive to print full color over the years; they got better and better to the point where now everyone has them in their home. And I can print out photorealistic pictures in three seconds, right? 

Yeah, it’s the same things happening with 3d printing. Now it’s a little bit more complex. It may take a little bit longer. But the reality is the same kind of exponential technology growth is happening. It’s happening to such a degree that what these big kinds of 3d printing companies eventually their goal is to and everybody’s working on it at the high levels in 3d printing or additive manufacturing is saying,

Kevin Mako 22:28  

How can we get closer and closer and closer to the cost level of one plastic part tooled versus one plastic part printed, and of course, ten years ago, very expensive? Every printed part was a fortune. The machines were a fortune. But as we all know, Moore’s Law, all of that is changing in time. 

So there are facilities, there’s one in particular, right now we’re having a kind of behind the scenes discussions with so I can’t go into it in too much detail. But they’re building a $10 million facility in Texas, just for this reason. So what they’re looking to do is to produce up to 500 units for new products, or changes to products or innovations on products, both for early-stage companies and for large corporations alike, essentially, in a reasonably cost-effective manner to test the market without being without actually paying to 3d print individual things.

Kevin Mako 23:18  

So they’re setting up certain methods and production lines and live technologies where they have certain materials getting fed in, they can very quickly and efficiently 3d print, live changeovers, all that sort of stuff so that your unit cost is coming down substantially. And it’s amazing because there are no upfront costs, right? It’s all variable costs. 

Once it’s actually designed and set up and tested, then it’s just a matter of printing out more units. So this sort of technology, although it’s at its infancy, right now, just look at what happened to printers. It will happen to 3d printing, where it just gets easier and faster and more efficient. 

So when you’re thinking about your products going forward, you may want to think if it’s not logical to tool up, or if you want to try ten different things in the market, but you can’t tool up ten different products or versions of that product start to think how I could do a few units? 

Kevin Mako 24:00  

What partners can I use? How can I design this appropriately so that this thing could not be mass-manufactured right? Light manufactured or the product of additive manufacturing, just to test out the market, you even looking at companies, right? Like IDT, Adidas, which are offering unique shoes to different users, you can actually customize your shoe online, and then they’re using additive manufacturing methodologies to send you a shoe that you’re the only one in the world that has, so that’s like the unique element of it, but there’s also the speed and execution of it. 

All of that is coming together and may apply to your products moving forward. And all of that is heavily reducing your cost to market at least to test, and then once you’ve tested and you know it’s a winner, then to a lot. So that’s why additive manufacturing is becoming so powerful. It’s just it’s simply reducing the cost of actually test run units before you go to market.

You don’t have to be coming up with something that is so revolutionary like a teleportation machine to be innovative. It’s taking innovation truly, especially at the mass manufacturer level, big producers, midsize producers, that is taking what you have and leveraging it based on the data that you’re able to collect in those first phases, small, incremental improvements.

How additive manufacturing can help expedite business case development and innovation

Sam Gupta 24:58  

Okay, amazing. So obviously, the policies are great. And I absolutely appreciate the trends and technologies. But when I talk to these traditional manufacturers, and obviously important to their engineers, and from the skils perspective, or from the appetite perspective, to be completely honest, they are one of the brightest people that I often talk to right now. 

They all understand these technologies, they all are very creative, they all are hanging out on things like I was talking about newer technology, we all have multiple ideas, but their biggest challenge and the barrier always is working in these traditional organizations, in pitching that next big idea in getting traction from the organization.

Kevin Mako 25:39  

And this is why it’s so important. So if you’ve got these engineers, or if you’re a CFO, or whatever it is, and you’re looking at it, and you’re trying to pitch up the chain and the corporation to say, yeah, we want to do this, here’s a big difference. If you had a million-dollar budget before, you could try one or two new products into the market a year. 

If that’s your budget, now, you can go to your executive and say, you know what, for that same million dollars, we’re going to try six products this year to test market, or on the inverse historically, if you were constantly bumping into the head, that ladder ceiling and saying, look, here, we want to develop this product, we want to test this market, and it’s going to cost a million dollars. And the executive said no, stick to what we’re good at. Now you can go to them and say it’s going to cost $200,000. And obviously, that’s much more appetizing.

Kevin Mako 26:28  

So again, you’re really reducing the barrier to entry for trying out new products. And then, of course, the products being successful, what executive doesn’t want to look at something that you’ve now proven you market validated, maybe you’re in a small geography, or maybe with a very niche demographic, whatever that might be, you can now say, Okay, look, for now, only $200,000, we designed, developed, tried additive manufacturing, we printed essentially 200 units, we sold it to this market, they were willing to pay, they loved it, look at the reviews that are coming back, of course, it’s an out of the park success. Now with 200 units.

Kevin Mako 27:02  

Let’s scale that to 20,000 units. Now you’ve got a great case model, a very quantifiable case model to say we’ve tested it. And this is why we want to improve this as opposed to having a bunch of engineers or a bunch of financial executives saying, yeah, I think this is a good new idea and could be a big deal. Forget that. That’s why those ideas get turned down historically. 

Now you have new technology that can give you essentially metrics behind that innovation. And if you’re confused or about how to actually pull that off, we help numerous companies with that very thing. Feel free to reach out to me, feel free to shoot me a direct line of contact on my LinkedIn or whatever else. And at least I can point you in the right direction, depending on the type of product that you’re looking to innovate on.

Additive manufacturing workflow

Sam Gupta 27:46  

Okay, so let’s talk about it from the engineering perspective. So let’s say find the engineer in the organization. And obviously, I like the pitch. And as a CFO, I’m probably going to like the pitch as well, that rather than investing a million dollars in one product category, now I’m diversifying my portfolio to five different products. 

So obviously, that’s a very fancy test, right? Now, let’s say find the engineer. My traditional workflow is going to be I probably design this product in my head, I work with my traditional suppliers, or maybe I need to work internally. And that’s how my R&D processes are set up. 

So let’s say if I want to work in the new mindset, or maybe I want to work with you, or a vendor like you, right, so how is my workflow going to change? What is going to be required from my side in terms of creating this new workflow where I can do these five products, as opposed to doing this one product and reading the entire workflow to walk me through the process, if you could? 

Kevin Mako 28:39  

Well, first and foremost, I mean, you have to look at the innovation like you traditionally would and kind of understand what difficulties or challenges you may have in the design. From what I’ve seen, there are always two types of hardware design. There is the one side which is okay, we thought of a new way that this could be improved, right, let’s say you’ve got a cup with a handle and you say, you know what, we’re gonna put a little pad on to the bottom of this cup, because people keep breaking them, when they hit them on the morning, they set them down on the table. That’s pre-existing technology. It’s a clear improvement. 

Let’s call it relatively easy to design an engineer. I mean, that one, in particular, is super easy. But this is the framework, right? You’re using existing technology. Now there’s the other side, which I like to call experimental design. And that’s where you say. You know what, we want to use a test lab to figure out new material for that cup, the whole cup, whereas if you set it down, it’s unbreakable. Now, that is an entirely different type of design.

Kevin Mako 29:30  

That is what I call traditional R&D or experimentation. Whereas opposed to the flip side is product evolved and inter evolution product evolution via design or pre-existing technology built into a new design or new framework. 

Generally speaking, if you’re an engineer, you’re going to get a lot of pushback from the experimental side of things. And you’re going to get a lot of interest when you can show a path to production with the nonexperimental things. So what I would suggest is, first and foremost, if you’re going to come forward to the executive branch with new levels of innovation, make sure that you have a fairly clear technological path to that innovation because executives don’t like to just open-ended experimentation.

It may work; it may not work. So the more that you can shore up in terms of ensuring that the experimentation is not required, but the other innovation is, and it will improve the product in certain ways, then the easier it is to get that sign-off.

Kevin Mako 30:30  

So that is the first thing that I think is very important. And we see that right at the startup levels all the way through to fortune 500 companies. We work with many different types of folks. We always see those two different types. And we always tell the experimental ones like, absolutely, but they can try this, but it’s an open-ended check. That’s what executives don’t like to see. 

You can’t go to an executive to say, well, it could be $100 grand, or it could be $10 million, we’re not sure. Hopefully, we’ll do it towards the lower end of that. It’s classic experimentation, right? How quickly are you going to find a cure? Well, every 10,000 samples that you different samples you put in gets you that much closer, but you don’t know if it’s 10,000 or a million samples before you find the one that clicks. 

And it’s the same thing when it comes to hardware. You want to generally avoid experimentally or at least have that as a small piece of the budget or a small piece of your ask. But the bigger piece of your ask focuses on well; here are the clear, quantifiable, direct things that I think we will be able to build fairly easily that will improve the bottom line or the top line. 

Sam Gupta 31:30  

Okay, amazing. Thanks for that. And we are close to our time, Kevin. So one thing I would like to mention here is I love hosting other podcasts hosts because they have fascinating stories and insight as well. 

So briefly, do you have any stories or insight that you’ve got from your podcast, from any of the guests, maybe something that totally rocked your world? And that you would like to highlight?

Kevin Mako 31:55  

That’s a good question, actually. So I run the product startup podcast, and we focus on essentially new hardware development. Most of our guests are kind of high-level executives or extremely successful product manufacturers on one side or the other. I remember the story of Mike Morton, who was on the show used to be the head of design for all of Dell desktop, out of the entire division for many years in any case, and one of the things that he always said, which was interesting, because he said, okay, you’re looking to develop something new. If it’s experimental, basically look at it. 

Even if it’s only partially experimental, which he says is always the pitch, right, as we talked about before, but he says first things versus double your budget, double the time. Yeah, he said, Look, if you do that, then work backward from that number, and everybody will be happy. But don’t try and push it. Especially if you’re trying to experiment or get creative or get clever with some really new technology that’s pushing the boundaries of anything that’s been done in the past, really keep that in mind, right?

Kevin Mako 32:55  

So in terms of design, you’re always better to be realistic, be honest, and forthcoming when it comes to these sorts of developments. But again, focus on what you can do, and then leave a small bit to that experimental thing. If the experimental thing works great, do more of it. If it doesn’t, then no biggie because you’ve still focused on most of the low-hanging fruit that easy wins the great next evolutions. 

And you know what, Sam, that all comes back to the very first thing that I talked about on the show, which is it which very few companies do if you are running manufacturing for right now I would suggest taking an honest look at every month or even three months if you’re doing it far, even every year, do you really believe that you have a strong internal innovation Information System, which collects and aggregates and organizes quality innovations from within your firm? 

And I can almost assure you that you almost everybody listening right now will say, well, the engineering firm does, yeah, the department does. But that’s only one of maybe ten different avenues that you should be collecting innovation information. And if you start with having a very well-designed information intake program, then it makes it exponentially less risky and far more profitable. 

As you start to implement innovations, which you will notice are consistent across the firm all the way from marketing through to like engineering, you will start to notice trends of certain things that are low hanging fruit, easy to execute, but will have tremendous benefits to either revenue or profitability. And that’s your first and easiest step and your least expensive step to creating great innovations going forward as a manufacturing company.

Sam Gupta 34:34  

Okay, that’s it for today. Kevin, do you have any last-minute closing thoughts, by any chance?

Kevin Mako 34:38  

No, that’s it. I would just if you’re interested in hardware at all. Please check out the product startup podcast productstartup.com, which I am very excited to be hosting. Like I say, every week, we have amazing guests on the show that are very like-minded individuals out of incredible product organizations. 

So hope to see you there and of course, anytime. Feel free to reach out to Kevin Mako. Hit me up on any social media platform, and I’m happy to have a conversation, even if it’s just to point you in the right direction. So thanks, Sam. I really appreciate you having me on the show. You are a great host, and I enjoy listening to the episode. So thank you.

Sam Gupta 35:10  

Same deal, my friend. You have been a great guest as well. And my personal takeaway from this conversation is going to have that strong internal innovation information system, and the more Intel and the insight that you have, the better you are going to be with your innovation. The far superior your budget planning and your spend is going to be. On that note, Kevin. I really want to thank you for your time. This has been a very fun and insightful conversation.

Kevin Mako 35:37  

Thank you, sir. Appreciate it.

Sam Gupta 35:38  

I cannot thank our guests enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you learned something new today. If you want to learn more about Kevin or his podcast, head over to productstartup.com. Links and more information will also be available in the show notes. 

If anything in this podcast resonated with you and your business, you might want to check out the related episodes, including the interview with Kevin Lees, who discusses how engineering can work effectively with production and finance teams. Also, the interview with Dave Hataj, who describes the role gears plays in our society and the nuances associated with the manufacturing process. 

Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform or DM me on any social channels. I’ll try my best to respond personally and make sure you get help. Thank you, and I hope to get you on the next episode of the WBS podcast.

Outro 36:36  

Thank you for listening to another episode of The WBS podcast. Be sure to subscribe on your favorite podcasting platform so you never miss an episode. For more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.

In this episode, we have our guest Shari Lava, who discusses the importance of partnership with your tech vendors and external research. She also talks about various trends that executives should know and how they have changed because of COVID. Finally, she touches on how to read research reports and why it is essential to have an organized methodology to lead large transformation initiatives, and how their digital transformation framework can help.

Chapter Markers

• [0:16] Intro
• [2:47] Personal journey and current focus
• [4:25] Perspective on Growth
• [6:02] The challenges for SMBs in implementing digital transformation framework
• [8:27] Utilizing external research for business decision making
• [14:13] The importance of tech vendor partnerships to create a digital transformation framework
• [20:57] Research-based decision-making to select technologies for digital transformation framework
• [26:16] How IDC digital transformation framework can help
• [29:28] Closing thoughts
• [31:49] Outro

Key Takeaways

• Tech priorities for the last couple of years have been very hardware and infrastructure-focused, when now all of a sudden we need to implement applications, we need to implement video collaboration, we need to roll out new notebooks, and we might not have a corporate image for that.
• If you look at some of these applications, they changed a lot in the last five years. ERP implementations look nothing like they did 10-15 years ago, but there’s still this idea that they’re all big and complex, and they take a year to implement it.
• If they don’t have a lot of technology, expertise in-house, and they’re not going to places to get knowledge about technology, they’re going to end up getting disrupted because more and more manufacturing executives are finally saying I want technology besides Excel, to run my business.
• They are missing the opportunity to really learn self-educate, to some degree, understand how technology can solve some of their biggest pain points today. And a lot of it has to do with decision-making and access to data and missing opportunities to steal a competitive advantage.
• If you’re trying to keep your digital customer journey moving and you’re not focused on implementing useful tech, then you don’t have a digitized customer journey. You have a makeshift journey.
• When we look at their business priorities, we see that there’s much more focus than ever on productivity and agility. And when we break down their tech priorities, we see that they’re focusing on putting more data into applications and getting it out of spreadsheets.

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About Shari

Shari Lava is a Research Director, leading the WW Small Medium Business (SMB) Research Program at IDC. Ms. Lava’s core research coverage includes identifying and supporting the unique, evolving technology needs of the SMB Buyer. For much of her 23-year career, Ms. Lava has worked on all sides of the SMB ecosystem including implementing business applications for SMBs, writing best practice research for tech buyers, and most recently being an operational leader in an SMB prior to coming to IDC.

Resources

• Connect with Shari
  • LinkedIn
• Connect with IDC
  • Website | LinkedIn

Full Transcript

Shari Lava 0:00  

When you’re looking to make a decision, how do you research it? Because we know that the stats have been kicking around for years that more and more companies do a lot more research before they ever reach out to a potential vendor. Right? In fact, they’re pretty far through the decision-making process, and you’re probably already on a shortlist.

Intro 0:16  

Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.

Sam Gupta 0:52  

Hey everyone, welcome back to another episode of The WBS podcast. I’m Sam Gupta, your host, and principal consultant at the digital transformation consulting firm, ElevatIQ.

While other industries such as banking or logistics have successfully differentiated purely because of technology and digital transformation framework, manufacturers treated digital technologies as their stepchild, especially in the SMB space. SMB manufacturers and distributors rarely use external research to augment their business or digital transformation initiatives. What could manufacturers do to learn from other industries and create a compelling customer experience using technology? 

In today’s episode, we have our guest, Shari lava, who discusses the importance of partnership with your tech vendors and external research. She also talks about various trends that executives should know and how they have changed because of COVID. Finally, she touches on how to read research reports and why it is essential to have an organized methodology to lead large transformation initiatives, and how their digital transformation framework can help. Let me introduce Shari to you.

Sam Gupta 2:05  

Shari Lava is a research director leading the worldwide small Medium Business Research Program at IDC. Miss Lava’s core research coverage includes identifying and supporting the unique evolving needs of the SMB buyer for much of offer 23-year career. Miss Lava has worked on all sides of the SMB ecosystem, including implementing business applications for SMBs, writing best practice research for tech buyers, and most recently, being an operational leader in an SMB prior to coming to IDC. With that, let’s get to the conversation. Hey, Shari, welcome to the show.

Shari Lava 2:44  

Thanks for having me, Sam. It’s our pleasure, 

Sam Gupta 2:47  

I’m super excited to discuss a lot of things from the research perspective. Before we do that, just to kick things off, do you want to start with your personal story and current focus so that our listeners know who you are?

Shari Lava 2:59  

Yeah, for sure. So I’ve spent the majority of my career focused on small and medium businesses and really all parts of the small and medium business ecosystem. And got my career. I started by building contact management applications, as we called them back in 1998. for small businesses, I worked for small businesses implementing these kinds of solutions. 

So now what I do is I’ve taken all of that experience in implementing digital transformation framework and being a small business leader, and now what I do is I actually look at small and medium businesses, look at what their technology adoption looks like. And then look at the types of offers that vendors or like Microsoft, or SAP, or all those sorts of folks are offering to these small and medium businesses and help them understand how they fit or don’t fit with certain types of clients. 

And I love this work. It’s really interesting because I’m passionate about technology, I was on my first computer at five years old, and it was in a school in a corner that nobody touched. And I think traditionally, small and medium businesses haven’t understood what technology could do for them. And then the pandemic came, and now they certainly see it. 

But the difference is they’re trying to climb a really steep curve. And so what I try and do is kind of help them jump that curve a little bit, both with my research and also in my advocacy of their interests with big tech vendors. 

Sam Gupta 4:25  

Okay, amazing, so I definitely want to dig deeper into each of those things, especially from the research perspective, because you guys bring a lot of insight, the combined insight of the community what you are hearing from these manufacturers about digital transformation framework or the tech vendors when you are talking to them. 

So we get a very consistent theme in terms of the research. But before we do that, we have one of the standard questions for every single guest that comes on the show, and that is going to be sharing your perspective on growth when you think of growth. What does that mean to you?

Shari Lava 4:53  

Yeah, I think right now what I would say, Sam, what I thought of growth a year ago and what I thought of growth now, very, very different. And especially for the SMB market, and especially the small businesses, growth can be pretty elusive right now if you don’t happen to find yourself in one of a handful of industries that have done very well during the pandemic, and so growth right now I think is focused still for a lot of SMBs on kind of pivoting the business, and I know a lot of us to think it’s been a year what do you mean pivoting? Haven’t they already pivoted? 

In some respects, they have, But as things are really fluid right now. And it’s more about levels of pivoting if you will. And so, finding growth is about constantly evaluating where the business is at what is in demand this week, so to speak, right? I say that almost kidding. Then moving your business as agilely. I know that term gets thrown around a lot. But it is possible to maximize whatever growth you can pull out right now. 

Tech priorities for the last couple of years have been very hardware and infrastructure-focused, when now all of a sudden we need to implement applications, we need to implement video collaboration, we need to roll out new notebooks, and we might not have a corporate image for that.

Shari Lava, Research Director, IDC

The challenges for SMBs in implementing digital transformation framework

Sam Gupta 6:02  

Okay, anything. So let’s go back to your comments about SMB is not understanding the tech adoption or not utilizing the technology to their advantage or implementing a digital transformation framework. So what are some of the challenges that you hear in the marketplace with your research?

Shari Lava 6:19  

Yeah, for sure. So if we’re going to talk about the technologies and the barriers, we have to start with what their technology priorities were, not that I want to spend too much time in history. But traditionally, when you talk to an SMB about what their top tech goals were, for the next six to 12 months, they would typically tell you things that were very hardware or traditional infrastructure focus, they said, Oh, well, we want to replace our backup, we need a couple of new servers, we need to strengthen security in the network, or we’re doing PC renewal. 

All of these things for both small and medium businesses were always their top five tech priorities, and then the pandemic came. And a lot of those things, not all of them, but most of them get disrupted, suddenly, I care a lot less about network security and care more about securing all the desktops, I suddenly had to go out and buy and the data that’s on them, that’s no longer sitting behind my corporate firewall, oh, when these ways we’ve been managing the business by spreadsheet, these don’t work anymore, right.

Shari Lava 7:19  

And so the types of technologies that we’ve seen businesses suddenly focus on, for the first time ever, they said, hey, I’ve got to get my data at a spreadsheet, I’ve got to get them into customer applications and financials applications and for manufacturers ERP application, and that’s at a much smaller company size than I think we would have seen traditionally in the past because they’ve had to digitize their entire customer journey and create digital transformation framework. 

Now the problem, of course, is that if your tech priorities for the last couple of years have been very hardware and infrastructure-focused, you probably whatever resources you have, and let’s be honest, many don’t have a lot, they probably have the wrong skills, because they probably have hardware and server and backup and all those kinds of skills, when now all of a sudden we need to implement applications, we need to implement video collaboration, we need to roll out new notebooks, and we might not have a corporate image for that if we even had a corporate image, to begin with. 

So very different challenges in implementing digital transformation framework and not the right expertise, in-house, not to mention they still have to keep all those other things running. And so really stretched for resources even more so than they typically were.

Utilizing external research for business decision making

Sam Gupta 8:27  

I could not agree more with respect to expertise, the manufacturers that we commonly come across or see, especially in the SMB market, and we are talking about super small manufacturers, right, typically don’t have any IT capacity, even if they might have some of those digital systems and capacity to create digital transformation framework. 

So their adoption or utilization of these systems is fairly low. Let’s talk about some of the things from the external research perspective. I don’t know what your perspective is in terms of utilizing external research. And this is the question that I asked every single guest that I get from the research perspective, the people who are involved from the macro perspective, and from my marketing background.

Shari, when I look at the external research, let’s say find the product marketer. As much as I want to rely on the internal data and the intuition to be able to decide okay, which product should I be selling? At what price what kind of product margin should I have? That I’m not losing to my competitors, right. This is where external research plays a very important role whether you are looking at the external perspective or the internal perspective in terms of deciding whether you want to buy the expensive machine or you want to buy an expensive ERP system. 

External research could play a very important role. So what is your experience with SMB manufacturers and distributors? Are they used to utilizing external research to supplement their processes or decision-making?

Shari Lava 9:52  

Yeah, I think it’s rising. I think it has been rising for a while, and I think it’s getting to the point where for most manufacturers, it’s something That they utilize more and more when making a decision. one of the things we ask in our research is when you’re looking to make a decision, how do you research it because we know that the stats have been kicking around for years that more and more companies do a lot more research before they ever reach out to a potential vendor. 

In fact, they’re pretty far through the decision-making process, and you’re probably already on a shortlist. And so they’re using things like industry publications, and they’re using things like external research bodies, such as IDC. But the other thing, too, is that there are some groups that are not leveraging it enough.

Shari Lava 10:36  

And they’re still relying on things like word of mouth, and especially the small businesses tend to rely a lot more on word of mouth. And that might be not necessarily your friend or your neighbor, or though that’s true for some tech. But when it comes to systems, it tends to be a more professional word of mouth. 

And that can mean a lot of things that can be a trusted adviser, that could be industry, peers, competitors, people who came from other companies that join your company, all of those sorts of things feed into it. And while that’s great, the issue with that is, if you look at some of these applications that really provide the most bang for the buck today, they changed a lot in the last five years. 

ERP implementations look nothing like they did 10-15 years ago, but there’s still this idea that they’re all big and complex, and they take a year to implement it, and all of those sorts of things, and that I think, really holds a lot of companies back, whereas if they were utilizing more of the research bodies that are out there to understand how those experiences have modernized quite a bit, I think that they would understand a lot quicker what the value is, and that the time to value is actually much, much faster than it used to be, and that these implementations don’t fail the way they used to, some of it could due to the maturity of digital transformation framework.

Sam Gupta 11:51  

Okay, amazing. So let me qualify my statement a bit more here in terms of utilizing the external research. So when we look at the manufacturers, they are typically utilizing a lot of external research for their own product development. And I’m probably going to be called out for my comment. 

The next comment that I’m going to make on this row is typically manufacturers and distributors the way they utilize technology or IP, it’s almost like a stepchild for a majority of the SME manufacturers compare this with, let’s say, for example, if you’re comparing this with banking, or insurance companies, I mean, they live on technology, and they really put their commitment on technology because they know that technology is probably going to be their competitive advantage if we can enable the customer experience using technology. 

But manufacturers typically don’t do that. They are hanging out in the, let’s say, manufacturing community, they are listening to their manufacturing influencers, but they very rarely hang out in, let’s say technology forums. It could be gotten to be ADP. It could be any of these symposiums. So what would be your recommendation to a manufacturing executive? Who is not hanging out in these forums, and what are they missing out on?

Shari Lava 12:59  

Yeah. So I mean, I think that there, we talked about earlier how low they are in terms of internal tech resources. And my research certainly shows that the sooner in their lifecycle that they have a tech resource, the more technology they start adopting. So if they don’t have a lot of technology, expertise in house, and they’re not going to places to get knowledge about technology, they’re going to end up getting disrupted because more and more manufacturing executives are finally saying I want technology besides Excel, to run my business. 

And I would say that without some sort of knowledge in-house to kind of bring that up a level, they need to go and educate themselves. And it’s actually more important than it’s probably ever been and will be long after COVID is a distant memory, which can’t come soon enough. Yeah, so I think they’re missing the opportunity to go back to your question I think they are missing the opportunity to really learn self-educate, to some degree, understand how technology can solve some of their biggest pain points today. And a lot of it has to do with decision-making and access to data and missing opportunities to steal a competitive advantage.

If they don’t have a lot of technology, expertise in-house, and they’re not going to places to get knowledge about technology, they’re going to end up getting disrupted because more and more manufacturing executives are finally saying I want technology besides Excel, to run my business.

Shari Lava, Research Director, IDC

The importance of tech vendor partnerships to create a digital transformation framework

Sam Gupta 14:13  

Now let’s talk about some of the tech vendor partnership issues. Right? So let’s say if you consider an example of a manufacturer or distributor, I mean they are going to be working with a lot of different suppliers. And typically, there, let’s say the product suppliers when we talk about material suppliers, are going to be slightly more critical. 

In fact, the equipment suppliers are going to be equally critical as well, because if they don’t think the nightly, then their production floor is going to be stopped or the material if they don’t have material on time, they don’t have those relationships with the material vendors. Sometimes that could be an issue as well, but they don’t have the same relationship with tech vendors, but in my mind and in my opinion, your ERP is sort of the glue to run your organization, whatever digital transformation framework or infrastructure that you have.

Even if you are processing, let’s say, the transaction or orders, everything that you are doing on the systems, even if that is stopped, your business is going to be stopped. So, in my opinion, I think that vendors should be treated more as the strategic partner as opposed to having this transactional mindset. So what would be your perspective on that in treating the tech vendor as the partner?

Shari Lava 15:22  

Yeah. So I think that traditionally, we talked to already about how the fact that SMBs hadn’t valued it in the same way in the past. And there was a quote from the head of Cisco That said that since the pandemic, the CIO has gone from living in the basement to living in the C suite. And that’s great internally. But as we talked about, not all of these SMB manufacturers really have any tech people. 

And so partners become your extension of your tech team, however big or small it happens to be. And if the tech has suddenly gone from being something you cut in an economic downturn to something you rely on to keep your business resilient than you did, I would totally agree with you, Sam, that you need really strong partnerships just like you do for all the other parts of your business as a way to keep that digitized customer journey moving.

Shari Lava 16:15  

So if you’re trying to keep your digital customer journey moving and you’re not focused on implementing useful tech, then you don’t have a digitized customer journey or digital transformation framework, right? You have a makeshift journey. And when it comes to what’s important, though, which I think is the other part of your question for the small businesses, they are looking for partners that get them that understand their challenges that speak their language, one of the biggest misses I often see is partners will throw out a lot of buzzwords. 

And so they think that they don’t get them and they may not, or the other thing that happens when they use a lot of buzzwords, and such is the small and medium businesses just kind of feel you almost make them feel like they’re not smart. 

Yeah. And therefore, you’re creating a psychological resistance, if you will, to work with that partner. You’re already you wouldn’t do that to someone you want to have a good relationship with. So why are you doing it to your SMB customer? 

Sam Gupta 17:19  

Exactly. Yeah, it comes across as very condescending. And I have seen that personally as well. And that’s why I try to stay away from all of these buzzwords. Let’s talk about a solution. So let’s talk about the digital outlook. Okay, so when I have the research folks on my show, I am always asking them to predict the technologies as we have agreed Shari here that we are going to be slightly more resistant towards using the buzzword?

They are going to be talking about. Oh, yeah, it’s going to be the next big thing. a Digital twin is going to be the next big thing. So if we discussed this from the business perspective, what are some of the trends that you are expecting from the business perspective that my CFO or the CEO needs to know, in terms of knowing how they should be positioning them all in the next five to 10 years? 

Shari Lava 18:28  

So I think when we look at what their business priorities are, we see that there’s much more focus than ever on productivity and agility. And when we break down their tech priorities, we see, as we talked about, that they’re focusing on putting more data into applications and getting it out of spreadsheets like that’s pretty important. 

When you take the buzzwords then like AI, if you agree, if you just say, hey, AI is going to be important, and SMB goes, don’t you understand my life is on fire, right? I don’t, really. But if you talk about why AI is related to those trends, and what AI means to an SMB, and how it can help them now, all of a sudden, we’re having a different conversation and what my research shows because it is one of the questions I asked SMBs I said,

What use cases if any, are you currently using AI for and which ones are you thinking about using it for and then I gave them a list of really practical use cases, things like, hey, I want to automate data capture, I want to get my system to actually provide me some insight that I wouldn’t see in an Excel spreadsheet.

Shari Lava 19:37  

I want to have AI automate some things for me that I’m spending too much time doing manually while I’m feeling so much pressure, and my employees are feeling so much pressure because we’re trying to change everything. 

And those were really kind of the top things that SMBs picked as things they want AI to do for them. Now. I think what that points to, And there was some additional research I did around this where they said, And the thing is, those are differentiators. For me, if I’m going to spend the money on an apple, a business application to manage my business, then I want it to help me with these things. 

It’s not enough anymore to tell me it’s going to centralize my data. It’s going to do all these things. It actually has to enable these things. For me, it has to help me be smarter and run better. And so if you can position if vendors can understand that, that’s actually how SMBs want to think about AI and digital transformation framework, then I think that you can bring the conversation to a level that’s digestible for everyone and help them help SMBs understand that there are benefits including manufacturers, especially manufacturers, who could use things like AI to warn them ahead of time when delivery dates and targets are going to be missed. And how, what kind of impact that’s going to have on the customer orders that are piling up. 

They are missing the opportunity to really learn self-educate, to some degree, understand how technology can solve some of their biggest pain points today. And a lot of it has to do with decision-making and access to data and missing opportunities to steal a competitive advantage.

Shari Lava, Research Director, IDC

Research-based decision-making to select technologies for digital transformation framework

Sam Gupta 20:57  

Okay, amazing, so we are going to be talking now about research-based decision-making. And typically, when we look at the manufacturers and distributors, they have not made as sophisticated decisions as their enterprise counterparts would have made. They are not really as equipped in making the research businesses. So let’s take an example of a CIO of the enterprise company. 

The majority of the time, when they make a decision, they are probably going to be asking for secondary research from corporations like IDC, just because they understand the value the IDC brings to the table, and they are probably going to be looking at different variables. 

Now, even if you look at the report from IDC or Gartner or any of the research firms, if you don’t know how to utilize that also can consume that information, how to read that, how to interpret that, how to customize that for your own advantage, if you are not going to get much value out of it right? You need to know how to read these reports and to be able to consume them on your own on one page. So now, my typical SMB manufacturers, I mean, typically don’t rely on these reports.

Sam Gupta 22:01  

And the reason for that is because they have this sort of fear that this is probably not going to be relevant for me because I’m probably going to see a lot more buzzwords that I don’t care for. So tell us, number one, the research methodology, all you guys do the research, what is your method to being able to do this research. 

And let’s say if SMB manufacturers want to get sophisticated because there is a significant failure rate when it comes to digital transformation framework and the ERP failures as well in the SMB community. And there is a reason for that because they are just not as good at making. So if you were to coach or advise an executive, why they should be consuming the research, how they should be reading the research, and what is your methodology in doing the research? Tell us a little bit about that?

Shari Lava 22:50  

Yeah, so when I’ve done these types of comparison reports, either here at IDC, this type of research report, or even the selection work that I used to do when I was actually working in partner organizations that implemented these kinds of solutions. The thing is, is there a lot of the research reports the mistake that a lot of SMBs make is they take a look at the graphic and they look at the top quarter. 

Then they say okay, that’s our shortlist. They don’t go any further. And the issue with that is that usually in the depth of those reports, and they’re big reports, but there’s a reason they’re big is that we talk about in these reports, this is right for you. If you only look in the shortlist, what’s on the graphic in the most desirable position, depending on which firm you’re talking about. Right? Then you miss some of the nuances because not every solution is right for everyone. A lot of these solutions are very specific to the industry. Some are specific to size segments. Some are even a better fit, depending on what the rest of the technology is in your ecosystem.

Shari Lava 23:56  

So those things you have to really have to look at and you have to understand those things and pay attention to those, and I look at CIO leaders because I’ve been in this role where I’ve been working with a CIO, my role previous to working at IDC, I was actually an operational leader, and in our case, we were talking CRM applications, but I was on the marketing side, and the CIO came to me with a shortlist that was basically the top four you would see in these graphics. 

And the issue I said is okay, the problem with these is, this one is too expensive. This one is a Cadillac that we don’t need. This one doesn’t even work well in our industry and would require significant customization. And I only knew those things for me because I had done a decade’s worth of CRM implementation work. 

So if the CIO does that, they’re missing all of those nuances. What we try and do in our methodology at IDC is we actually try and break the reports because we know that they will do that and if they don’t do it, the decision leader, the business leader, that they’re doing the research on behalf of will say, Well, what about this name?

Shari Lava 25:03  

And what about that name, and they go with the brand names they recognize. So what we try and do with our reports is we actually try and break our reports into different size segments, different report segments. And we actually do change the weighting criteria in the background to be the things that we think are more important at that stage of growth for a business. 

When a 50 person company needs different features to be rock solid, then a 150 person company and a leader will say, Yeah, but I want future proof. I want to make sure that it can grow with us. Yes, and that is important and definitely should be part of the criteria. But you also need to make sure that you get the value now, or number one, nobody’s going to be interested in phase two. The number two, you’re not going to see the kind of growth you need, right. 

We do see that when these digital transformation frameworks are implemented, well, they do contribute to business growth, but part of it starts with getting that right solution. And so I think we’ve gotten a lot of great feedback from customers that these customized versions of these reports that are a bit more specific to PSI segments really help the decision making process and float up players that are a better fit than just sort of the brand names that everybody recognizes.

How IDC digital transformation framework can help

Sam Gupta 26:16  

Okay, amazing. So let’s talk about one of the things that I have heard recently about IDC, and I keep hearing from customers that your digital transformation framework is really good. And sometimes that actually confuses me, because when I look at IDC, as more of the research firm, you guys are not really in the selection business, what is the deal with this digital transformation framework, and why companies are finding them so useful. Tell us a little bit about this little framework that you guys have,

Shari Lava 26:41  

yeah, for sure. And we have a number of these, including some that are more geared towards enterprise and some that are more geared towards SMBs. But what you really have to think of them as, as a starting place, a roadmap, if you will, right? 

I think that a lot of businesses think they have to build this from the ground up. And what these do is they provide templates of, hey, if you want to improve this part of your business, if this is where your bottlenecks are happening, or where your digital customer journey is, is falling short of a good customer employee experience, then look here, Oh, and don’t start with item three on the list, because one and two are precursors to it. 

So they’re really roadmaps to help SMEs figure out where to start. Because let’s be honest, this can be really daunting if you were running a primarily physical business. And you’ve had to switch to a digital business, knowing where to start aside from where the fire is the greatest, which is not a bad place at first. 

But at some point, you want to actually be more disciplined in how you’re going to tackle this next because this is not a short thing. Even if the pandemic were gone tomorrow, the world’s changed, and you can’t change it over. You can’t change your business overnight. You need to change it quickly and efficiently. But you need to do it properly, or it’s going to fail. 

And so this digital transformation framework really provides that starting place, and they still help you stage it in the right order to get the maximum benefit from the investments that you’re making in technology. 

Sam Gupta 28:13  

Okay, so tell me a little bit more on the framework side. So let’s say if I look at them, what am I expecting when I look at them? So is it going to be more from the digital process perspective? Let’s say if I’m the machine shop, can I expect my unique processes mapped out in this digital transformation framework, and then probably some sort of solutioning as well from the digital journey perspective? So let’s say you find a machine shop or building construction manufacturer. What am I expecting that I’m looking at these frameworks?

Shari Lava 28:40  

Yeah, so you’re right that they take a process-oriented approach? And so you would look. Yeah. Are you going to find it exactly for your business? No, there they’re obviously, a bit more. I don’t want to say generic, but they’re, they have to obviously work for a number of different businesses. 

But if you’re in manufacturing, you would look at the industry-specific ones. And so you’d look at the ones for manufacturing. They will tell you what the typical process looks like from best practice research. And then for each step, it will tell you what to focus on, what kind of technology provides support for those parts of the processes or helps run those parts of the processes and then sort of helps you kind of understand where you are and where you want to get to and plot a course there.

Sam Gupta 29:28  

Okay, amazing. That’s it for today. Shari. Do you have any last-minute closing thoughts, by any chance?

Shari Lava 29:33  

Many closing thoughts? Could I talk about this all day? No, but a minute, five minutes. Oh, my gosh. Okay. I think that, and we’ve spoken about this earlier, Sam, I think that if a manufacturer isn’t thinking differently about technology than they were 12 months ago, then I don’t know what they’ve been doing. 

And I don’t mean to offend anyone when I say that, but I think if you’re not thinking about this from a long-term perspective and thinking of it more as something that will pass. I think you’re really missing the boat. And I think that you’re not setting up your business for success in the future. 

I think the requirements to digitize and manufacture are only going up and outside of the pandemic, which has a lot of unique requirements in itself. We have things like track and trace becoming much more important for social responsibility reasons for pandemic reasons. And that’s only going to continue to grow; consumers are getting savvier, consumers are asking more questions. 

Shari Lava 30:33  

Social responsibility is really kind of part of that. If you don’t have the technology to kind of answer those questions that your customers have, if you can’t tell them where things were sourced from, I think in the future, that’s going to be increasingly a barrier to success, right. Everything from tax advantages to customer satisfaction could be impacted by that. 

So you, you can’t manage that on paper. And you can’t manage that in Excel because it’s becoming more interconnected. And you need to be part of that ecosystem. So if you haven’t started down this path of creating a digital transformation framework, I guess my final thought would be if you haven’t started down this path, and you’re an SMB and manufacturing, you need to start for competitive reasons for regulatory reasons. And we’re definitely here to help.

Sam Gupta 31:30  

Okay, and my personal takeaway from this conversation is going to be, and I am known to double down on my own insanity, so I’m going to do it again, do not treat technology as your stepchild. On that note, Shari, I want to thank you for your time. It’s been a pleasure and a fun conversation.

Shari Lava 31:48  

Thanks so much, Sam, for having me.

Sam Gupta 31:49  

I don’t think I guess enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you learned something new today. If you want to learn more about Shari’s research, head over to idc.com and search for small and medium business. Links and more information will also be available in the show notes. 

If anything in this podcast resonated with you and your business, you might want to check out the related episodes, including the interview with Laurie McCabe, who discusses how technology can help struggling businesses be more efficient during downturns. Also, the interview with Bob Evans who discusses what SMB customers need to know about cloud infrastructure providers. 

Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform or DM me on any social channels. I’ll try my best to respond personally and make sure you get home. Thank you, and I hope to get you on the next episode of the WBS podcast.

Outro 32:48  

Thank you for listening to another episode of The WBS podcast. Be sure to subscribe on your favorite podcasting platform so you never miss an episode. For more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.

In this episode, we have our guest Paul Van Metre, who discusses how machine shops can use their business processes as a sales tool in their sales and marketing collateral. He also describes the nuances of running a machine job shop efficiently from his own machine business experiences. Finally, we have had a chance to discuss several scenarios and ProShop implications on your efficiency and profitability, including the most realistic timeline and practical strategies for an ERP implementation for a machine shop.

Chapter Markers

• [0:56] Intro
• [2:53] Personal journey and current focus
• [4:09] Perspective on Growth
• [5:03] Machine job shop process vs other manufacturing industries
• [6:37] The unique precision and quality needs of a job shop
• [8:06] The job shop process as a value prop
• [15:23] Job costing and tracking of a job shop
• [18:36] Automation vs increased admin efforts in data collection
• [21:53] The appropriate candidates for data collection on a job shop floor
• [24:56] The competitive advantage of automated and paperless job shops
• [28:36] The realistic implementation time for a job shop
• [35:19] Closing thoughts
• [36:53] Outro

Key Takeaways

• When you have really excellent business processes, it’s actually what sets you apart from your competition from even the sales perspective.
• When you pull back the curtain, and you look deep into an organization, it is just rife with chaos and the things that aren’t actually as good as they sound on their website, and buyers can sniff that stuff out very quickly when they really start digging into the bones of a company.
• Job shop business is typically such slim margins, you have to be able to uniquely identify the actual costing of every job, because you have to make sure they’re as positive as possible because one negative job can just wipe out your whole month’s worth of profit if it really goes south.
• By eliminating paper by asking people to track time digitally, right at their workstations, it’s not a cost driver. It’s actually a considerable cost saver.
• A paperless system is somewhat essential. So you can always have real-time information on exactly where a job is at, who’s working on it, what are the quality measurements they’ve been checking so far? How can you guarantee that the parts are good and they’re going to be delivered on time and because most companies don’t go into that level of detail in their sales process, the buyers are still going to be skeptical that this is a company that they can really trust.
• A manufacturing company does not make money in the office. They make money on the factory floor. That’s where they’re taking raw materials and turning them into finished goods that are adding that value.

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About Paul

Paul is the president of ProShop ERP, a fully paperless ERP/QMS/MES system for contract manufacturers in the metalworking industry. He got his industry experience from founding and growing an aerospace machine shop that was listed 5 times on the INC5000, twice voted as a best company to work for, and he was awarded Young Alumni of the year from his Alma Mater, and he had an 8 figure exit from that business. ProShop is now quickly becoming recognized as the premier ERP provider for companies in the metalworking industry.

Resources

• Connect with Paul
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• Connect with ProShop
  • Website | LinkedIn | YouTube

Full Transcript

Paul Van Metre 0:00  

The shop will need to accurately estimate how much time it will take how much material it will take any external processes that need to buy or have the parts sent to special tooling or work holding they’ll need. If they don’t get those things all right or as close to right as possible, then that’s just starting out to be potentially a recipe for disaster.

Intro 0:21  

Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.

Sam Gupta 0:56  

Hey everyone, welcome back to another episode of the WBS podcast. I’m Sam Gupta, your host, and principal consultant at a digital transformation consulting firm, ElevatIQ. 

Running a machine shop is complicated, with complex parts, heavy possession needs, and tricky material handling requirements. With cost pressures from customers, rising material costs, and shrinking margins, one inaccurately estimated job could wipe out the profits for the whole month. Also, customers are savvy with their evaluation, as they now want to vet your end-to-end business processes to validate the claims on your sales collateral. 

In today’s episode, we have a guest, Paul Van Metre, who discusses how machine shops can use their business processes as a sales tool in their sales and marketing collateral. He also describes the nuances of running a machine shop efficiently from his own machine business experiences. Finally, we have a chance to discuss several scenarios and their implications on your efficiency and profitability, including the most realistic timeline and practical strategies for an ERP implementation for a machine shop. Let me introduce Paul to you.

Sam Gupta 2:08  

Paul is the president of ProShop ERP. A fully paperless ERP and MES system for contract manufacturers in the metalworking industry. He got this industry experience from founding and growing an aerospace machine shop that was listed five times on the INC 1000 twice, voted as the best company to work for, and he was awarded Young Alumni of the year from his alma mater, and he has had an eight-figure exit from that business. 

ProShop is now quickly becoming recognized as the premium ERP provider for companies in the metalworking industry. With that, let’s get to the conversation. Hey, Paul, welcome to the show. 

Paul Van Metre 2:51  

Hey, Sam, it’s great to be here. Thanks for having me. 

Sam Gupta 2:53  

Of course, it’s my pleasure. Do you want to kick things off with your personal story and current focus?

Paul Van Metre 2:58  

Yeah, absolutely. Sure. So I have lived and breathed machine shops, my entire professional career. I started one actually right out of college, which is an unusual thing to do. But my buddies and I went through an engineering program. It’s very hands-on. We learned a lot about machining and manufacturing, and just fell in love with it, and decided to start a shop straight out of college. 

So one of my buddies took out a second mortgage on his house. And that was enough money for us to buy a CNC machine and start our business. So I did that for 17 years, actually. We grew that company from zero to about 75 employees and 30 plus machines. It was just an incredible journey, just an incredible learning experience along the way. 

During some of that, during most of that time, actually, we decided to start developing an ERP type of product just exclusively to run our own business because we couldn’t find anything on the market we thought was worth buying. So we did that. And it then turns out other shops wanted to buy it. So we pivoted 17 years later, sold the business, and are now full-time selling ProShop ERP software.

Sam Gupta 4:09  

That’s great. And I think there are going to be a lot of lessons for our listeners in terms of your growth journey and growing that from zero to 75. I think that’s what you said, right? That’s an incredible journey. 

So we are going to dig deeper into that. But before we do that, we have one of the standard questions that we ask all of our guests, and that is going to be all your perspective on business growth. When you think of the word growth, what does it mean to you?

Paul Van Metre 4:34  

Well, it starts with being sales-driven. All organizations have to be sales-driven. If they want to grow, if they’re not, they’re just not gonna have the customers to do so yet. Once they have those customers because they’re sales-driven, they really need to build business processes. You can’t scale or grow with just a mishmash of random people doing random things. You’ve got to have solid rock-solid business processes and systems in order to manage that scale and grow smoothly and efficiently.

Machine job shop process vs other manufacturing industries

Sam Gupta 5:03  

Okay, amazing, so let’s go back to your comment about the machine shop, so obviously, you were running your machine shop, but now I don’t know if you basically work with any other businesses, but my question to you is going to be what are some of the nuances that you have seen from the business process perspective of a machine shop that does not exist in the other manufacturing sub-industries so if you can take an example of certain industries and if you could compare them that will be very helpful

Paul Van Metre 5:34  

So most machines, I mean, there are many different types of machine shops. The most common ones would be considered a job shop. They are taking customer specifications in the form of 3D models and engineering drawings, and they are machining manufacturing precision products to deliver to their customers. It’s a high mix, low volume business. It’s always something new, and because of the nature of machining, they’re dealing with incredibly precise tolerances, very difficult, challenging materials sometimes.

And it’s a very hard kind of business to run. The margins are generally slim, and the chance of losing money even as a business is really high. So you kind of got to be running on all cylinders. You got to be dialed into efficiency all the time really focused on process, and I think it’s just because of the precision nature it’s more challenging than a lot of other businesses that are even a job shop type of thing where things are coming in new all the time.

A paperless system is somewhat essential. So you can always have real-time information on exactly where a job is at, who’s working on it, what are the quality measurements they’ve been checking so far? How can you guarantee that the parts are good and they’re going to be delivered on time and because most companies don’t go into that level of detail in their sales process, the buyers are still going to be skeptical that this is a company that they can really trust.

Paul Van Metre, President, ProShop ERP

The unique precision and quality needs of a job shop

Sam Gupta 6:37  

Okay, so that’s a very interesting comment, right. So, if we are talking about precision here, obviously, the quality requirements are going to be there in this business that may not be as important as some of the other businesses where precision is probably not going to be as important. 

So in this particular case, can you touch a little bit more on from the precision perspective how the business process change because of the precision requirements?

Paul Van Metre 6:59  

Yeah, well, there have to be very careful steps to review the contractual requirements from your customers, particularly with the types of customers that we work with and the type of shop that we work with before, a lot of Aerospace and Defense or Medical industries. 

So a lot of flow down requirements, quality requirements, security requirements, and even federal types of requirements for cybersecurity and defense types of things, so there’s got to be a lot of checks and balances to make sure you’re not forgetting something or missing a small detail that will just absolutely kill that job. 

So very, very stringent focus on review, and quality and checklists, we think checklists are really an important way to do that. And ultimately, this when you have really excellent business processes, it’s actually what sets you apart from your competition from even the sales perspective. And that’s something that we always focused on in our shop, and it was really was a formula that worked for us.

The job shop process as a value prop

Sam Gupta 8:06  

so tell us some of the ingredients, and this is a very interesting comment especially using the business process as a tool. I don’t know how many shops and the manufacturers are really thinking that I don’t know if that is going to be part of the value prop, but it seems like you are suggesting here that you know that could be used as a very broad marketing messaging.

So let’s say if you were running your own shop Paul, so what will be the areas that you will be highlighting from the business process perspective, and you can talk slightly more in the ERP language as well? That will be amazing because that will actually help connect the dots together, right? 

So let’s say I don’t know whether you are going to specify that we have higher quality, but that could mean a lot of different things. So how would you position your value prop so that you are differentiating with your competitors and being slightly more specific?

Paul Van Metre 8:56  

Sure. Well, I’ll start by saying that every company out there that is buying precision machine parts, you had someone on your show just recently, Matt Guse from M.R.S. incredible shop, great guy. So every and I’m sure he can tell you this as well. You know every customer when they come to a shop, they will have had horror stories in the past of other vendors that didn’t perform well. 

Maybe they accidentally made something out of a wrong variant of a material, or the machine-made, they made the entire batch of parts, and they missed this one little dimension or feature that has to scrap the entire job, and because of the critical nature of the type of work, you know that a machine shop does there are often mistakes made, and that causes really catastrophic results for the client.

Paul Van Metre 9:45  

So every shop out there says they have great quality, they have great on-time delivery and they put that on their website, and they try to tout that but buyers these days, buyers of you know of any kind, but really, in this case, buyers of machine precision machine products are extremely sensitive, and maybe a bit skeptical, rightfully so that these vendors are actually as good as they say they are. 

Because generally speaking, when you pull back the curtain and you look deep into an organization, it is just rife with chaos and the things that aren’t actually as good as they sound on their website, and buyers can sniff that stuff out very quickly when they really start digging into the bones of a company, so we believe, and we did we practice this ourselves that by really focusing on selling our business process and our quality management system, which are really quite interconnected with each other, that was a real differentiator for our client. 

And it proved to be the case we grew tremendously over many years, and I think got a lot bigger than the average machine shop out there. And so we’re now using this same concept to help our customers grow their businesses.

Sam Gupta 10:59  

Let’s talk about a little bit more of the ERP right because if you think from the ERP perspective, an ERP that is going to be relevant for the job shop is going to be slightly different than your generalized ERP, because as you correctly pointed out, that the needs of a job shop are completely different from the business process perspective. 

And that typically drives the ERP features that a business is going to need. So let’s say if you are saying that I’m just high quality or whatever generalized pitch in your value prop, that’s not gonna cut it because everybody says so, right. But let’s say if you can translate that in slightly more ERP language, and that could be a differentiator in my mind. 

So let’s say if you were to talk about a little bit of ERP language here, right, also how our job shop ERP is different from your generalized ERP. And how, let’s say, job shops can use some of that verbiage in differentiating, because if they are going to say in your sales collateral. I’m using jobs or ERP, and I’m using these specific features that are only relevant for a job. And because of that, this is going to be helping you with respect to quality and with respect to precision. Now, that’s a strong pitch, in my opinion, right? So if you were to design this pitch, what would be your recommendation?

Paul Van Metre 12:18  

Great question. And I appreciate your asking that. So I mean, it can start as early as the quoting and estimating process, right? Most business transactions with a job shop start with a customer saying, here’s my drawing my model, please give me a price on 1000 of these or on 20 of these or 100 of these. 

And a shop will need to accurately estimate how much time it will take how much material it will take for any external processes that need to buy or have the parts sent to special tooling or work holding. And if they don’t get those things, all right, or as close to right as possible, then that’s just starting out to be potentially a recipe for disaster. 

So they can certainly talk to their clients about how they estimate accurately how they make sure that when they quote, an accurate lead time that they can commit to that lead time, that customer will get those parts in four weeks, or six weeks or eight weeks. And they won’t need to come back to the customer to say, Oh, I’m sorry, we made a mistake, we need to raise the price or the parts are going to be late, we’re not going to be on time. So starting as early as that is, I think, a really important step.

Paul Van Metre 13:25  

And then, going past that, when they receive an order from the customer, they should be talking about their contract review process. They should be talking about their manufacturing, planning, and engineering process, how they are going to set that job up for success to ensure that they can execute as they estimated in the first place. 

There’s nothing that is worse for a shop that is going to fail on a job and fail for their customer when they go to manufacture those parts. And they realize that there’s something that they didn’t consider, and its code totally derails the project. So the more thorough their contract review and planning and engineering processes, the more likely that job will be set up for success in the shop. 

And then when it hits the shop floor, they need to have accurate tracking, accurate job costing, the accurate status of exactly where all their jobs are at any one point in time. Are they on machines?

Paul Van Metre 14:24  

Are they at a vendor? Are they being inspected? And are they already on the truck to be shipped? Right? It’s amazing how many companies have no idea where their jobs are unless they actually physically walk out to the shop and look. 

So we believe that a paperless system is somewhat essential. So you can always have real-time information on exactly where a job is at who’s working on it. What are the quality measurements they’ve been checking so far? How can you guarantee that the parts are good and they’re going to be delivered on time and because most companies don’t go into that level of detail in their sales process, the buyers are still going to be skeptical that this is a company that they can really trust?

So if they can demonstrate with no uncertain terms about how they guarantee that they are more likely to win that customer, they’re more likely to win more business with that customer. And we’ve seen this time and time again, with hundreds of shops that we’ve worked with, including, of course, originally our own business.

When you pull back the curtain, and you look deep into an organization, it is just rife with chaos and the things that aren’t actually as good as they sound on their website, and buyers can sniff that stuff out very quickly when they really start digging into the bones of a company.

Paul Van Metre, President, ProShop ERP

Job costing and tracking of a job shop

Sam Gupta 15:23  

Okay, so let’s talk about this see job costing and tracking of the job through the shop floor. So in some cases, when we work with some of the customers, let’s say they have never used any ERP system. And now they are super excited that they want to actually switch to an ERP system. 

So I’m actually referring to a recent story that we were involved with. And in this case, I mean, and I’m pretty sure you have experienced this as well, that a lot of folks have this notion of technology is sort of the binary switch, where they feel that the technology is sort of the automated switch, and once you actually switch it on, then all your problems are going to be solved, right. 

So let’s say if they have never used an ERP system, so initially, everything was manual. But now, if they are buying, let’s say, ERP systems, what they want to do is they want everything to be automated. They don’t want to do much work. So in this particular case, when we started talking about, let’s say, your delivery tracking, or the material tracking, as the job actually moves through the process, that is super important. 

Now, you could also, let’s say backflush; I don’t know if you guys do backflushing or not. That could be an automated way of doing that.

Sam Gupta 16:35  

But I mean, then you are actually going to lose a lot of trackability from the material perspective. So there are two scenarios here. Number one, you could have this completely automated. Hey, I have released my BOM to my production floor. 

Now my workers should not be touching the ERP. Now I should have my job costing them in an automated fashion without any data entry required. So let’s say if you will explore an implementation based on this customer, what would be your recommendation? Is it a good idea to sort of automating everything? What is going to be the implication? 

Let’s say they backflush everything, including your material and labor, meaning everything is going to be automated, your labor is going to be reported as it was, let’s say put on the BOM, the material is going to be reported as it was put on the BOM. So there is not going to be any sort of room for variation, right? So what would be your thoughts on this process? Do you agree with the customer? Do you see any implications here in this scenario?

Paul Van Metre 17:32  

I think for a job shop, that’s actually a terrible idea. Standardized costing, like that, is just not the reality of the job shop business. So you can’t take the standard material cost and labor cost that was on the bottom and just use that because that has no basis. In reality, what we really need to know is how much it actually took in labor, how much we actually spent on all of our materials. And compare that to our original estimate and what was what we had priced the part up. 

Again, because the job shop business is typically such slim margins, you have to be able to uniquely identify the actual costing of every job, because you have to make sure they’re as positive as possible because one negative job can just wipe out your whole month’s worth of profit if it really goes south. 

So there has to be some manual input. But you have to try to make that as easy and simple as possible for the user. But collecting actual hours collecting the real purchase cost of everything you’re buying, I think is incredibly important for a job shop.

Automation vs increased admin efforts in data collection 

Sam Gupta 18:36  

Okay, so let’s define some, right? So when you say some of that needs to be entered. So I’m actually looking for some sort of best practices here because my role in this conversation is to be a CFO. And if I were to think from the perspective of a CFO, so in my mind, what I’m thinking is, let’s say sure I get the idea that let’s say if I might lose in a specific job just because there was a variance in either material or labor Rate but at the same time let’s say if I asked my guys to report on every single step, every material, every job, obviously that’s going to be a cost overhead in reporting that is what so the CFOs like to think from the complete perspective right? 

So you are actually increasing the actual cost because you are increasing the admin effort. So what would be your recommendation? How would you define the best practices? What should be automated, what should not be automated?

Paul Van Metre 19:27  

Sure. So first of all, let’s mention that a traditional ERP has what we call job travelers, right? They physically they’re paper documents that get pushed out onto the shop floor. Generally speaking, they have barcodes on them, and the employees would if they’re tracking time on an operation or on a job, they would scan the traveler, they would scan maybe their employee badge, they would scan the operation they’re working on, and they’d scan, maybe an activity, maybe They’re setting up or they’re running, or they’re inspecting. 

And just the very practice of having someone scan four or five or six different barcodes, yeah. And they’re doing this at a centralized terminal out on the shop floor, say a typical company with 50 people out on the shop floor, they might have six or seven computers scattered inside the factory that is somewhat centrally located to their equipment.

Paul Van Metre 20:26  

So the employees can relatively easily walk over there and do that, just that alone. You were having it be on paper. Having it be centralized computers rather than work center-specific computers is an incredibly expensive cost driver. And you’re right, if you’re asking them to track that much of their work, using that method, they’re gonna be spending a lot of time walking back and forth across the shop.

And everyone that’s been in the shop knows, it’s not just a two-minute walk is a 32nd walk from your machine over to this station, you’re going to have to wait for someone else, you’re going to get sidelined by a co-worker that says, hey, can you come to take a look at this with me, you might go to the bathroom, you might go to the watercooler and grab some water every time you’re leaving your equipment to track time that is costing the company money.

It’s costing potentially throughput. So we are advocates of putting devices right at every single machine. Yeah, there is a cost to that. But you can get them fully dialed in for three or $400. And the ROI of putting a device at every workstation is actually very, very short, probably in the matter of just a few weeks when you add up the cost of people walking and traveling and looking for paper documents and things of that sort. 

So I would say that by eliminating paper by asking people to track time digitally, right at their workstations. It’s not a cost driver. It’s actually a considerable cost saver.

The appropriate candidates for data collection on a job shop floor

Sam Gupta 21:53  

Okay, so let’s make this situation a bit more complicated. So let’s say if you are not using the barcodes, okay, and you are completely paper drawer in which you have to actually do the data entry, and you don’t necessarily have a centralized computer as well. 

So basically, what you’re doing is you are actually collecting data on a paper, okay, if you have a patient, there are some reasons and let me see, let’s say the executive does not feel comfortable in bringing the computer on the shop floor just because they are afraid of the cybersecurity risk. 

And we have seen those scenarios as well. So they simply want to use paper on the shop floor, and they want to send back a paper. So if that was the case, and we have to consider the cost of inputting this data as well, in this particular case, what would you be automating? And what would you not be automating in terms of data entry?

Paul Van Metre 22:43  

So basically, you are collecting all the data on the paper. You already have your BOMs, right? That is printed on the job traveler, the job traveler is moving around the shop, and on the paper, you are literally inputting your, your labor hours, and you’re also inputting your, let’s say the if you have any variances in the material, let’s say if you plan for, I don’t know, 50 of the items, but then you ended up using 45. 

So you will note that down, and then your supervisor is going to come, and then they are going to collect the paper, and they are going to actually do the entry. This scenario also happens in cases where let’s say if you have workers who are not as computer savvy because there are going to be cleaning costs and trimming them. 

But I mean, they obviously know how to write on paper. So some businesses are comfortable doing that. So if you were doing this, would you still automate? Would you not automate? What would your recommendation be in this scenario?

Paul Van Metre 23:38  

Yeah, and I can definitely empathize with shops that are fully on paper. We work with many of them. That’s true, there are definitely people that work out on the factory floor that have been doing it the same way for 40 years, and they tolerate doing it by paper, but they definitely are not going to tolerate doing it on a computer. 

That’s the reality of our world every day. And we have to through training and advisement and coaching and supporting these clients and trying to make software that’s intuitive and easy as possible try to make it so that even the most sort of grumpy you know shop for machinist will actually see an incredible benefit to them in their job on a daily basis by learning a few basic, mouse clicks to try to help track their time and provide the company with more real-time information. 

So we try to just put the positive spin and what the ROI will be both for the company in general and for the individual employee who might be frustrated with certain things that the company hasn’t done or isn’t taking their feedback or their input enough and they have ideas and how to improve the process. And there’s a lot of ways that you can help open up that flow of information in a general pure eliminating paper.

Job shop business is typically such slim margins, you have to be able to uniquely identify the actual costing of every job, because you have to make sure they’re as positive as possible because one negative job can just wipe out your whole month’s worth of profit if it really goes south.

Paul Van Metre, President, ProShop ERP

The competitive advantage of automated and paperless job shops

Sam Gupta 24:56  

Yeah, so let’s look at this scenario. From the perspective of The customer, let me see the original topic that we were discussing was really creating sort of the value prop and also from the to strengthening our sales pitch. 

So as majority of the machine shops are really contract manufacturing shops, right? They are working for a customer. They are serving a customer, right? So nowadays, I mean, obviously customers are not just going to be happy with the sales pitch when they are probably going to come to visit your shop, they are going to be asking a lot of questions. 

So let’s say if they are exploring two different shops, let’s say you are in a competitive situation, and one shop is completely automated with the centralized screen or whatever. And then the second one is really running on the paper. So let’s say you have run the shop yourself, Paul, what do you think? Are you going to lose the business? Are you going to win the business? Let’s say if you are paper-based, can you do anything to strengthen your pitch if you are going to be paper-based, and you have to include that as part of your value prop?

Paul Van Metre 25:52  

Well, I will give you an actual story, okay, and your listeners can even read about this. There’s an article published about it. We had a customer, they were in Connecticut, a small contract manufacturer, and their customer got bought out by a larger firm. And that larger firm decided to pare down the vendor base right there. We’re gonna go visit all the suppliers and cut on some number of suppliers. 

So our customer was dual sourced on a number of part numbers, a number of programs with another shop that was in that same area, and their audit team came out to visit our customer. The audit team went to visit the other competitor. And when they visited our customer, the first thing they did was they sat them down in their conference room. They pulled up their system on the big screen TV right there. They went through their entire system digitally of how are they manage their projects, how they make their contract, review how they verify quality, how they make sure they’re on-time delivery. 

And they even looked at a job that was running on the shop floor right at that moment in time for that customer. They could see exactly how many parts were made; they could see the inspection results that the machinists and inspectors were typing at that moment.

Paul Van Metre 27:11  

And then they walked out on the shop floor, and they saw it happening in real-time. And they saw the work instructions on a screen right next to the machine. They saw them entering in their inspection results. And the auditors were just absolutely blown away. 

And when they visited the other supplier, they could show them none of that they had paper documents. They said, well, I don’t know, let’s go look in the shop and see how many parts are made. Right? They had paper records of inspection, perhaps, and that it was just not nearly as impressive and confidence-inspiring. 

Our customer won all the business, the other vendor was cut entirely from the supply chain, and then that customer went on to more than double the business. So it actually went by 4x, what it originally was. Just I think it’s a prime example of how using your business process can really differentiate you from a company that is not that doesn’t have as robust a good business process. 

Sam Gupta 28:07  

Okay, so let’s talk about one more scenario since you had the comment about putting your, let’s say, terminal right next to your machine. And typically, with ERP implementation, I’m pretty sure you would agree with this one that the ERP is just more than the software. 

It’s going to be your people’s process and technology. Whenever you’re exploring any sort of ERP initiative, it’s going to be much bigger than just the software. It’s not going to be as simple as, hey, give me your data dump, I’ll put it in my system. And you you are ready to go in like two weeks, three weeks, whatever.

Having a system that has sort of deep functionality to increase overall effectiveness on the shop floor, reducing setup times, increasing machine utilization, and allowing those employees to be much more effective with their time has got to be a part of the consideration for job shops.

Paul Van Metre, President, ProShop ERP

The realistic implementation time for a job shop

Sam Gupta 28:36  

So I’m actually going to ask you one of the interesting trends that I typically see in the enterprise software market. There is this sort of rat race going on in the ERP community that the implementations can be done, let’s say in two weeks, three days, four weeks, that is just unreal. 

In my experience, what would you say to that, especially for job shops, when you have to carefully analyze your processes, when you have to carefully analyze your processes from the efficiency perspective as well, for example, putting, let’s say, devices right next to a machine and looking at how your workers are operating all your individual processes are now this requires careful planning, careful analysis, and careful implementation as well. 

So would you actually hire this implementation consultant just because they are claiming that they can do it in three weeks versus the other one who is probably claiming that six months? What is the realistic amount of time that any implementation will take in a job shop?

Paul Van Metre 29:38  

it all depends on the size of the company. It really, really does. We have had clients that have had to have been a live system of record change in less than four weeks, but they were relatively small, probably under ten people. I would say something more on the in the order of eight to 12 or 16 weeks is more realistic for maybe a 20 to 100 person company, something like that. 

And but it can, it doesn’t need to be six months, nine months, a year, or more, it definitely does not, at least in our case, but yeah, but quite honestly, we don’t have a ton of experience with companies with hundreds or 1000s of employees. That’s just not the market we serve.

Paul Van Metre 30:14  

Yeah, and I certainly understand that big organizations it’s often a multi-year process. But yeah, whether with a relatively intimate team that has and the biggest variable that we’ve seen, quite honestly, regardless of size, is just how dedicated that company is to moving ahead without reservations without people digging in their heels. 

And that comes from the top that comes from the leadership saying, we are doing this, there are no ifs, and, or buts about it, you either are with us, or you’re against us. And I’ve had similar my most successful clients say that they say, if you fight me on this, I will fire you, right. 

But once we’re done, then I want all your feedback. I want to hear what you like and don’t like about the system. But you just kind of reserve judgment until you really understand how this is going to work. Fear of change is huge. Everyone has it, or most everyone has it, and rightfully so. So it does require that sort of steady hand and leadership to make sure that it goes smoothly. 

Sam Gupta 31:13  

Yeah, what 100%, but I mean, things are not typically as binary as in the real world, right? So in our case, I mean, see, when we tried to do, let’s say, the implementation in the short time, typically the biggest challenge is going to be the business priorities. 

So I know that you made a comment that the business needs to be committed and dedicated. That is great. But at the same time, these are the same people, especially with the smaller organization, they have to run their business. That is the top priority always. Yes, sure. ERP implementation is great. 

But that cannot be the main priority. Running your business today is the main priority for any executive for any CFO or anything you write. So if I’m the manufacturing CFO, my first priority is always going to be how can I sell to my customer today? Because that’s how I make money.

Sam Gupta 31:59  

Yep, implementation is great. I mean, see, that is going to be, let’s say, in next three months, six months, five months, whatever. I’m cool with that. But that is going to be tomorrow’s benefit. So sometimes, when we try to rush in the implementation, it just sort of creates this environment of panic that nobody wants to see, especially during ERP implementation. 

You want to make sure that the actual users have enough training and testing clients. And as ERP systems are extremely complex, designed to be complex, because it’s a very cross-functional knowledge that you have to learn. And you are learning a new process. You are learning a new system that requires time, right? 

So yes, have you seen these implementations being successful, let’s say in three to six months, or the four weeks implementations that you have mentioned? What do you still recommend based on the scenario outlined here?

Paul Van Metre 32:48  

I guess I have fairly limited experience, and that we’ve only ever implemented our own product, I don’t have any experience implementing other ERP systems. But I do know that when we are, and we have a very, very defined process that we go through, and we actually use ProShop to manage the project manage it, we have what we call an implementation process, work order, and we run it just like a job, actually. 

So when we start, say, something it’s very easy to understand when we start at the beginning of the process, where we’re training on estimating, estimating, and quoting then after they’ve learned how to estimate and quote, we expect that they will start estimating and quoting in ProShop, immediately, right, so the week after they learn it, they are using ProShop to estimate and quote, so they are running their business, at least in estimating on ProShop immediately, then the orders that they start to win from that activity will be the training folder for doing order entry, contract review, and so on down the line. 

So in the best-case scenario, you are using the ERP almost immediately, and at some point, you will start to ramp up more and more use of the new system. And you will start ramping down, and at some point, you will no longer put any new jobs in the old system.

Paul Van Metre 34:05  

And there will sometimes be a natural progression depending on your lead time of where you just quietly turn off your old system and the new one has become the system of record formally. 

So now maybe I should preface this or add this little detail ProShop from a financial perspective and an accounting perspective. It is not accounting software. We have integrations with QuickBooks and Sage, and a couple of other products. And so very often, our clients are either maintaining their financial system that they had before, or they’re making a separate switch of as to where invoices and bills are coming from and where they’re doing their AR and AP, but so it’s worth saying that in the case where say they were using QuickBooks enterprise and they want to keep using QuickBooks enterprise, there is never a switch over from that side of things, right? 

That’s just continuous, which is nice. It’s nice that they’re not they don’t have to change that. So that allows from the execution, the manufacturing side has this sort of slow or not even that slow, pretty quick ramp up and ramp down of their old system in a relatively smooth and seamless way. So it can absolutely be the case that a 100 person shop in three months could be turning off their old system.

Sam Gupta 35:19  

Right, amazing. Paul, that’s it for today. Do you have any last closing thoughts, by any chance?

Paul Van Metre 35:24  

Yeah, I think it’s just really important that when companies are looking to switch ERP, they are thinking a little bit more broadly about the entire organization, and especially on the manufacturing floor, right? A manufacturing company does not make money in the office. They make money on the factory floor. That’s where they’re taking raw materials and turning them into finished goods that are adding that value. 

And having a system that has sort of deep functionality to increase overall effectiveness on the shop floor, reducing setup times, increasing machine utilization, and allowing those employees to be much more effective with their time has got to be a part of their consideration. 

And when you do that, that’s really where you can impress a customer and their quality auditors. When you show them, you have this deeply embedded, robust business process that goes from front to back that can ensure that your service will deliver as you promise it will.

Sam Gupta 36:28  

And my personal takeaway from the conversation is going to be the need for a job shop is going to be fairly unique. So make sure you understand those needs and evaluate against the solution that you are exploring before you commit to software. On that note, Paul, I want to thank you for your time. It’s been a very insightful and fun conversation.

Paul Van Metre 36:46  

Thank you, Sam. I appreciate all the tough questions. I really do. Of course, brother All right, my friend. Thank you, sir.

Sam Gupta 36:53  

I cannot thank our guests enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you learned something new today. If you want to learn more about Paul or ProShop, visit loveYourERP.com or proshoperp.com. Links and more information will also be available in the show notes. 

If anything in this podcast resonated with you and your business, you might want to check the related episodes, including the interview with Dave Hataj, who describes the role gears play in our society. Also, the interview with Matt Guse from M.R.S. Machining, who discusses the challenges associated with manufacturing complex parts in short runs. 

Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform or DM me on any social channels. I’ll try my best to respond personally and make sure you get help. Thank you, and I hope to get you on the next episode of the WBS podcast.

Outro 37:54  

Thank you for listening to another episode of the WBS podcast. Be sure to subscribe on your favorite podcasting platform so you never miss an episode. And for more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.

In this episode, we have our guest Christiano Gherardini, who discusses the importance of costing granularity and why it is crucial to understand your products’ profitability. He also talks about various costing scenarios and the implications of choosing an incorrect costing method. Finally, he has had a chance to talk about multiple costing concepts, including macro and micro variance analysis, costing layers, backflushing, rework, costing concurrent resources, and much more.

Chapter Markers

• [0:52] Intro
• [1:56] Personal journey and current focus
• [3:00] Implications of choosing incorrect costing methods on growth
• [4:22] Manual costing processes vs automated
• [6:31] How to choose appropriate costing methods for your business?
• [9:07] Costing methods scenarios and case studies
• [16:29] Costing methods and their granularity across different industries
• [25:00] Macro vs micro variance
• [27:15] The nuances of labor cost allocations
• [30:08] Product costing limitations of legacy ERP systems
• [35:59] The implications of Backflushing
• [36:54] Closing thoughts
• [37:22] Outro

Key Takeaways

• If you analyze costing, it can get very, very granular, and when you’re using manual methods, you lose a level of detail. In fact, the ability to refresh it and see how the price of the supply chain which is off the charts right now in terms of price increases how that impacts costing.
• There are so many cost elements, and again, as you move into a more automated system that allows you to land them in there to load those costs and then refine as opposed to having to remember everything every time, so it is compromising to have a manual costing system, and quite honestly it’s typically not going to have the level of accuracy of an automated system where you can see changes very very quickly.
• Unless it’s a mature business that really understands their costs, approaching standard costing is difficult because standard costing expects that you have an Excel spreadsheet that articulates materials, labor, routings, and operations.
• You generally pick a costing method for the company, but you can have different costing methods for different products.
• In a costing category, you typically are seeing three different cost layers for material, three for labor, and three for machining. Most people think it’s just the price you pay for your vendor, but in a standard costing model, we can have that material cost, and then we can also have a fixed overhead, such as the cost for that warehouse.

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About Chris

Chris is an experienced Microsoft Dynamics & Cloud Practice Owner with a demonstrated history of delivering integrated ERP & CRM solutions and leading companies through a digital transformation. Since 1994, Chris has built the business around an exclusive focus on the Microsoft Dynamics portfolio of solutions, including Dynamics 365 Finance & Supply Chain (Dynamics AX), Dynamics GP, Dynamics 365 Business Central (Dynamics NAV), Dynamics SL & Dynamics 365 Customer Engagement.

Resources

• Connect with Chris
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• Connect with Turnkey Technologies
  • Website | LinkedIn | YouTube

Full Transcript

Christiano Gherardini 0:00

You look at the data after a month. It’s okay. I’m close to tweaking as opposed to going into a big data study that can take a lot of effort. And that’s why the comment about standard costing is very complex for the organization that requires a lot of labor versus FIFO, where it’s going to accumulate everything, and it’s going to be the actual costs of

Intro 0:16

Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.

Sam Gupta 0:52

Hey everyone, welcome back to another episode of the WBS podcast. I’m Sam Gupta, your host, and principal consultant at a digital transformation consulting firm, ElevatIQ.

Cost accounting is a complex topic, you have so many different choices, and sometimes it’s hard to decide which method may be appropriate for your business. If you choose an incorrect counting method, you will get a significant variance and require more admin effort to discover the source of variance and tweak the processes to reduce it. The incorrect costing method could also mean that you don’t have a true sense of profitability for your products.

In today’s episode, we have our guest Cristiano Gherardini, who discusses the importance of costing granularity and why that is important to understand the profitability of your products. He also talks about various costing scenarios and the implications of choosing an incorrect costing method. Finally, he has had a chance to talk about multiple costing concepts, including macro and micro variance analysis, backflushing, rework, costing concurrent resources, and much more.

Let me introduce Chris to you.

Sam Gupta 1:56

Chris is an experienced Microsoft Dynamics and cloud practice owner with a demonstrated history of delivering integrated ERP and CRM solutions and leading companies through a digital transformation. Since 1994. Chris has built the business around an exclusive focus on the Microsoft Dynamics portfolio of solutions, including Dynamics 365 Finance and Supply Chain, Dynamics AX, Dynamics GP, Dynamics 365 Business Central or Dynamics NAV, Dynamics SL, and Dynamics 365 Customer Engagement.

With that, let’s get to the conversation.

Hey, welcome to the show, Chris.

Of course, my pleasure.

Just to kick things off. Do you want to start with your personal story in current focus, Chris?

Christiano Gherardini 2:39

Sure. So I’m Chris Gherardini. I’m the president and owner of Turnkey Technologies. I started this company back in 1994. And after 27 years, I am a very focused Microsoft Dynamics ERP partner and implementation partner. So I like to solve, and I’m a technical guy that gets to do accounting software and ERP software all day long. So it’s quite, quite pleasurable at this point.

Implications of choosing incorrect costing methods on growth

Sam Gupta 3:00

So, okay, amazing. So one of the standard questions that we have is going to be your perspective on business growth. When you think of the word business growth, what does it mean to you?

Christiano Gherardini 3:10

Business growth and I’m bullish, I actually have a very positive outlook, through the next three, five years, and you think about growth, there’s a lot of different growth, there’s revenue growth, there’s efficiency growth, there’s personnel based growth, but I think that the markets are strong.

And I think that the US economy is strong, and I think it’s going to support and in our industry, we’re seeing 25% standard industry growth. So that’s pretty amazing stuff.

Sam Gupta 3:35

So have you seen any specific growth challenges when it comes to utilizing a specific costing method, and that becoming a bottleneck to the business from the efficiency perspective from the growth per year perspective?

Christiano Gherardini 3:53

Sure. And I think costing is a hot topic. And if you do it wrong, it can compromise growth. Because what’s that mean? Well, maybe you overprice your product, maybe underprice your product. So if your costings are not accurate, and again, you lose business because you’re overselling, and that’s compromising to growth.

So absolutely costing is key to competitive advantage, in fact, to know you are margins precisely and moreover, even to know your best customers, you’re your most profitable customer. So it’s related to everything Sam, it really is.

Which costing methods require manual processes to be automated

Sam Gupta 4:22

So if we look at the state of a business, for example, let’s say if you have the management team or the CEO, they have never done manufacturing in their life, and all of a sudden they are doing manufacturing, that could be one scenario. The other scenario could be they might be doing the manufacturing on the spreadsheet, and now they are implementing an ERP system. Obviously, as in the case of any ERP system, things are going to be a bit organized.

They will be able to track the costing a bit more. So one of the trends that I typically see when I look at the businesses that are either on QuickBooks or spreadsheet is they would not be doing the costing appropriately. So what are some of the challenges that you have seen in the market for the businesses that have never either done manufacturing or might be coming out of either QuickBooks or spreadsheet?

Christiano Gherardini 5:15

It’s a great challenge for those organizations because as you really analyze costing, it can get very, very granular, and when you’re using manual methods, you lose a level of detail, in fact, the ability to refresh it and see how the price of the supply chain which is off the charts right now in terms of price increases how that impacts costing and right away back to what I said it pricing, you could be committing to manufacturing and a price point you find out that all of a sudden the product price changed or the cost changed.

And your manual systems don’t refresh, and I think that is I said granularities, it’s just tough, it’s tough to manually to get all that data. And we think about how are they costing? Are they in Excel with QuickBooks? They may just be doing material costing, and they may not cost labor to production. But then they may forget costs. They may forget overhead and shop charges. They may forget equipment maintenance and machine time.

So there are so many cost elements, and again, as you move into a more automated system that allows you to land them in there to load those costs and then refine as opposed to having to remember everything every time, so it is compromising to have a manual costing system, and quite honestly it’s typically not going to have the level of accuracy of an automated system where you can see changes very very quickly, and that’s imperative in the market we’re in today frankly.

How to choose appropriate costing methods for your business?

Sam Gupta 6:31

Okay, amazing. So let’s talk about these costing methods, right? And that is always a slightly more debatable topic, at least from my experience, so when I talk to different CFOs, different accountants. And they always debate in terms of which costing method is going to be right for them, so describe different costing methods that we have and which are going to be situations in which these costing methods are going to be appropriate.

Christiano Gherardini 6:55

Different business systems support the standards, and some have a few advanced, but you know generally you’ll hear about LIFO, which is last in first out. You’ll hear about FIFO, which is first in, first out. You’ll hear about average costing. You’ll hear about standard costing, and there’s LIFO periodic and FIFO periodic, which are your standard and FIFO standard.

So you’re like, wow there’s six to choose from and how do I pick and you know a lot of people in the past you say ask your accountant and some of it’s based on your industry so again if I’m buying finished good products I buy and I normally sell people are taking a first in first out which means they’re chronologically reducing and consuming their inventory.

Christiano Gherardini 7:32

Some people, why would they pick LIFO? Well, they’re trying to maybe the price goes up, and they’re trying to reduce their margins on sales, and they’re keeping higher margin potential sale products in inventory still so so again, that’s a tax strategy.

Sometimes when they’re using LIFO where they’re trying not to recognize as much revenue average can make things simple for people. And again, if we’ve got high volatility, it’s up. Its down average gives them consistent margin recognition through the different periods as opposed to one month I made $1,000 the next month I made $10. So again, if you see that, that would be related to more of a perpetual where the cost may have changed dramatically from one period to the next.

Christiano Gherardini 8:09

Whereas average, say hey, we made $500 in both months, right because the cost was $500 between the two. And then as we get into the standard costing again the manufacturers again you know companies that use standard costing so again, they’re trying to consistently analyze margin across what they’re trying to establish as a baseline and sometimes standard is a guess, right, I think it’s $5, and they do some math to kind of prove that up.

But there’s a lot of iterations to continue to refine standard cost and again in an automated system where you land a standard cost, and if you’re granular about articulating the pieces that are in that standard cost well, then you can even map out an even more detailed and measure performance against these little cost layers and look at variances and tweak and refine and again there’s a high degree of precision in standard costing and even analyzing variances.

So again, depending on the business, if they’re high volatility and your pricing of the products that are coming in generally manufacturing versus just a distributor or so again, there’s a lot of conversation over how those different costing methods.

Costing methods scenarios and case studies

Sam Gupta 9:07

So let’s take some examples and some scenarios, right? So I don’t know if you’re going to have some stories. I’m actually going to tell you some stories, and then you can tell me whether I’m approaching this right or not.

So let’s say if I have recently graduated, and I am hired in a manufacturing company, and they have given me an assignment that you should be running an ERP initiative. Okay, I have read the things in my school. And obviously, conceptually, I understand what LIFO means, what FIFO means, what average means, what standard means.

But I don’t necessarily have experience in setting the standard for a company, and I am working in a manufacturing shop, and this manufacturing shop is a food manufacturer. I spoke to some of my accounting friends, and those friends told me that LIFO is an appropriate method. The costing method for me, what will be your perspective on this? Am I choosing the right method?

Christiano Gherardini 10:06

And honestly, LIFO is one of the least popular costing methods that I’ve seen in implementations, frankly, because last in first out, which means you’re leaving old inventory on the shelf, Well, okay, if there’s not an obsolescence factor to your inventory, maybe that’s not a big deal.

But certainly, you’re leading what would be perceived as the least cost item still sitting on the shelf because we expect the prices have gone up more recently. So what we’re doing is we do not recognize as much margin. Okay, well, again, it depends on the business. And maybe they’re profitable. And they’ve Oh. We don’t want as much revenue to be recognized.

But that would be my first reaction, and trying to understand is what was the rationale for that based on ownership? If the accountant says, Oh, no, I think this is the best choice. And again, I’d have to ask about the supply chain side and understanding. But what’s, what’s the characteristic of the materials, the raw materials being purchased? And again, is there volatility? Has there been a continuous increase over time that’s influencing that decision?

But normally, my first thought is they’re trying to keep some lower-cost items in inventory.

Sam Gupta 11:06

So what would be your recommendation? And can you tell me a little bit about which method is going to be appropriate for me so that I can go back to my accountant and the management and tell them that you know what? What you were thinking from the LIFO perspective is absolutely incorrect. And you guys probably should be thinking about either average, or FIFO, or whatever. So tell me, which method would you recommend? If you have any questions about my business, I’m more than happy to answer for you.

Christiano Gherardini 11:30

Sure. And again, the selection of a costing method normally I inherit that, but I would be leaning more towards a FIFO. And a lot of times, unless it’s a mature business that really understands their costs yet, approaching standard costing is difficult because standard costing expects that you have an Excel spreadsheet that articulates materials, labor, routings operations.

And so again, the more mature an organization, the more likely they are to head towards standard costing, the less mature FIFO, First In First Out again, reclining logically consuming inventory. And again, in that manner, manufacturing is going to be showing actual costing. So again, we still have to kind of understand pricing ambitions and margin ambitions.

Whether pricing does vary on a cost-plus basis, whether there are contracts in play, again, the standard costing would align more to a more established contract price, because we’d have consistent margin recognition per period based on prices established, whereas again, as you’re hearing me with a FIFO, or even a life of perpetual, we could have high variances in cost compared to a static price point.

So is pricing static? Is pricing flexible? Is it cost-plus pricing? I guess that’s a question that I want to ask you there because pricing can influence what I would recommend in terms of margin recognition.

Sam Gupta 12:40

So in this particular case, this is a pet food business, right? So we are actually selling the consumer packaged goods. So we don’t really have price variability, I guess, just because of the kind of ingredients that we’re using.

It is just meat and a couple of flavorings. So, for the most part, I mean, the price is fairly standard, just because we have the vendors that we work with all the time, and they don’t really vary the prices as much. So obviously, our prices don’t vary as much either. So would you be leaning more towards FIFO? In this particular case, is that your recommendation?

Christiano Gherardini 13:14

And again, if if if your organization is many years old and has a large staff, then they can probably take on a more complex costing method because that’s what that would be. There’d be more labor involved in doing a standard costing.

Sam Gupta 13:28

Okay, amazing. So let’s take another scenario here. Okay, so we have one more business, it’s the electronic business. Now, in this particular case, we are carrying a bunch of products, some are going to be things like your keyboard, but we also have the batteries that have the shelf life again. So we have a different product next. So, which costing method would you recommend here in the electronic business and why?

Christiano Gherardini 13:51

Would I still think that FIFO is going to be the lowest maintenance around inventory? So I think that’s another one of those attributes. But again, we’re moving out the oldest inventory first in electronics.

Sam Gupta 14:06

What do you recommend more about tracking the accounting method at the product mix level? Or do you recommend that? Shall we generalize it as the FIFO as the generalized method for all the products or a man do, let’s say battery a FIFO?

Because they have the shelf life, but my models or keyboard, they don’t really have a shelf life as such? So would you do it at the product mix level? Or would you do it at the device level?

Christiano Gherardini 14:31

I think you generally pick a costing method for the company, but you, as in your example, can have different costing methods for different products. And again, as you think about manufacturers, if they’re mature, they’re gonna like standard costing more because they can track more precisely, track variances, and try to refine those efficiencies, and FIFO FIFO is gonna be a low overhead costing method for an organization, and again, whether it’s, it’s keyboards, whether its mice, whether it’s again, as you think about foods, it’s very applicable to that.

Sam Gupta 14:57

I don’t know if you are going to have any stories, and you can share your stories as well if you have seen any costing methods where they were used incorrectly and the kind of problems you had.

So I’m going to propose one more example here, and maybe you can share your recommendations. So now this is a lumber business, okay. And this is what they are trying to do is they have a lot of lumber that actually comes to the yard, and then they have to track the cost of the lumber. So in this particular case, would you still recommend FIFO? Do you recommend average, standard, or LIFO?

Christiano Gherardini 15:31

So here’s what gets above that if we’re lot tracking. For example, if I have a lot of lumber that I purchased, and let’s say I’m still picking FIFO, even within a FIFO mechanism, I can still have a lot of inventory, and that lot would have a specific cost, even within those FIFO layers, I now I can go sell that lot of lumber.

And actually, the cost for that lot travels with it. So that’s a pretty precise caveat within a costing method. So yeah, I’m still standing by a FIFO perpetual being a low overhead costing method. And moreover, in the lumber industry, I think we’re going to be looking at lots because I can assign costs to a lot of lumber that I receive.

And then, when I sell that lot to a specific customer, I can price it accordingly because that cost travels with a lot. And if I’m pricing it, I’m very specifically able to articulate my margin at the point of the transaction, as opposed to it randomly showing up.

So again, I have visibility of the cost of that lot within that FIFO layer. I attached that lot to my sale transaction. That’s the cost that goes with the price that I established for that transaction. So it’s a very predictable margin scenario.

Costing methods and their granularity across different industries

Sam Gupta 16:29

Okay, so now let’s talk about some of those costing details, right. And in some cases, when we go across, let’s say, manufacturing shops, some manufacturing shops track these costs at a very deep level, meaning they are going to have, let’s say, 600 different Chart of Accounts.

And then it’s going to be extremely verbose in terms of that kind of cost they are tracking, but some are going to be slightly more concise. Right. So what is your recommendation in terms of what are the key details that manufacturers should be tracking? Do these details vary across the micro verticals? For example, let’s say if I go from the electronics manufacturer to automotive manufacturer, to let’s say, aerospace manufacturer, do these costing details vary?

Christiano Gherardini 17:16

They’re going to be applicable to all businesses. And the question is whether every business plans and manages, and tries to rationalize those costs. And if I use the examples where even as you asked about general ledger and Chart of Accounts, do you need 600 accounts?

Not necessarily. But in costing methods, you typically are seeing three different cost layers for material, three for labor, three for machining, and what are you talking about on material? Most people think it’s just the price you pay for your vendor, but there’s actually in a standard costing model, we can have that material cost, and then we can also have a fixed overhead. What’s that mean? Well, I’m figuring out a cost for that warehouse.

Christiano Gherardini 17:49

And then, I can have a variable overhead, even for material which could be my warehouse labor. So again, in the material costing, I want to track what’s the material costs, well, what’s my facilities, and what’s my warehouse labor. Now let’s talk about production labor, great, now I’ve got production labor, I’ve got a cost for wages, and then I’m going to have fixed overhead for that worker could be his benefits.

And I could have some variable overhead for that worker. The same conversation is for machining. I’ve got a fixed cost to operate the machine. And then I’ve got some variable overhead and some fixed overhead because again, what am I factoring in there? I’m factoring in maintenance and repair.

Christiano Gherardini 18:23

And so, in essence, those nine categories of costing between material labor and machining give me the granularity to allocate 100% of the costs related to material, warehouse, warehouse, personnel, shop, shop floor, workers, machines, all of those costs.

So now we identify those nine different categories. And again, not everybody’s trying to allocate overhead to the material. But again, if we really get granular, we really want to do 100% of it. Those are the nine categories. And as we flip to the general ledger, well, now we need matching accounts for those nine different levels.

And the different category that we would think about is variance. Oh, okay. So I need a variance for a material, variance for material overhead, fixed and variable variance for labor. So we end up with a variance category for those nine categories. And then we have WIP, work in process, right? Because at any point in time, I would say, how much labor do I have in the WIP?

Christiano Gherardini 19:14

Okay, how much labor overhead do I have in the WIP, and so again, the visibility into the variance of labor, the variance of the WIP of labor, and then the next category is finished goods inventory, because again, if I’m doing all these different layers of cost, and I have a $10 million in balance sheet inventory that something I said, well, how much of that 10 million in balance sheet inventory is labor versus material versus overhead versus right.

And then, at the end of the day, when I sell those products out of inventory, it ends up in the cost of goods. I can have that same level of granularity. If I wanted to see a lot of that cost of goods number, it said one number. Do I see how much of that cost of goods is really related to a material overhead or and at the end of the day, there’s even another application of accounts called the applied accounts meaning, the bookings against these actually act as a contract expense.

So if you think about the P&L, and not to get too technical, but in a profit and loss statement, I’ve got a line item in there for shop wages. It comes from ADP.

Christiano Gherardini 20:09

Well, I’ve got a line item right next to it. It’s called wages applied to manufacturing, which the ADP is a debit, right? I got 100,000 in wages. Well, the credit entry comes when I start executing manufacturing routings, right?

It’s crediting $100 in labor for an hour, this guy’s time. And where’s the debit go? The debit goes to work and is a process. So what happens at the end of the day, at a period level is I see, well, I had 100,000 in wages, and I applied 90,000 to manufacturing, huh? What’s that mean? Well, it means my standards are too low, right? I didn’t absorb all my labor in production.

So that’s a macro variance analysis. But again, as we talked about those nine different categories of costs, and the granular in the general ledger accounts, they’ll give you that purview on okay, here’s my problem and my labor standards too low or too high. What if I had 100,000 of wages?

Christiano Gherardini 20:55

And I absorbed 150,000? In wages? Oh, that’s a problem, too, right? And so, what does that mean? My costs are wrong. And there’s a whole lot of related analysis that can come by looking at that, that delta between the actual expense and the amount of it that’s absorbed through the manufacturing process.

So getting granular, but as I said, that’s the degree that you can go to and, and what you’re trying to do is you’re trying to find exceptions, you’re absolutely trying to find the exceptions and remediate those. And the next month, guess what? No variance. That’s certainly where we would end up.

Sam Gupta 21:23

So when we look at these cost categories, and you did mention that we have roughly 3-4 materials, three for labor, and three for machines as well, right? So when let’s say, if I’m doing this for the first time, it could get very confusing.

Okay, which one is going to be my pick? Which one is going to be my variable? So okay, so what is going to be the guiding factor here to decide, okay, which are my next category, which is my variable categories, so I don’t end up mixing them?

Christiano Gherardini 21:47

That’s right. And its crawl walk run is what I’m going to tell you that most companies choose to do, and we see a lot of them. Their costing methods could be just material costing? Well, that’s not accurate enough, right. But, but typically, and one of the challenges with standard costing is I don’t know how long it takes, which means what they do, they have to start collecting data.

And there are data studies that help you derive accurate standards. And even as we put routings on manufacturing, but there’s always a starting point, is what I would say. And as you look at costing, you don’t have to attack everything when you start with one product. Maybe you have one bill of material, one production. It’s 80% of your business. And guess what, we start there.

Christiano Gherardini 22:20

And again, there’s a crawl, walk, run, you don’t have to deal with fixed and variable overheads initially, maybe it gets added, and you look at the data after a month, it’s okay, I’m close tweak, tweak as opposed to going into a big data study that can take a lot of effort.

And that’s why the comment about standard costing methods is very complex for an organization that requires a lot of labor, versus FIFO, where it’s gonna accumulate everything, and it’s going to be it’s the actual cost of what happened.

So, but again, there’s a crawl approach in there, you don’t have to jump in and use all those, but some accountants will know. And they’re like, okay, roughly, I got $100,000 in, in a warehouse, okay, I divide that by what, how many deals do I do or how much this divided, you come up with some amount, and you plug it in?

Christiano Gherardini 22:57

And then there’s a point where you measure how close I am in refinements that will collapse the variance. And again, there’s a point we say. I’m within 3%, that’s enough. So again, it’s the 80-20 rule. You’re really trying to find the exceptions and remediate those and up, like I said, even as material. As we talk about standards, all I’m doing is getting a macro variance on the material.

I don’t see where the problems are at while I’m off by a million dollars. Where’re the million dollars? I don’t know because I didn’t track it. So now you bring into a whole another category of data collection. So if you think about it well, how do I know that’s the right material? It said five. I use five. I went and counted. I’m shorting the stock that somebody grabbed seven instead of five. So there’s a saying with labor, I thought that it takes five hours. Well, why do I have twice the cost of labor? Did he take 10 hours? Which job took 10 hours? Why did you use seven?

Christiano Gherardini 23:47

Did he break two? What happened? And so as you hear that second set of questions, to really pinpoint variances, that’s the next degree of costing, we have a standard that said five hours, but I have the worker, he clocks in, he clocks out it, guess what, he took five hours? Oh, hey, guess what? It took 12 hours. I got a problem, right? And every time you did it, it’s been 12-12-12.

So as we take that next step, right? It’s a crawl, walk, run as we go into data collection. And, and even in that context, I don’t have to do that for everything I make. Same thing on the material. I said it says five. You go in and scan five. I don’t have to scan everything. There are some of them. It’s predictable, but if maybe he’s using gold as part of the process, guess what? I want him to clock out how much gold he takes for the job.

Christiano Gherardini 24:27

Okay, again, if you break something, he’s going to have to scan out more of it so that I know what happened here. Well, that answers that question. As opposed to thinking we have a systemic problem. It’s the same thing on labor collection. Maybe you do it on one particular type of thing you produce because it’s the most important you sell the most.

And that’s what once you figure out how much time it takes you to adjust your standards, you’re reducing those variances and so a number of different techniques to kind of crawl into this incrementally, depending on what you’re trying to fix or find out what’s going on. And sometimes people just can’t tell they make money, but they don’t know where they’re losing money is the point. That’s a blur.

In a #costing category, you typically are seeing three different cost layers for material, three for labor, and three for machining.

Macro vs micro variance implications for various costing methods

Sam Gupta 25:00

Okay, since you mentioned the macro variance analysis, so I don’t know how that works. Can you touch a little bit on that? And do you have anything called micro variance analysis? Sure.

Christiano Gherardini 25:10

So it’s a great question. So what we originally started talking about is what macro where I’m looking at the profit loss statement, and I see my 100,000 in wages, and I absorbed 80,000 in demand by manufacturing, that’s macro says 20 grand, wow, I don’t know where I’m wrong.

I don’t know which of my productions is high and which ones are low. I could have some that are highest, some that are low. And the net change, the net difference is 20,000. So that’s macro analysis. And I think the other example of macro analysis is variance analysis is I do a physical inventory, the end of the month, I’m off by a million dollars.

Christiano Gherardini 25:41

Well, yeah, I have no idea what happened. And so that’s macro. And, again, if we don’t issue material against the manufacturing order, meaning it says, hey, take, let’s take 10 pounds, I assume you use 10, I consume 10, I go count, and I’m off, I don’t know. And again, that step forward when we have these big variances.

I need to start having this guy check out how many pounds he takes. It said 10. He took 10, he came back got ten more. Okay, I need to record that. And then now we get a micro variance, which means on a production order basis, I can look at the variance at a production order.

And then I can get very, very precise. And moreover, if we’re collecting labor by a worker, I can tell that this guy only makes three widgets a day, and the other worker makes 10. That’s an example of micro variance analysis. And it’s costing, its performance. And so there’s a lot of those micros and again, inventory variance, where am I losing product? Where are my labor assumptions off?

Christiano Gherardini 26:36

Where did he have more machine time than he should have? Why did that happen? So again, in the CFO and the owners, we want those answers. Because again, if we can’t see the exceptions, we can’t define that. And like I said, overall, we’re profitable, but we may be losing money on some, and we need to see that.

So that’s the example macro, you’re seeing it on the P&L micro, you’re down at the production level, where I can see it for a specific product run, I can see it by the worker, I can see it by a machine. Again, maybe I’m tracking out defects.

So I’m tracking good and bad. And, hey, that’s important to know that something’s not right. And so again, as we get to that next level of detail, that’s where we really get to solve the problems.

Most people think it’s just the price you pay for your vendor, but in a standard #costing model, we can have that material cost, and then we can also have a fixed overhead, such as the cost for that warehouse.

The nuances of labor cost allocations

Sam Gupta 27:15

So let’s talk about the labor issues. And typically, when we look at costing methods, I guess, from my experience, the costing for the material is going to be slightly easier.

But it gets really complex when we look into labor issues, right? Especially when it comes to scheduling for labor, let’s say if one resource is working on multiple machines or if you’re looking at the actual utilization of labor across the jobs.

Sometimes those problems could be challenging because let’s see if one person is working on a specific job. And then he or she has to move over because he or he has some sort of emergency and there’ll be another person comes in. So how do you keep track of all of this?

And how do you accommodate the rate changes? Let’s say if you are shifting from one worker to the next, how do you accommodate all of these things into costing,

Christiano Gherardini 28:00

It gets tricky. And I think that’s whereas you’ve asked standards on a bill of material, a standard routing in standard labor, and a generic worker. That doesn’t really give you what you need. But typically, what people will do is they’ll set up labor codes to represent the different what’s called tiers of cost for workers, as opposed to the degree where every worker has a regular and an overtime cost code.

And you can go to that degree where every worker has that, and it agrees with what’s on there is their salary. So that’s the nth degree you have a work labor code for every worker. And again, as they clock in and clock out.

Christiano Gherardini 28:33

And again, you have to get the clocking because if you’re not collecting the individual time against the production, it’s generic, right? It’s a standard, and there’s not going to be any variability because it’s not just going to substitute a WIP or a labor code when someone changes.

But if somebody is clocking in, clocking out, and there’s a labor code that’s assigned to them that may be assigned to that operation, it gets very specific. It pulls in a very precise labor rate. And so if somebody clocks in somebody else clocks in, we got two different labor rates, I have a supervisor, I have a junior, I have a senior, I can have a senior engineer, I can have lots of different positions.

And sometimes, again, are the rates based on position? Are they based on the individual? But again, it’s different people clock in and clock out of production. We’re aggregating all these various costs at that level of detail.

Christiano Gherardini 29:15

So techniques and we go back to the page running two machines at once. Well, again, we’ll assist them to let them log into two jobs at once. Some systems won’t let you clock in twice at all. You’re already clocked in the running over there. So what happens? Does he get two identities? There are people little set up to two identities for an individual, but then it’s interesting.

Is he always concurrent? Which means are those two identities at the half rate? Or do I have to at full rate into it half rate, and I log in using the appropriate one. So it adds complexity when people are running multiple jobs? And there’s maybe there’s a different technique of costing that job than the standard one. And it goes the other way where wait, I’ve got three people working on this one. So now you have three workers.

And again, how do I cost them? So again, we’re aggregating, and some systems do have the capability of knowing how many people are on the crew. Sometimes You’re just adding multiple people are clocking in on the operation. And then the actual labor is, is much more precise than what you can articulate the standard routing.

Backflushing means to consume the materials on the bill of material as written. So it takes the standard recipe, it consumes the standard recipe, there is zero variance at the production order is what that means. You don’t collect labor, there’s zero variance at the production order works.

Product costing limitations of legacy ERP systems

Sam Gupta 30:08

Okay, so let’s talk about routing. So let’s talk about some of the older ERP systems. And I don’t know if you have seen some of the older ones where they didn’t really have the routing, just because they could not support that kind of sophistication, because the technology was limited back in the day.

So a lot of manufacturing companies still use those MRP systems. And the way their implementation looks or appears is for each of the operations on the routing they are going to have, or they are going to divide that individual job order.

Okay, so for each of the operations, we have five different jobs. So in the modern ERP systems nowadays, I mean, they can support all of your detailed routings, right? So you’re not going to have multiple BOMs. You’re not going to have multiple job orders.

Sam Gupta 30:48

But in the older ones, you have the individual job orders for each of the operations. So let’s say if a manufacturer is there who’s still using that old ERP system, and they don’t really have a detailed routing system, and they feel that I’m actually trying to show the new ERP system, and I’m actually trying to coach them that okay, this is how the modern ERP system is done.

But they think that my processes are unique, okay, and maybe you are not able to support the way my processes are constructed or built. What will be your recommendation for this manufacturer? Are they approaching this right by creating the individual job order for each of the operations in the manufacturing process? What is going to be implications if they keep doing that?

Christiano Gherardini 31:34

Yeah. And I think. That’s an interesting perspective is, again, if we’re stuck on a legacy system and can’t upgrade, you’re creating a workaround. I mean, there’s not a perfect answer, and without knowing what the specific system is, but whether you have the granularity of three cost buckets for material or you load it all into one, again, the account is going to have to have a manual way to parse that out, in terms of being convinced that there’s not a system that can accommodate the manufacturing.

I’ll say this discrete process, mixed-mode, engineer-to-order, configure-to-order make-to-stock, integrated from a CAD PLM system that automatically generates BOMs, and routings, all that capability. Sophistication is in the market. And I think that even parametric configurator.

So I think there’s a lot of people to be pleasantly surprised as to how much the technology has evolved, and against it to take a fresh look. Because honestly, I use the tagline empowering competitive advantage. And frankly, if your costing methods are wrong and your system is limiting you, you’re not competitive.

And I think most businesses are recognizing that great, but they can still get accurate costing out of legacy systems. They’re just going to have to create a workaround.

Sam Gupta 32:39

Okay, so let’s talk about one last scenario. And you seem to be emphasizing how important it is to issue the right materials, especially if they are going to be expensive. You also emphasized during this conversation how important it is to clock in and clock out to be able to cost accurately.

Now I am talking about one of the manufacturers, and they again were using a very simple ERP system in their case. I don’t know which ERP system was that, to be honest. But I mean, we didn’t have as much admin effort for them. They felt bad. Clocking in, clocking out is going to create additional work for the production floor. They felt that the material issue should be completely automated, there should not be any step of material issue.

There should not be any step of labor reporting if you went to college or were advised to this management team. Do you agree with this approach? Would you question this approach? What will be your recommendation in this video?

Christiano Gherardini 33:32

I’m smiling because it depends on the business and to your point is maybe their bill of materials. And their assemblies are pretty predictable, and they don’t have to count. They don’t have to issue material. So the technique they’re using is called backflushing.

Again, with a backsplash on the front end, backflush on the back end, a lot of people use backflushing because a lot of them aren’t manufacturing the raw materials into component parts. They’re not grinding welding, that maybe they’re taking a bunch of pieces, and they put them all together into an assembly. It’s still manufacturing. There is still labor. There are still operations.

But again, the material issue piece, maybe it’s pretty straightforward, and maybe they don’t have that. I talked to a group today that rework, rework, rework means you continue to issue more and more material that was beyond the original specifications.

Christiano Gherardini 34:13

So again, based on the business based on the products or manufacturing, a backflush is fine. And honestly, we go back to that macro labor variance. The CFO may say, man, I got this, I absorb it all. I don’t need to figure it out. Oh, are some high, some low at the end of the day? Maybe they’re overly profitable. And guess what, the right to make people clock data doesn’t take them anywhere better.

But there are other people that are more competitive situations that need that precision, and four percentage points on price can cause them to lose. And if that 4% is artificially inflated due to inaccurate cost, and again, it’s back to everybody has a different feel for some people have it nailed.

They know their costs, they instinctively know it, and they’re making a ton of money and guess what the cost of implementation, the cost of data collection, or even mobile devices in a warehouse, it doesn’t appeal to them.

Christiano Gherardini 34:59

It could also be an old ERP. We’ve got a new breed ERP, and we’re seeing a lot of change in the guard and mobility in the warehouse and to be able to elegantly have work, move, and have even transfer orders or quality orders and have those things elegantly show up on a workers device.

So he knows what work you should do. That’s the new world. That’s the new expectation, but there’s a lot of people that still don’t. I’m making a ton of money, I don’t need to do that and ensure they don’t, okay, and again, they’re gonna be profitable.

But it’s, how much more profitable could they be? There’s the real question, and they don’t know. They can’t quantify that because they believe that it is as good as it’s gonna get. And like I said, case by case. So you can’t argue with people if they’re convinced, but there are other people that want to, they want a better way. They want to be competitive, they want to refine, and they want to compete.

And those are the ones that absolutely are going to implement these types of features incrementally. And again, where it makes sense, right? We don’t touch everything, but we want to chase the stuff that really can make a difference. As I said, You got one product you’re doing 80% of your revenue on. Boy, you sure want to make sure that you’re right on that one.

The implications of Backflushing

Sam Gupta 35:59

Since you mentioned the term backflushing, and a lot of my listeners might not be familiar with that term. So what is backflushing? That is number one. And number two, which companies or scenarios are going to be appropriate to use backflushing.

Christiano Gherardini 36:11

Yeah, and again, it is still back to the predictability of the assembly. And again, a backflush means you take the recipe, and you use it as is. It’d be like opening up a cake mix that has the eggs and the butter and the oil and everything, and you dump the whole thing in the oven, done. I don’t do anything else.

Oh, I asked for two eggs. I put three in. Well, you put three, and you’re not backflushing. You’re doing an additional material issue. But that’s what backflush means. It means to consume the materials on the bill of material as written. So it takes the standard recipe, it consumes the standard recipe, there is zero variance at the production order is what that means you don’t collect labor, there’s zero variance at the production order works. Hey, I executed the recipe. I think you don’t really know. And you can’t substantiate that.

Sam Gupta 36:54

So, okay, amazing. That’s it for today. Chris, do you have any last-minute closing thoughts?

Christiano Gherardini 36:59

Oh, like I said, any company that wants to take their game up and get more efficient in manufacturing and be more competitive, we would love to help. There are a lot of opportunities out there for companies to do more. And the expectations of people are just that that we are rising to the occasion with better technology to track those costs to be efficient to manage. That’s it, Sam, thank you.

Sam Gupta 37:16

Okay, amazing. So my personal takeaway from this conversation is going to be costing methods have far more implications on your business, it’s going to have on your profitability as well. To understand your costing and do it right. So on that note, I want to thank you for your time. I really appreciate your insight.

Christiano Gherardini 37:32

Appreciate it, Sam. Thanks for having me on.

Sam Gupta 37:33

I cannot thank our guests enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you learned something new today. If you want to learn more about Chris head over to turnkeytec.com. Links and more information will also be available in the show notes.

If anything in this podcast resonated with you and your business, you might want to check other related episodes, including the interview with Ram Krishnamurti, who discusses costing strategies for different businesses and why that matters for ERP implementations. Also, the interview with Brian Sommer, who discusses why legacy ERP systems and artificial accounting practices need to change with time.

Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform or DM me on any social channels. I’ll try my best to respond personally and make sure we get out. Thank you, and I hope to catch you on the next episode of the WBS podcast.

Outro 38:30

Thank you for listening to another episode of the WBS podcast. Be sure to subscribe on your favorite podcasting platform so you never miss an episode. And for more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.

In this episode, we have our guest Andrew Lees, who discusses how engineering can work effectively with manufacturing vs outsourcing and finance teams. He also provides several strategies in working with overseas vendors and contract manufacturers to mitigate financial risks. Finally, he has described how CFOs can budget and plan engineering initiatives and work with engineers effectively.

Chapter Markers

• [0:24] Intro
• [2:32] Personal journey and current focus
• [7:49] Perspective on growth
• [11:51] Listening Skill differences in working with internal manufacturing vs outsourcing
• [15:06] The underlying reasons for conflicts
• [18:51] Is financial motivation the reason for conflicts with manufacturing vs outsourcing?
• [21:58] Contacts and contactual obligations
• [22:48] The differences in financial hit between due to conflicts
• [25:59] Best practices of financial management for engineering contracts and engagements
• [30:45] Closing thoughts
• [31:43] Outro

Key Takeaways

• It’s so important to realize and really wrap your head around that when you start producing production parts, it’s almost like a new product development phase.
• It’s really important to be open-minded about that and to not get too frustrated with manufacturers, because I’ve seen that too, where it’s like, hey, why doesn’t this just work? And engineers and clients are getting mad at the manufacturers and manufacturers like, Whoa, we’re making this to spec, but we’re using a process that you didn’t use in prototyping.
• With overseas manufacturers, you have to give them exact guidance. As an engineer, I understand the design the best, but the manufacturer understands the manufacturing process better than I do. But dealing with overseas requires you to research manufacturing yourself as opposed to relying on them for guidance.
• There are so many different processes that are design engineers aren’t intimately knowledgeable about. They might understand it, but they might not really know exactly what the limitations are.
• Setting those expectations upfront is huge because that would get a design engineer thinking. So they can think about alternatives to solve the problem. And while they’re starting on the tooling, I could be thinking of, hey, if this doesn’t work out in this way, I’ve got these backup plans.
• As long as you’re super clear, everything comes back to setting that clear expectation and beginning, you could say if it’s a little bit of a riskier project, they might say that this is what we think the cost should be. We don’t expect the cost to go over. But there is a chance that it could, and here’s why.

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About Andrew

Andrew Lees helps people bring their ideas to life with product development engineering and launch strategy consulting. He has a background in mechanical and aerospace engineering, and he has launched both B2B and B2C businesses, including Stoke Ventures. He also co-hosts a podcast for entrepreneurship called That Entrepreneur Life.

Resources

• Connect with Andrew
  • LinkedIn
• Connect with Stoke Ventures
  • Website | LinkedIn | YouTube

Full Transcript

Andrew Lees 0:00  

I’ve got these backup plans. I’ve got these ideas from a design perspective. Now I can communicate better with the manufacturer about offering ideas. I think most design engineers want to offer ideas, but then they’re not necessarily sure exactly how to help.

Intro 0:24  

Growing a business requires a holistic approach that extends beyond sales and marketing. This approach needs alignment among people, processes, and technologies. So if you’re a business owner, operations, or finance leader looking to learn growth strategies from your peers and competitors, you’re tuned into the right podcast. Welcome to the WBS podcast, where scalable growth using business systems is our number one priority. Now, here is your host, Sam Gupta.

Sam Gupta 0:59  

Hey everyone. Welcome back to another episode of the WBS podcast. I’m Sam Gupta, your host, and principal consultant at a digital transformation consulting firm, ElevatIQ. 

New product development is complex, especially when you might have to decide between in-house manufacturing vs outsourcing. There are financial risks associated with research and development. The experience could be even more frightening if you’re new to R&D, have a tight budget, or work with external or overseas partners. While you might perceive that the risks may be lower with internal initiatives, it may not be true as it’s harder to track the internal opportunity cost and stay on track with other competing priorities. 

In today’s episode, we have our guest, Andrew Lees, who discusses how engineering can work effectively with production and finance teams. He also provides several strategies in evaluating manufacturing vs outsourcing. Finally, he has described how CFOs can budget and plan engineering initiatives and work with engineers effectively. 

Let me introduce Andrew to you. 

Andrew Lees helps people bring their ideas to life with product development, engineering, and launch strategy consulting. He has a background in Mechanical and Aerospace Engineering. And he has launched both B2B and B2C businesses, including Stoke Ventures. He also co-hosts a podcast for entrepreneurship called that Entrepreneur Life. 

With that, let’s get to the conversation. 

Hey, Andrew, welcome to the show.

Andrew Lees 2:29  

Hey, Sam, how are you doing? It’s great to be on here.

Sam Gupta 2:32  

It’s amazing. I’m super excited to discuss just because you have tons of design background, and also the manufacturing background, especially if the companies that are starting with their product journey or the design journey or evaluating manufacturing vs outsourcing, I think they will have a lot to learn from you. So just to kick things off, do you wanna start with your personal story and your current focus?

Andrew Lees 2:51  

Yeah, sure. So again, Sam, thank you for having me on here. I’m excited to talk to your audience today. I got a background in mechanical engineering. I went to Lehigh University in Pennsylvania. And from there actually kind of took it a step back before college. I knew I wanted to be an inventor. I thought that was pretty cool. I was always taking things apart and putting them back together. 

So I wanted to create products. And I was always coming up with these different ideas for things. But I didn’t really know exactly what I wanted to how I wanted to turn that into a professional career. So engineering made a lot of sense. My grandfather was a mechanical engineer. I started to really love what he did and love math and physics.

Andrew Lees 3:40  

And so that’s what got me into engineering. When I was in college, I thought maybe I wanted to get into aircraft design. So I was major in mechanical engineering and a minor in aerospace design. I got really into that. 

I thought maybe I wanted to work for a Boeing or Lockheed or NASA or something like that, which would have been cool, except that it really didn’t align with my entrepreneurial spirit. I always had that inventive entrepreneurial type spirit. So I wanted to ultimately want to do my own thing. And I actually worked with a guy, one of my bosses, at a product development firm. He used to work for GM. 

And he said there were guys that would just work on the cupholder, and they’d be like the cupholder guy for their entire life, and I’m like, No way I’m pigeonholing myself into designing one thing, that people take for granted in this in this big product, right?

Andrew Lees 4:42  

So I really wanted to focus on things that I could do from idea through, like take the entire idea to concept development, design, detailed design, engineering, prototyping, and then get it through to production in various settings including internal manufacturing vs outsourcing. So really, it really made a lot of sense then that I would start to focus after college after I work for a big company. I started working for a really small product development consulting firm. 

And then from there, I spun off my business Stoke Ventures where I help inventors and startups develop their ideas, take their idea, and then turn it in to bring them to life, design engineer, prototype, and then help guide people with manufacturing as well. 

And then from there, I noticed a lot of inventors, a lot of startups really, really don’t know, they don’t understand the startup process, really what they need to do, to take an idea, bring it to life, and make money with it. And so I came up with another service that I offer called Stoke strategies. And with that, I help with launch consulting like launch strategy consulting.

Sam Gupta 5:58  

Okay, so I absolutely love your background. And the reason for that is because I don’t think we have had any inventors or engineers on the show. And as we are slightly more CFO and COO community, so obviously, we love innovation as long as that produces some money.

Andrew Lees 6:21  

Exactly. That’s the thing, right is, yeah, I think people sometimes especially as a consultant, or even I’ve seen it with manufacturers where they don’t want to talk to an inventor, they don’t want any part of that sometimes, because it’s pretty risky, they might feel that inventor might not have an idea of what the heck they’re doing. 

And so with my strategy product, which is actually something that I’m really trying to focus on now, in addition to product development, is I really want to give people the tools that they need to start and launch their product. 

And what’s cool about that is that it makes them smarter; like for manufacturers, for IP attorneys, I’m trying to kind of guide them and help them on their journey. But also the kind of the byproduct of that is that they become more educated clients so that when they do go to a manufacturer, they know what they’re doing. 

And they might be an inventor, but they have a strong foundation, and they understand the financial part of it, they understand what they’re getting themselves into what the costs are, what the lead times can be, what the challenges are, all the logistics and everything that’s involved, so they’re so it makes them a lot less risky. 

So to the manufacturing community, that’s something that hopefully my, my strategy service kind of, hopefully, that helps with that kind of thing.

Sam Gupta 7:49  

Yeah, so we are going to dig into all of that. To be honest, I mean, we are going to be talking about a little bit of intrapreneurship because those traditional manufacturers are not going to be really in the startup phase, but they have similar challenges as the entrepreneur. 

So we are going to be talking about all of that. But before we do that, we have one of the rituals here that we do on the show. And that is going to be one of the questions that we ask every single guest, and that is going to be your perspective on business growth. What does business growth mean to you, Andrew?

Andrew Lees 8:18  

That’s a loaded question, but I love it. There are so many. What’s cool is there are so many different ways to look at business growth. I mean, you and I offline were talking a little bit about our personal business growth with our consulting businesses. It’s tough. We kind of go through growing pains, and there’s so much to do it, but it really depends on what kind of business you’re trying to grow. 

I have a product-based business called Grass Racks. We make bamboo board racks for like display racks for boards, bikes, and skis, and that is totally different. Like the growth strategy for that company is totally different than the growth strategy for my consulting business. I mean, at the end of the day, it becomes really simple to get more clients to get more customers, right? But the way that you go about doing that for different businesses can be wildly different.

Andrew Lees 9:14  

So for B2B, I think that one of the most important things you can do is network is to do things like this, get on podcasts, put content out there, connect with other people who are in your space, and do it purposefully so you don’t necessarily just talk to anybody but do it purposefully where you’re trying to help somebody else who’s in your space and in turn a lot of times what will happen is you know they’re going to help you they’re going to think of you, hey I know this manufacturer or whoever you know whatever you’re doing, you’ll be remembered because you’re the manufacturer who’s out there trying to help people and try to connect with as many other people as possible.

So yeah, I think that’s in terms of like growth mechanisms that’s really important and then finding other professionals like what I’ve done one of my growth mechanisms is, is talking to manufacturers and saying:

Andrew Lees 10:16  

Hey, you guys, your injection molding company or CNC machining or whatever it is that you’re doing metal forming. I’m a product development engineer, I have a lot of clients who need manufacturing, I’d love to send work your way, do you have anybody who might be coming to you a little too early, and that happens a lot, a lot of manufacturers, get customers of all different at all different levels that could be, large, even larger companies who don’t have, they might not have CAD files, or they need to dial in their design a little bit more before they can really dig into manufacturing. So then they’ll refer to me, I refer work to them. And so that’s a really great way to kind of grow.

Sam Gupta 11:01  

Yeah, so let’s actually dive into some of the engineering things that are actually going to excite you, I guess, as an engineer, so one of the comments or stories that I have from one of the episodes that I just did recently and this notion of engineering, or I don’t know if I should be using the word conflict between the engineering vs manufacturing. 

So in our client base or the listener base, when we look at the kind of companies that we deal with, they are either going to have the in-house manufacturing capabilities, or they are going to be working with the contract manufacturer. So they need to evaluate manufacturing vs outsourcing.

So obviously, the engineering is great, but one of the comments that one of the contract manufacturers made is, hey, look, well, from the engineering perspective, your product may be great, but sometimes you might not understand the nuances of making parts such as gears.

Listening Skill differences in working with internal manufacturing vs outsourcing

Sam Gupta 11:51  

Now, gear making is very, very different; it’s going to have its own nuances from the process perspective. The material that you may have chosen in your design may not work in the physical world, from the supply chain perspective, from the manufacturing perspective. 

So there is always this sort of conflict between engineering vs manufacturing? Have you seen something similar in your experience? If you have, what would be your advice, let’s say for the engineers or the CFOs? How can they work in the contract manufacturing situation? Or even if they are doing this manufacturing internally, what will be your advice to sort of work with your manufacturing team? And how to be slightly more receptive, how to be a better listener overall?

Andrew Lees 12:34  

Yeah, that’s a great question. So what comes to mind comes to the top of my mind really for this is I deal with it a lot with going from prototyping to production manufacturing, yeah, because prototypes can be so different. With our product development, we’re not just designing something that looks cool but that can be manufactured either through internal manufacturing vs outsourcing. It can be prototypes. It can be 3d printed, but it can’t be manufactured in production, but even when you’re designing something that can be prototyped and manufactured in production, there’s still how it performs with a prototype like with 3d printed parts isn’t necessarily exactly how it’s going to perform with production parts.

And so yeah, I deal with that all the time is kind of helping clients to understand. This is good for engineers to understand, too whether you’re a product development engineer you’re working doing consulting work for other people or whether you’re part of an internal team engineering department of a larger company, it’s so important to realize and really wrap your head around it and really be more open to the fact that when you start producing production parts, it’s almost like a new product development phase.

Andrew Lees 14:00  

It’s not like starting your product development over, but when you start with production, you can expect that boom, this is going to pop off the machine. It’s going to work exactly as the prototype did. There are different limitations to it. And there are different outcomes that you’re going to get with those parts and your assemblies, and so you’ve really got to you’re gonna have to take your first production parts off the line and test them and iterate that process over again a little bit. 

You’re usually going to have to rework at least something, depending on the complexity of the parts. So yeah, that’s something that I see all the time. And it’s really important to be open-minded about that and to be and to not get too frustrated with manufacturers, because I’ve seen that too, where it’s like, hey, why doesn’t this just work? And engineers and clients are getting mad at the manufacturers and manufacturers like, Whoa, we’re making this to spec, but we’re using a process that you didn’t use in prototyping. So you’ve got to, you’ve got to understand that it’s going to be a little different. 

The underlying reasons for conflicts with manufacturing vs outsourcing

Sam Gupta 15:06  

Yeah. So, why is this a challenge? Let’s say in the ideal world, if everybody was listening the way they should be listening right. Then we would probably not have as much friction. 

But why do we have so much friction? Do you have any examples or stories that you might be able to share in terms of what the problem was? Was that really the process differences? Was it more of the ego issue? Is it really the communication? Do you have any stories in terms of what was the core issue in dealing with the situation?

Andrew Lees 15:37  

Yeah, so a product that I developed, it’s a fishing product. It’s a small product. But man, we had to pack a ton of functionality in this tiny little product, and it was injection molded; it’s got basically a small razor blade that’s embedded in the product that’s assembled into it. 

And that cuts the line, and it’s got to be at the right angle, it’s got to be sharp enough, there are a few nuanced criteria to it, that seem it doesn’t, seem like it has to be that specific or that getting that angle of the blade just right relative to the other features on the part would be supercritical.

And so when we were we got it to work again, it’s one of those things where it worked perfectly during prototyping. And then we got to production, and it didn’t work perfectly. But one thing that I had to really, I had to really get wrap my head around with the manufacturer is, and we were working with a manufacturer overseas, in China through a company here, who is a little bit more than a broker.

Andrew Lees 16:54  

They do like project management, that kind of stuff, too. But it was like a communication breakdown. That’s perhaps the real difference between internal manufacturing vs outsourcing. But it wasn’t. They didn’t understand what we were looking for exactly. It was that I was saying, hey, this is what we need, we needed to function exactly like the prototype, just let’s just get there, I don’t care how you do it, we just need to get there. 

And they were kind of like, Well tell us. So I mean, I think I gave them one idea at the beginning of like, hey, this, this might be how we could solve it, that didn’t work. And then it just ended there. So instead of taking instead of, like where a lot of companies might say, Okay, I understand what the end goal is. 

So I’m just going to get there. And I’m going to really think about all the different possibilities, all the different ways that we could get there. And we’ll try some different things. And we’ll figure it out. Instead of that, it was kind of like, Hey, we tried this thing, and it didn’t work. So it won’t work.

Andrew Lees 17:49  

And you should do this instead. And we’re like, No, we can’t, we can’t just completely change the functionality. The part has to work this way. It can work this way. And so what I realized was that especially, and this is specific, I think sometimes dealing with overseas manufacturers, is you have to give exact guidance, you have to tell them, hey, these are the options, let’s think through this. 

And also, don’t be afraid to kind of, to kind of think through it yourself. And sometimes that’s tough, but it’s important that you have to give and take because, as an engineer, I understand the design the best. And the design intent, the best and engineering part of the product, but the manufacturer understands the manufacturing process better than I do. 

So I was hoping that I could rely on that a little bit. Sometimes you really have to, say hey, these are the options, test these three things and see what works.

Is financial motivation the reason for conflicts with manufacturing vs outsourcing?

Sam Gupta 18:51  

So tell me a little bit more about that story. So is it primarily because engineers don’t have as much manufacturing exposure, or is every process going to be different? So it’s just hard for them to be able to visualize the kind of challenges you are going to run into the manufacturing? Is it really the communication barrier from the overseas perspective? 

But I have seen this in the case of, let’s say, the customer-vendor situation as well. Because at the end of the day, when you look at the vendors, they have financial motivations as well. If you change a lot of design, from the manufacturing perspective, they have to change their tooling. They have to try this right. So I don’t know whether you are paying during the tooling process, but it’s a lot of work for them. 

So that might be one of the motivations. So tell us a little bit more about what kind of challenges do you see? What can we do to sort of fix that, and what can we do to make this process slightly more streamlined? Both from the engineering perspective, both from the CFOs perspective, I mean CFO is going to be at both sides, the customer side as well as the vendor side. Right?

Andrew Lees 19:54  

Exactly. And I think, and yeah, manufacturers, I think I’m sure they know that they want to figure out what the most streamlined process is. And it is tough because manufacturers know their processes the best. And then the engineer who designed the product knows what they need out of the product the best. 

And so, sometimes, getting on the same page can be tough. But I think really understanding really going through the product in a thorough way at the beginning of the product, and the project can be really helpful, and kind of getting on the same page of the engineer might say, hey, we needed to function like this. And I’m not as familiar with your processes because there are so many different processes that are design engineers aren’t like intimately knowledgeable about, they might understand it, but they might not really know exactly what the limitations are.

Andrew Lees 20:50  

They’re just communicating that saying, hey, this is the process we’re going to use. And here are the major limitations. And here’s what we could, here’s what we could run into with apart and just saying that is really important, you might not run into these issues. 

But just laying this out there. And setting those expectations upfront is huge because then it could get like, as a design engineer myself, that would get me thinking, Okay, now I get it, okay, so I can start thinking about alternatives to solve the problem. And while they’re starting on the tooling, usually you have to get something done right before you even test it to know whether or not it’s going to work while the manufacturer is working on that tooling. I could be thinking of, hey, if this doesn’t work out in this way, I’ve got these backup plans. I’ve got these ideas from a design perspective. 

Now understanding the manufacturing process, now I can communicate better with the manufacturer about offering ideas because I think most design engineers want to offer ideas. They don’t just want to lob it over to the manufacturer and say, hey, you will figure it out. They want to contribute well, but then they’re not necessarily sure exactly how to help.

Contacts and contactual obligations between manufacturing vs outsourcing

Sam Gupta 21:58  

Yeah, so let’s bring some dollars into this equation. We, as the CFO community, right? Obviously, the design is cool. Disruption is cool. That’s great. But when we talk about the hard dollars, I mean, that’s where the things get slightly more difficult, right? 

So in your experience, I don’t know what relationship you have had with this manufacturer. I don’t know if your contracts are going to be primarily parts-based. Let’s say you produce these many parts, and I’ll pay you this much, or that I’m going to be other incentives. 

So what has been your lesson learned in working with these manufacturers and your suppliers and understanding what kind of different contract arrangement might be there? And what do the manufacturers need to know about these contracts on websites while working with the contract manufacturers?

Andrew Lees 22:42  

So, in other words, what kind of cost structure are we looking for, as designers or clients?

The differences in financial hit between manufacturing vs outsourcing due to conflicts

Sam Gupta 22:48  

So there might be several different ways of structuring a contract when you’re working with the supplier. One would be I’m looking for these many parts. It could be as simple as that. Now, if you make five revisions in the design, that’s going to be a financial loss from the vendor’s perspective. 

So I don’t know how long they can continue with that. As you have mentioned initially, that is what they are looking to deliver based on the spec. So if you know what you are doing, then I can print this whole day. There is no problem at all because everything is defined, right. 

But if you don’t know if you’re more in the R&D phase, at this point of time, somebody has to bear that that financial loss, either it has to be that manufacturer. So those clauses are going to be part of the contract, right? When you are going through the legal process, when you are going through the financial process, somebody has to bear that loss. So in your experience, what are some of the ways to mitigate this risk for both the manufacturer as well as for the designer?

Andrew Lees 23:44  

Yeah, that’s a great question. So again, I think it comes back to setting expectations at the beginning of the project. You say, hey, these are the costs associated with developing this tooling developed, developing the manufacturing process for these parts. And so we’ve got that cost, we’ve got some unknowns, we’re not exactly sure, as much as possible, within the scope of that of those parts not changing, really, at all. 

If there are any changes that need to be made, I would consider that generally out of scope and generally something that the manufacturer should not have to eat the cost of it through the process if there are some tweaks that need to be done with the mold, that’s kind of that is something that I would expect the manufacturer to do. And as long as they’re not major modifications, I’d expect that that would be kind of in their estimated cost from the beginning.

Andrew Lees 24:39  

But yeah, if the engineer or the client comes back and says, you know halfway through the project and says, hey, can we just like modify this a little bit or change this feature or that feature, it at that point, it’s really should be on a client to pay whatever costs the manufacturer is going to incur. 

And I think Sometimes manufacturers are a little bit gun shy to go back and say, Hey, we’re gonna need more money. But if the scope changes, that’s totally fair. I’ve definitely run into that where, for whatever reason, we’ve needed to make a change. And we, we say, hey, we understand that this is out of scope, we’d like to make this change, and there’s who kind of get some pushback, and really, all we want to know is what’s the cost. 

And if the cost is $100,000, and our budget to make this change is $10,000, well, that it’s not going to work. And we say, okay, just keep going the way that you were going, that’s fine. I think just knowing the numbers and having those costs, and making informed decisions is critical when it comes to differences in manufacturing vs outsourcing. 

And as a manufacturer, you kind of can’t be shy to just say, hey, this is what it costs. This is going to be out of scope. And this is what it costs, and boom, there it is. Do you want to move ahead with it or not? And I think most designers or most clients, they’re going to respect that.

Best practices of financial management for engineering contracts and engagements

Sam Gupta 25:59  

From your experience, do you have any sort of best practices for the engineers? And again, I’m going back to my example. Let’s say if you have printed the same part 5000 times, then there is no variability in the process. Right? And your partner knows what they are doing. Do they already have the manufacturing process? Well, there is no variability as such, right. 

But if you are, in your case, anything, you are trying to design something new, completely new category, right? So what are the best practices in terms of financial management? Let’s say if I’m the engineer, and I am working with my COO or CFO, they don’t like to see any risk, as they don’t like to see any sort of uncertainty in the process. 

So obviously, let’s say if you are trying to pitch to me, Andrew, I’m going to ask you, okay, how much budget Should I keep? Is it going to be 100,000? Is it going to be 5,000? And what am I going to get out of this? And there is always going to be a little bit of friction between the engineering and finance team, because when his team is looking for certainty, an engineering team cannot provide that certainty, because obviously, we have not done this, what are some of the best practices, from your perspective for both sides of the table to just reduce this thing? Make a slightly more streamlined,

Andrew Lees 27:11  

Man, you hit the nail on the head. I mean, that’s something that I deal with as a consultant. There’s uncertainty with what I do. Yeah, and I’m trying to mitigate that risk. And taking on a new project sometimes can feel a little bit just like diving in with your eyes closed, you’re like, Well, I really cuz you really, really want to, I don’t think anybody or most, most engineers, most manufacturers, irrespective of whether you are working with internal manufacturing vs outsourcing, don’t want to take on a project just to get the money, they want it to work out. 

And especially with manufacturing, you have an increased incentive to work out. Because if it does, then you can be, like, once you reduce that risk to almost nothing to where you’ve got the project or the product all figured out, you can just make 1000s of parts a day, or whatever it is, and you’re, you’re essentially printing money at that point. So you want it for many different reasons for, integrity for financial reasons.

Andrew Lees 28:08  

You want it to work out. But yeah, you’re so right, there’s that risk. And uncertainty is like, it’s tough, and no company wants to take that on. So yeah, I will say that I think, in general, product developers and manufacturers are, by nature, a little less risk-averse than maybe other companies because we are doing something that is unknown. And that had, and it is, but it hasn’t been proved exactly on a regular basis. 

But I think to reduce that risk, one way to do it, and, and I do this in my consulting business, too, you can do with manufacturing, I think as long as you’re super clear, again, everything comes back to setting that clear expectation and beginning, you could say if it’s a little bit of a riskier project, say, Hey, I this is the estimate, this is what we think the cost should be. We don’t expect the cost to go over. But there is a chance that it could, and here’s why.

Andrew Lees 29:04  

And we’re honest. We’re not going to know exactly what the additional cost is until we get there. But we have to get there, and we have to figure it out. And if everything goes really well, you’re not going to go over this cost, but just so you know that there, there could be some additional costs associated with it. This will be true whether you compare the internal opportunity cost with manufacturing vs outsourcing.

If you could always not exceed a number that hey, this is going to be $50,000 not to exceed 75 or something like that. So I’ve seen that happen. And then for obviously for projects that are less risky than you really know, hey, there are things that can happen here that we’re not exactly sure of because it’s a different product. 

But we’ve done a lot of products that are similar to this, so we feel very confident with it. We feel very confident with the process, so you can really dial in your number a little better, but the riskier it is, the more you want to let your engine engineer, the design engineer, the client that you’re working with just let them know, here’s what the options are. I think people respect that because then they know, Okay, wow, this is a little more complicated than I thought it might be. 

Andrew Lees 30:00

And I understand what could happen. I think if a client is like, if you say, hey, there’s gonna be $10,000, this project, whatever it is, whatever the scope of work is, and they say, okay, it better because I don’t have $10,001, then that’s probably not a good client, right? Yeah, because they’re like, right on edge there on that, man, there’s no room for error. And in this in product development and manufacturing, there is air. So you have to have everybody’s got to understand that. And everybody’s got to realize that you have to have room for error.

Sam Gupta 30:45  

Okay, amazing, Andrew. So that’s it for today. Do you have any last-minute closing thoughts, by any chance?

Andrew Lees 30:49  

Nothing in particular, but I’m really excited to, again, connect with your network. And if anybody has any questions about what I do, as a product developer, if you have any clients who you think if you’re out there, and you’re manufacturing, you have anybody who’s coming to you, who’s not ready for manufacturing, but they might need some design and engineering work, I’d be happy to work with them. 

And also, I do startup strategy as well. So it seems like everybody’s got a good idea, but I’m trying to help more and more people figure out how to get that idea and turn it into money. So happy to help with those two things.

Sam Gupta 31:22  

Okay, amazing. And my personal takeaway from this conversation is going to be it comes down to communication. So just be open-minded, irrespective of whether you are an engineer or in the finance community, irrespective of whether you are working with internal manufacturing vs outsourcing. It’s all about communication. So communicate, communicate and communicate. On that note, I want to thank you for your time. It’s been super insightful and fun.

Andrew Lees 31:41  

Thanks, Sam. Yeah, I had a great time. I really appreciate it.

Sam Gupta 31:43  

I can’t thank our guests enough for coming on the show for sharing their knowledge and journey. I always pick up learnings from our guests, and hopefully, you learn something new today. If you want to learn more about Andrew or understand how he can help you develop and launch your idea irrespective you need help with manufacturing vs outsourcing, head over to stokeventure.com And listen to his podcast about entrepreneurship at theentrepreneurlife.com. Links and more information will also be available in the show notes. 

If anything in this podcast resonated with you and your business, you might want to check out the related episodes, including the interview with Dave Hataj, who describes the role gears play in our society. Also, the interview with Matt Guse from M.R.S. Machining, who discusses the challenges associated with manufacturing complex parts in short runs. 

Also, don’t forget to subscribe and spread the word among folks with similar backgrounds. If you have any questions or comments about the show, please review and rate us on your favorite podcasting platform or DM me on any social channels. I’ll try my best to respond personally and make sure you get help. Thank you, and I will catch you on the next episode of the WBS podcast. 

Outro 32:57  

Thank you for listening to another episode of the WBS podcast. Be sure to subscribe on your favorite podcasting platform so you never miss an episode. For more information on growth strategies for SMBs using ERP and digital transformation, check out our community at wbs.rocks. We’ll see you next time.