For years the industrial sectors, no matter how specific and nuanced, have conducted a battle of process versus project. Process came into focus 30 years ago when lean manufacturing became the rage. It was not a fad because the notion of efficiency, eliminating waste and best practice made sense then and still makes sense today.

Follow-up permutations have morphed into lean six sigma, working to fix an operation based on quantifiable metrics. Theory of constraints (ToC) falls under this purview as well, suggesting that manufacturers can focus on process bottlenecks as where to put time and resources to ameliorate what is most important.

All these processes are guided by the notion of continuous improvement process (CIP). Things change, ranging from competition, personnel, supply chain disruptions and product complexities. These are just some of the situations which can place a manufacturer in a diametrically different circumstance next month, next quarter and even next year. A methodological process to evaluate what is working, what isn’t working, what can work better and what can drive profits can be an informal exercise, but increasingly, there are lean teams, process improvement leaders and best-practice evaluations for companies at $100 million and more in annual revenue. Even smaller companies are seeing the efficacy of evaluation and process assessment practices.

While process is critical, in a project-based manufacturing environment, the variable nature of design and production, as well as a non-stop need to meet engineering, manufacturing and custom products, make CIP difficult. When so much manufacturing was outsourced 20 or more years ago, the cost-savings were realized in low-wage labor and production of standard SKU with highly repetitive processes. One could order a freight of a single SKU because demand was consistent and profit margins were derived from off-shoring cost-savings. Supply chain disruptions, particularly during Covid-19, have reignited the reshoring conversation even among the most rudimentary of repetitively manufactured products.

An elevator manufacturer could tack on a 40% margin for one-of-a-kind custom-built hotel or office building elevators. Companies that would never have previously considered themselves custom manufacturers were able to offer highly engineered products meeting the specifications of clients. These companies moved their personnel to a more engineering focus consultative sale rather than sales “order takers.” This does not preclude the continuation of standard (catalog) parts, which may still make up to 65% of the total sales. Yet, when looking strictly at the bottom-line, the project-driven sales are usually at a much greater profit margin.

Issues In Project-Based Manufacturing

Sadly, much of the profitability in project-based manufacturing can evaporate quickly if the processes in bidding, engineering, product change impacts and production consequences are miscalculated. This is not the world of thin-margined consumer packaged goods (CPG). Those processes often lose margin in the intralogistics due to mis-picks in the warehouse or other fulfillment concerns — including labor shortages. In the project-based manufacturing world, poor bidding processes used to “win the sale” become a major problem that neglects all the engineering and production changes inherent to customized products.

While repetitive manufacturers can rely on standardized processes that are systemized in the ERP, project-based manufacturers don’t have that luxury. ERP systems were not designed to support the unique processes of projects with their constant changes and the ripple effect in production (and profit). Therefore, these businesses typically end up using lots of separate applications and tools outside of the ERP. None of these tools are connected, which causes delays in insight and ultimately production.

Working With Today’s Constraints

Instead of facing this problem with the traditional process mindset, these management teams need to think “projects first.” Teams need to think like a project business, which focuses on the project financials, operations and analytics as core to their business model. As a result, leading project businesses are much clearer in their processes and technological requirements.

With a project business approach, it is much easier to see where improvement is needed. It becomes obvious that traditional ERPs do not work as they should for project-based manufacturers. As more manufacturers and companies, in general, become more “projectized,” there is a growing need to find end-to-end solutions that fit their unique business paradigm.

Source: Forbes

Polk & Associates

Large enough to serve a diverse clientele, yet small enough to maintain a hands-on approach, we are committed to maintaining the highest accounting and ethical standards with continuous education, extensive research resources, and excellent quality control.

Polk and Associates is a member of the Michigan Association of Certified Public Accountants, and the American Institute of Certified Public Accountants. The firm participates in the AICPA Peer Review Program, and has always received the highest level of award for its audit practice and quality control.