SECTIONS

Local manufacturers rethink production models post-Covid

The government saves a billion by buying locally manufactured cars for disciplined forces.

When the Covid-19 pandemic struck, people with low disposable incomes reduced their spending on anything but basic needs forcing companies to adopt just-in-time manufacturing.

This is happening as manufacturers raced to prevent wastage. For many, when the economy began to reopen, there was no change in strategy.

High demand was met with unsatisfactory supply due to shortage of raw materials and supply chain disruptions, and companies had to be careful on how they approached manufacturing.

The pandemic was quickly followed by Russia’s invasion of Ukraine, and logistical challenges that affected transporting goods to markets.

Raging inflation, shortage of the dollar, a weakening shilling, the stock exchange’s bearish run, and uncertainty ahead of the August 9 polls are among the reasons some local manufacturers are wary of mass production.

Globally, a semi-conductor chip shortage, which tech giant Intel says could go up to 2024, has affected the production of key electronic devices, seeing a rise in prices. For some gadgets that needed the chip, a just-in-time manufacturing approach.

Just-in-time manufacturing is defined as a production model in which items are created to meet demand - not created in surplus or in advance of need.

According to Tech Target, just-in-time is aimed “to avoid the waste associated with overproduction, waiting and excess inventory”.

In essence, what is produced is sure to find a market.

This approach reduces risk, with minimisation of wastage, but would also impede the ability to make sales, especially in markets where people could consider impulse buying.

“In an effort to balance cost and risk, a whopping 84 per cent of UK businesses now think they should move on from a ‘just in time’ supply chain model to a ‘just in case’ model to overcome potential supply chain crises moving forward,” says Forbes, indicating a willingness to revert back to a practice that was common pre-pandemic.

While producing, companies have also been tasked with choosing whether to stock raw materials in anticipation of future production or to just look for the requisite materials when it is the actual time for production.

Henry Ford, the founder of the Ford Motor Company, is quoted as favouring a just-in-time inventory nearly a century ago.

“We have found in buying materials that it is not worthwhile to buy for other than immediate needs. We buy only enough to fit into the plan of production, taking into consideration the state of transportation at the time,” he is quoted as saying.

“If transportation were perfect and an even flow of materials could be assured, it would not be necessary to carry any stock whatsoever. The carloads of raw materials would arrive on schedule and in the planned order and amounts, and go from the railway cars into production. That would save a great deal of money, for it would give a very rapid turnover and thus decrease the amount of money tied up in materials.”

For many companies, this still holds.

Andrew Muriungi, the founder and chief executive of Rhino Mabati, says the decision between mass production, which could be considered a “push” system and in which the company forecasts demand, prepares a production schedule, and then orders inputs to begin the production process, and just-in-time production might depend on the goods one is producing, and how likely it is that customers can forego them. It is also pegged on the markets one is targeting.

His company, Rhino Mabati, makes roofing sheets, which have to await orders by clients because every sheet has to be made according to the specification of the customer.

“Whenever you have to customise, you make the customers have a special connection with the product. They own the product more, and form an emotional attachment with it in such a way that they could even be better lifetime customers,” he says.

However, he adds, the distribution model that a business is using also determines the method of production that they will prefer.

“If you are dealing with distributors, you have to make mass productions so that they have the product in stock for the customers that they are serving,” says Muriungi.

“However, when you are dealing directly with the customer, you await their order and ship the goods according to their specifications and needs.”

Muriungi states that companies may choose to go for just-in-time production to make sure that every time they are tasked with production, they can be certain that they will be making a sale, thus profit, that will keep the business running.

It is also a cost-efficient method of production. Companies that do so could do away with space they do not need, such as for storage, and consequently cut on overloads.

“It could be disastrous if a company has financial constraints and there is a stock that is yet to be disposed of because there is little demand for goods already manufactured.

“You could produce and then within the time a good number remains in the warehouse, or the shelves, the shilling is still depreciating against the dollar,” he says.

In this case, when the sale eventually happens,  one will have made a smaller than the anticipated profit margin, or even a loss.

Shortage of raw materials, which has hit many sectors during the pandemic, also causes a reduction in production, which could trigger increased demand.

This ramps up the prices of goods and one could feel that all the goods and services that a manufacturer at that point releases will be sold, albeit for the increased prices.

But where the product is not a basic need, many may hold back on spending, anticipating drops in costs of goods.

Changes in tastes and preferences are also likely to change estimates that a manufacturer had made, and where a product has an easy substitute in the market, customers may seek solace there as they await price stabilisation.

In such times, manufacturers opt for just-in-time manufacturing.

Shortage of staff, which slows down production, also leads to a preference for just-in-time manufacturing.

Companies that produce easily perishable goods will also want to produce just what will be consumed immediately to prevent losses due to goods that get damaged easy.

Lower stock holding also means a reduction in storage space which saves rent and insurance costs.