I think about this question a lot, and I am often stumped by what I see going on around me in the manufacturing sector. I find that people in our sector are doing the opposite of what I think should be the norm when it comes to spending money. The question I often wonder is:
Is it better to improve processes and make investments when it is busy, or when it is slow?
One of the sectors I am familiar with is the forestry sector. When companies in the forestry sector are busy, the amount of investment goes up and when the sector is slow (when the price of lumber is down) then investment is curtailed. This is the same thing that other manufacturing sectors are doing. You may say to yourself that this seems like a logical way to go about things.
However, when you begin to examine the situation, what seems to be the most logical is not really how things should be done. When it’s busy, companies tend to put a lot of investment into their firms. I was always told “we need to make hay when the sun shines.” I do get the fact that when it’s busy and capacities are reached, you do need to add more production capability to achieve your commitments, but when is the best time to implement this?
If a company makes these investments when it’s slow, they are able to make more hay when the sun shines. These investments are disruptive to the organization and interfere with production as new processes or pieces of equipment are installed, resulting in necessary downtime, troubleshooting, installation time, etc. They usually take longer than expected and their immediate negative impact is far worse than expected.
Don’t get me wrong: when you’re at max capacity then you need to do something. But if you make the strategic investments needed before that busy time hits again, the maximum capacity is higher and production becomes more efficient. Your first reaction may be to hold onto your cash when it’s slow, but if you spend during this time your disruptions will be minimal and you will be ready to produce more when you are busy again.
As we have seen over the last decade, there are going to be slow times and busy times. It is never slow forever and never busy forever. A good investor makes purchases when times are slow, and ends up adding a lot of profit to their bottom line when things are busy. Just like buying a stock – purchase low, sell high. Business owners who implement these investment principles can achieve the same result for their company’s bottom line.
Author: Udo Jahn
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