Building production capabilities

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Covered in this topic are the following

Key considerations in building production capabilities

Production is the creation of something new by adding value to inputs via a transformation process in which services and goods are made available for exchange in a marketable form.

Consider the following example:

A company may take raw materials (inputs) such as fabric dye, thread, buttons and cotton, and transform them into ready-to-wear clothing, thereby adding value. Equipment such as sewing and pressing machines may be used in the transformation process. Skilled workers must inevitably be hired to operate the machines and to use their know-how, creativity and capabilities to transform raw materials into the final product.

Key production capabilities

The following production capabilities may need to be built in accordance with the configuration of the offer within the business strategy, and when the capability does not already exist:

  • Quantities
  • Cost
  • Time
  • Quality

The business strategy determines the characteristics of the offer to be produced and marketed; if the strategy is poorly designed or designed on the basis of erroneous or incomplete information not verified through market research, the characteristics are inadequate for the target market or segment and building the corresponding production capability will be a waste of valuable resources which could mean the end of the business or even of the enterprise.

International considerations

In all probability, your company is currently producing for a domestic market. Producing for an international market is quite different since there are many new factors to consider. Each market has specific requirements, likes and dislikes, and expectations that must be met in order to win their business. While you may have a clear understanding of local quality and time expectations, local demand and cost structures, it is important to carefully examine each market as a separate entity that has different needs to be satisfied.

Your success in international markets will not only depend on your ability to understand their specific needs, configure an offer accordingly and market it, but also on your ability to build the production capabilities needed to manufacture your offer according to your strategy. Differences in quality requirements, safety and environmental standards, packaging and product presentation, ingredient specifications and product labels - these are just a few of the production elements that must be manufactured according to their configuration.

Producing the required quantities

Due to increasing expectations of international markets, and awareness in health and environmental issues, unseen and non-obvious physical characteristics of the product are becoming more and more important in global trading. These include material specifications and ingredients of the product, packaging and printing materials, and even nutritional value of a food product. While your products might conform to expected domestic characteristics, they might not be acceptable in international markets.

Whether we start a production line from zero or expand an existing one, we need to:

  • know the market's demand for the goods produced;
  • understand the capacity requirements as well as other necessary resources;
  • do engineering studies of the production process in order to produce the physical characteristics of the product; and
  • evaluate the existing facilities with respect to their capacity to be modified to produce new product characteristics and to their capacity to accept expansion.

How much can we sell?

If an enterprise does not know how much it will be able to sell internationally, it will be almost impossible to make plans for production, marketing, financing, etc. By knowing its international selling capabilities, a company is able to make informed decisions as regards to production modifications, facility locations, additional machinery and equipment needs, product changes, and so on.

Several forecasting methods are used to obtain information about a market. One example is to use market research that has already been done by an export promotion office. This information can assist an organization in determining its present and future capacity requirements for the new market. It is important to remember that even though this research is based on specific data, it is open to fluctuations due to the effect of many unpredictable causes and hence may contain inevitable errors.

Once your organization has determined its selling potential in the international market, it can then evaluate its current operations to see what changes and modifications need to be made in order to be capable of producing at the new product demand.

Understanding capacity requirements

The capacity of a plant is the main limiting factor in producing the required quantities within a given time. Once you begin exporting, capacity will be a critical factor to your company's success. Generally, capacity is defined by unit of output per unit of time, such as the number of fishing flies of a given design produced in one day.

By going global, your market size can expand considerably. Although your organization might be able to sell large quantities of products internationally, if your production facilities are not capable of keeping up with the increasing demand, your export operations will ultimately fail.

If your organization has the resources, it can increase its production facilities in order to satisfy this increase in demand. Several ways to find sufficient funds to expand facilities are:

  • create a partnership or joint venture to share resources and risk;
  • manage resources more efficiently (labour, materials, machines, transport, etc) to save money; or
  • decrease costs (change suppliers, buy in bulk, be organized, maintain machines, etc.).

Expanding production facilities might not be an option for your company. However, there are various alternatives that may enable your company to satisfy an increase in demand:

  • Outsource certain elements of production.
  • Modify your existing production facility in terms of layout, machines, workflow, safety, etc.
  • Re-engineer the production process (change the way in which you produce).
  • During slow-moving periods, build up stocks and inventories that can be used when demand is very high.

Producing at the required level of quality

To produce goods that conform to the designed and decided quality, companies must set manufacturing standards. Everything that is incorporated in a company should be considered. Here are just a few examples:

Raw/incoming materials

Are all the materials being used for your final product conforming to legal requirements of your new market? If not, are there suitable replacement materials?

Skilled and unskilled labour

Have your employees been adequately trained to carry out their tasks? Is their work monitored? Are they compensated for their speed or for thoroughness in their job?

Packaging and product presentation

Will your normal packaging be suitable to abide to the quality standards of your international market? If not, what type of change is needed?

Establishing quality standards

When deciding upon standards to set, managers should keep the following in mind:

  • Achievable standards should be set and all concerned parties should agree on these standards.
  • Standards should be defined and put into writing for the product itself, processes, and activities of all departments of the company.
  • In order to analyze the differences between actual and expected performances, indicators should be selected and results should be recorded.
  • Changes in the quality expectations of the market should be monitored and company standards should be revised accordingly if necessary.

Quality control procedures

Once a standard of quality is set within the organization, it is important that it be strictly enforced within the whole enterprise. Since quality control directly affects organizational costs, it is essential to ensure that the cost of the quality control system is less than the cost of producing poor quality products (cost in this sense means financial, reputation, lost market shares, etc.). If every parameter of every item produced is controlled, however, quality control costs will be very high. Therefore, a balance must be made between quality and costs.

The desired quality should be compared with the actual quality achieved and any deviations detected should be promptly corrected.

Producing on time: stocks and inventories

In order to ensure prompt delivery of goods, companies should secure inputs prior to production. When doing so, the following questions must be asked:

  • How much will be needed?
  • When will it be needed?
  • How much will it cost?
  • How and from where will it be sourced?

Therefore, a production plan supporting the marketing needs should be prepared. Production must be supported by adequate:

  • production inputs (raw materials, components, packaging materials, etc.);
  • goods under process (semi-finished parts, goods to be finished into a final product, etc.);
  • finished goods;
  • maintenance, repair and operating materials;
  • re-sale materials (scraps, re-usable industrial waste, etc.); and
  • financial assets to secure the investment.

While it is true that keeping a large inventory results in a larger financial burden due to cost of storage space and use of resources without immediate financial return, some companies still decide to go ahead with keeping inventories. When a company has slow and busy periods, such as companies that produce seasonal products, it can be an effective way to ensure company stability. That is to say, they can:

  • use a smaller production facility at full or near-full capacity at all times;
  • make efficient use of resources;
  • maintain employee job stability by providing constant work, rather than hiring seasonal staff; and
  • result in workers with more skills and motivation.

Purchasing

Cheaper purchases, quality at the required level, delivery on time and appropriate quantity are all important factors for purchasing. An organisation can choose to either buy from one single supplier or from several suppliers.

Buying in larger quantities from one single supplier means:

  • cheaper buying rates;
  • more customised services; and
  • reliable delivery times and product quality.

However, buying from alternative sources means:

  • secure supplies;
  • reduced dependence on one single source; and
  • more purchasing power.

The typical cost structure of an enterprise can be represented by the following table:

Direct costs

Factory overhead

Marketing expenses

Administrative expenses

  • Direct materials
  • Direct labour
  • Other direct costs
  • Supplies
  • Fuel
  • Utilities
  • Spoilage
  • Indirect labour
  • Storekeeper’s wages
  • Maintenance wages
  • Supervisor’s wages
  • Cleaners and porters
  • Watchman’s wages
  • Other indirect costs
  • Depreciation of equipment
  • Machinery repairs
  • Insurance of property
  • Rent
  • Salaries and commissions
  • Advertising
  • Samples
  • Travel expenses
  • Telephones, internet connectivity
  • Postage
  • Trucking and packing
  • Packing materials
  • Entertainment
  • Salaries
  • Office expenses
  • Audit fees
  • Stationery and printing
  • Rates and taxes
     
 

Manufacturing costs

   

Total production costs

 
About KEPROBA

The Kenya Export Promotion and Branding Agency (KEPROBA) is a State Corporation established under the State Corporations Act Cap 446 through Legal Notice No.110 of August 9th, 2019 after a merger between Export Promotion Council and Brand Kenya Board.The Agency’s core mandate is to implement export promotion and nation branding initiatives and policies to promote Kenya’s export of goods and services
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