In my mind, a true job shop is one that makes discrete quantities of parts on a purchase order and ships them all to a customer in one shipment. No long-term delivery or commitment requirements. On the other hand, a shop that does have longer term purchase orders with multiple releases and/or formal purchase agreements or contracts is not what I would describe as a job shop.
Let’s go through some of the pros and cons of each so you can clearly see what type of business mix you have and whether it works best for you.
- Lower volume- lower investment in outside processes
- Shorter time to payment as total process/invoice cycle is short
- Lower or no WIP (Work In Process) and finished inventory.
- Shorter lead times leading to scheduling issues
- Cash flow is erratic due to generally lower billing per jobs and random delivery dates
- Must have operators/programmers that are good at quick setups and machines that accommodate the greatest flexibility in jobs
- Must have a steady receipt/acquisition of jobs to keep machines operating
- Must have machines that can do multiple operations in one handling of parts.
- Steady workflow that can be managed in terms of scheduling optimal lot sizes vs. cost to produce
- Predictable cash flow, as shipments are regular
- Ability to allocate resources and purchasing to obtain some scalability saving
- The need to constantly be searching for more jobs is lessened so less pressure is put on sales force.
- Need to define all issues in regards to contract that may require legal assistance to set up
- Requires larger financial commitment by company to handle larger cash outflows
- High WIP and inventory costs will be incurred especially if terms negotiated are not very favorable to company. (e.g. Kanban deliveries coupled with poor and erratic customer usage requirement scheduling)
- Longer lead times to first and last payment on orders
- Places burden on internal paperwork process and purchasing to coordinate multiple internal orders used to fulfill customer purchase orders.
These are the highlights of what goes into making a decision to go either way. Most shops wind up with a hybrid of the two systems with a larger (i.e. greater than 30%) of their work being of the contract variety. Some are 100% contract.
My own belief is that the hybrid model gives you the best of both worlds while maintaining flexibility to service a wide range of customers. Both types can be profitable but must be managed closely to maximize these profits. Smaller companies will most likely be more of a “job shop” in nature while larger companies especially those over 100 employees or $15-$20 million in sales, will end up with most of their work in long term agreements or contracts.
So what’s your mix? Does it work for you? Is it the ideal combination for your size and customer/work type? Do you want to change it? Call me and I’ll walk you through an analysis I’ve prepared that will help you answer these questions as well as a plan to help you get where you want to be!