Before You Buy a Bigger Building: How to Find Out If Your Plant Is Really Full
The short version: Before you sign a lease or pour a slab, measure the flow, not the floor. We check five things first: WIP in weeks, inventory with no demand, actual hours against quote, what the floor is holding, and where the hours pile up. What you find is your story. Here's one from a display maker with the new building already drawn: 7.4 weeks of WIP in assembly, and a $4 million move that became $3.3 million it never spent.
In January 2020, a display manufacturer we'll call Shelf Esteem Displays hired us to design its new building and confirm the square footage. This is what we saw on the floor, the question the CEO couldn't answer on the first tour, what the numbers said, and the five things you should measure before you commit a dime to real estate. The lesson applies to any plant, warehouse or office that feels full.
What does a plant that has outgrown its building look like?
Walk into the plant with me in January 2020. It sits in a Midwestern suburb, and the company, which I'll call Shelf Esteem Displays, builds point-of-purchase displays for retailers you've walked past a hundred times. A private equity firm owns it. Sales are growing about 20% a year, two add-on acquisitions are on the drawing board, and a second facility is being folded into this one. The lease on this building is up that fall.
Start at the dock. Inbound material, outbound finished goods and empty pallets are all competing for the same few doors, and there aren't enough of them. Walk past receiving and the aisle narrows, because the import product that came in floor-loaded is sitting on the concrete, three bays deep, some of it with inventory stickers from the previous November. A forklift driver is doing a little dance to get one pallet put away: move two, set one, move two back. Keep going into assembly, 60,000 square feet of it, and you can't see the floor. Finished displays are staged for shipping next to raw material staged for jobs that haven't started, next to custom pallets for a customer program that nobody has room to put anywhere else.
Then the small stuff that tells you more than the big stuff. The men's room usually has two or three people waiting on a stall. The women are using portable restrooms. The parking lot is full. The electrical service won't support one more machine. The CNC machines, everyone will tell you, are the bottleneck, and in the busy season the whole place is bursting at the seams.
Nobody was imagining any of it. If you had walked that floor with me, you'd have reached the same conclusion the leadership team had reached: this company has outgrown its building.
So they did what careful leaders do. They got quotes on a new facility, 360,000 to 420,000 square feet, and budgeted more than $3 million for the move. Then they hired us to design the layout and confirm the square footage. Two greenfield layouts, in fact, and, almost as an afterthought, a third layout for the current building with whatever improvements we could find. Just to be thorough.
Near the end of that first tour I asked the CEO, the founder's son, the question I ask in every plant: how would he know if someone took 90 minutes to do a 60-minute job. He thought about it, and then he started building the answer out loud. Pull the labor transactions. Line them up against the job router. Cross-reference the estimate from the prototype stage. After a minute I stopped him. He was describing how it could be done. The point was that it hadn't been. He didn't know, and neither did anyone on his team, because nobody had ever written down what a job was supposed to take and then checked.
That's not a knock on him. He grew up in that plant and knows every machine in it. But a plant that doesn't predict its own performance can't measure itself against anything, and a plant that can't measure itself has no way to tell the difference between full and slow.
If you can't tell a 90-minute job from a 60-minute job, you can't tell a full plant from a slow one.
What did the assessment find in the first week?
A quick word on the word. When a private equity firm looks at a company it's about to buy, that's operational diligence. When the same firm asks us to look at a company it already owns, we call it an assessment. Same walk, same numbers, same questions. The only difference is who's writing the check, and whether there's still time to change the price.
We started where we always start, with the work moving through the building. Work in process, or WIP, is every job that's been started and not finished. Material cut but not assembled. Displays built but not packed. Pallets waiting for the next station. We pulled the open-jobs report and divided the open hours in each department by the hours that department could actually work in a week.
Assembly had 7.4 weeks of WIP sitting in front of it.
If every customer had stopped ordering the morning we did the math, it would have taken assembly the better part of two months to finish what was already in front of it. And 79% of the plant's open hours were stacked up in assembly, not at the CNC machines everyone had been pointing at. The bottleneck was where the hours were piling up, a long way from the loud equipment.
Assembly was slow for a simple reason. Its space was being eaten by inventory, pallets and old jobs. A lot of good people were doing a lot of activity in that bay, and much of it was rearranging product that was already finished so the next job could squeeze in. The people were fine. The system gave them nowhere to put anything.
Then the inventory. Shelf Esteem had about $11 million of it on the books, and somewhere between $2.5 million and $3 million was not due to be used anytime in the foreseeable future. Our Consumption 9-Box (a way of sorting every SKU by how much you use it and how predictably you use it) found nearly 3,000 SKUs, worth $875,000, that hadn't moved once in the prior year, on top of the excess the team had already flagged. Some of it was finished goods built on speculation. Most of it was the 1% to 3% of extra material project managers ordered on every job as insurance, charged to the customer, and then left on a rack when the job shipped. Add that up across a year of projects and it came to about $500,000 of new excess and obsolete inventory, every year, that nobody had ever totaled. None of it was dishonest. All of it was taking up floor, and all of it pointed at a purchasing process with no one watching the back end of it. Dead inventory is a floor-space problem until it becomes a balance-sheet problem, and that's a story for another day.
We timed a forklift driver taking eight minutes to do a one-minute putaway. The driver was fine. The open slot was behind three other pallets, each of which had to come out and go back in. Those custom pallets in assembly were built in January and didn't ship until February 10. For weeks they sat in exactly the same place, finished, taking up floor.
And underneath all of it, the schedule. The plant manager could release any open job at any time, and the unspoken objective was to keep people and machines busy. That's how most plants are run, and it's how you end up with 7.4 weeks of WIP, because every job that starts before the one ahead of it finishes has to go somewhere.
George Carlin had a routine about stuff. A house, he said, is just a place to keep your stuff while you go out and get more stuff. When the house fills up, nobody gets rid of anything. They get a bigger house. That's the whole explanation for why a smart leadership team looked at that floor and saw a building problem. The house was full of stuff. And every square foot of it was already on the lease.
A plant that measures busy will always feel full.
What happens when you fix flow instead of buying floor?
Our mid-project memo to Shelf Esteem's leadership team had a one-line title: We don't think you need to move, and here's why.
The why was not complicated. Cut the wood inventory roughly in half, about $1.3 million. Put up 1,100 new pallet positions for the import product that had been living on the floor, and recover about 8,000 square feet in one stroke. Move the prototype cell and the weld stations so material stopped crossing the plant. Release jobs when assembly can take them, not when the schedule has an open slot. Run a daily plan-versus-actual meeting and fix what missed.
Then we priced both paths side by side.
Moving and building out a new facility: just under $4 million. Reworking the existing plant: $635,000 for the short-term layout, which opened up 46,000 square feet of productive space and handled two to three years of growth, or just under $1 million for the fully optimized version (restrooms included), which opened up 60,000 square feet and handled four to five.
The cost avoided was roughly $3.3 million. Leadership took the recommendation: they stayed put, implemented the plan and folded the second facility into the building they already had. Now look at the calendar. We were hired in January 2020. The memo went out in February. In March the country shut down. A lease signed that winter would have meant paying for two buildings, a build-out and a move during the exact months nobody could get a crew through the door, with demand frozen on top of it. The analysis didn't predict any of that. It just made sure they weren't carrying $4 million of new fixed cost into whatever came next.
Bullet dodged.
I told the short version of this story in Shocking Profit. This is the long one.
Space is not the problem. Space is the symptom. ~ Tim Van Mieghem, Shocking Profit
What is the hidden profit in growing without adding overhead?
Here is what fixing the flow instead of buying the floor was worth, in three numbers.
$3.3 million of capital they didn't spend. The move and build-out, less the cost of reworking the plant they had.
An extra $4.6 million of profit a year, about 70% of today's profit. On the 20% growth already in the plan, our model has the flow fix earning $4.6 million a year more than the move would have. Same customers, same crew, same roof.
$500,000 a year of excess inventory that stops being created. The project overage was quietly turning into dead stock every year. Stopping it is worth the material, and it closes a purchasing gap that had been invisible.
The first number is the one everyone remembers, and it's the least important one. The second is the one I call Black Gold in Shocking Profit: it's what happens when a plant grows 20% a year and the labor and overhead lines don't grow with it.
And here's the part the real-estate conversation often leaves out. At 20% annual growth, Shelf Esteem will eventually need a bigger factory. When they do move, however, the productivity gain moves with them.
Fix the flow first and the new building gets cheaper every year you wait for it.
What should you measure before you sign a lease or pour a slab?
These five were Shelf Esteem's story. Yours will have its own shape: maybe scrap instead of WIP, maybe a schedule that looks fine and a quoting process that doesn't. And every one of them has a twin in a warehouse or an office, where WIP is the inbox and "we need more space" sounds like "we need more people." But these are the five places we look first on every capital request, because one of them is almost always where the hidden capacity is. You don't need a consultant to run the check. You need a week, a clipboard, and your own people. The folks on the floor know exactly where the stuff is hiding, and their input is gold.
WIP in weeks. Take the open hours on your floor and divide by the hours you can actually work in a week, by department. More than one shift's worth sitting in front of any operation is a flag. More than a week means your plant is a warehouse for half-finished product. Shelf Esteem was at 7.4.
Inventory with no demand. Sort every SKU by usage and volatility. Anything with zero transactions in the last 12 months is paying rent on your floor. Anything with one or two hits a year is next in line. At Shelf Esteem that was nearly 3,000 SKUs and $875,000 before anyone looked at the slow movers.
Actual labor hours against quoted hours. Pull the last 50 jobs and compare. If actuals routinely run past the quote, you have a standard-work problem hiding in the WIP, and more floor won't fix it. At Shelf Esteem, nobody could run this check, because nobody had ever written down what a job should take.
What the floor is actually holding. Walk every bay and mark it: working, waiting, storing or walking. Shelf Esteem's assembly bay was holding finished custom pallets that waited weeks to ship and finished goods nobody had ordered. That space was on the lease. It wasn't producing anything.
Where the hours pile up. Ask where the open hours sit, not where the loudest machine is. Everyone at Shelf Esteem said CNC. The numbers said assembly, with 79% of the WIP. You can't fix a bottleneck you've misidentified, and you certainly can't buy your way out of one.
Run those five before you call the broker. Some of them will come back clean, and that's useful too. But in my experience, when a plant feels full, one of these five explains it about nine times out of ten, and the answer is flow, not floor.
Measure the plant before you measure the lot.
When is a bigger building the right answer?
Sometimes it is. The rework bought Shelf Esteem two to three years of growth, and at 20% a year that runway runs out. But there's a sequence, and it matters. The proven path is to improve before you move. A plant that carries seven weeks of WIP into a new building will have seven weeks of WIP in the new building, plus a bigger mortgage. A new facility hides waste for about 18 months, and then it's full again and the same people are standing in the same aisle saying the same thing. Fix the flow first. Then size the building to the operation you have once it flows.
Key Takeaways for PE Operating Partners | Key Takeaways for Owner-Operators |
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Frequently Asked Questions
How do I know if my manufacturing plant is really at capacity?
Start with work in process in weeks: divide the open hours on your floor by the hours you can work in a week, by department. More than a week of WIP in front of any operation means your capacity is being consumed by waiting, not by work. Then compare actual labor hours with quoted hours on recent jobs and walk the floor to see how much space is storing rather than producing. If WIP is high, actuals run past the quote and much of your floor is holding inventory, you are out of flow, not out of space.
What is work in process (WIP) and why does it matter for plant capacity?
Work in process is every job that has been started but not finished: cut material waiting for assembly, built units waiting to be packed, pallets staged between operations. It consumes floor space, cash and labor without producing anything a customer can pay for, and it is the clearest signal that operations are running at different speeds. At Shelf Esteem Displays, 7.4 weeks of WIP in assembly was the real constraint, not the CNC machines everyone suspected. Reducing it frees space, shortens lead times and raises throughput without new equipment or people.
Should I improve operations before moving to a new facility?
Yes, almost always. Waste moves with you: a plant carrying excess WIP, dead inventory and a busy-first schedule into a larger building reproduces the same conditions with higher fixed costs. Improving first shows you the capacity you already have, which may eliminate the move or push it out several years, and if you do move, you size the new facility to a flowing operation and carry the productivity gain with you. The proven path is improve, measure, then decide on space.
How much capacity can flow improvements uncover?
More than most owners believe. Shelf Esteem Displays recovered 46,000 square feet with a $635,000 plan instead of a $4 million move, enough for two to three years of growth, while folding a second facility into the same building. When WIP is high and labor runs past quote, the hidden capacity is usually substantial.
How does growing without adding labor or overhead affect profit?
Dramatically, because growth that doesn't add cost drops through at gross margin. In an illustrative model of a $65 million manufacturer growing 20% a year, fixing flow first (so the existing crew absorbs the first 15% of growth) produced about $14.4 million of profit the following year, against $9.8 million from moving to a larger building with labor growing in step with volume. That $4.6 million gap, about 70% of the starting profit, recurs and widens, before the one-time move cost avoided and the cash released from inventory and WIP.
Before you call the broker
Run the five yourself. If they all come back clean, buy the building with a clear conscience. If one comes back ugly, that's where the hidden capacity is, and finding it in a week is what my team does: for PE firms with a facility expansion sitting in a value creation plan, and for owners who'd rather not sign a ten-year lease two years before they sell. Call (312) 726-6111, or grab 20 minutes directly on my calendar at calendly.com/tvm.
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