Just in Time, World Class Manufacturing and Total Quality
Management all have a common goal: To make the plant more flexible
and responsive. Quick changeovers, kanban linkages, cells, vendor
partnering, and so on, have all entered the manufacturing scene over
the past decade to help companies respond to today's buyers' market
rather than yesterday's sellers' market.
Tremendous improvements in flexibility have resulted. Some companies
can deliver custom products in days now, compared to weeks or months
just a few years ago.
But it is obvious there is a limit to how flexible manufacturing
can be, at least cost-effectively. Extreme flexibility will either
be impossible or prohibitively expensive. At this stage, it is
mandatory to ask what other choice you have. But maybe this question
should be asked sooner, before you spend money increasing
flexibility beyond what is necessary.
The Demand Objective
Ask any group of business managers, "What would you like demand on
this company to be?" After a few moments' hesitation, they will
invariably reply, "Stable, predictable, growing at a pace I can make
money from." Ask them, "What would you not like the demand to be?"
They will quickly respond with, "Erratic, unpredictable, declining."
Now ask, "What specific program is running right now, in sales and
marketing, to try to give you stable, predictable, growing demand?"
The answer will be "Zero." In fact, it is worse than zero,
most sales and marketing programs cause volatile demand. They take
the underlying customer demand, which is relatively stable for many
products, and introduce peaks and valleys.
There is a double hit with these actions. Erratic demand and
unpredictable demand are almost synonyms. Stable demand and
predictable demand are also almost synonyms. In a buyers' market,
availability off the shelf or short delivery times are mandatory.
But this is costly or even impossible if the demand is erratic and
unpredictable, regardless of the techniques used.
Many actions inside and outside sales and marketing cause demand to
be erratic. I'll cover some of the more common items and suggest
ways of removing their negative effects. I hope you will evaluate
your own situation to see if these or other conditions apply. Set up
your own improvement program for your unique issues.
An easy example of induced demand volatility is discount structures,
where the more you buy the cheaper the unit price. The customer
wants 10 per week, but we incentives him to buy periodically in
batches of 100.
This is looked upon as a win-win situation for the customer and us,
but it is more often lose-lose. The customer has to pay for, handle,
and store excess materials. We have unpredictable demand, so are
often out of stock or scrambling to replenish after this large
order has hit.
Moving to rebates based on annual purchase quantities will take away
much of the erratic demand. You still might get an end-of-year peak
to meet an arbitrary discount level. These peaks can be leveled out
by having different dates for the end of the year for different
customers or sales territories.
Sales promotions function similarly to quantity discounts by selling
tomorrow's even sales in a peak today. Buyers take advantage of
promotional discounts to forward order, balancing the quantity
ordered and the resultant savings against the additional inventory.
Rarely do promotions increase the total sales. And even rarer do
promotions make incremental profits for the company, its objective
Magid Abraham and Leonard Lodish in the article, "Getting the Most
out of Advertising and Promotion," HBR May/ June, 1990, state "Only
16% of trade promotions are profitable—and for many the cost of an
extra $1 of sales is greater than $1." And this is looking at the
trading costs and benefits only. The incremental factory costs
getting ready for and recovering from promotions are ignored. Add
this to the analysis, and the 16% figure of successful programs
drops even lower.
The solution? Analyze your promotional programs. Check which ones
really added value, which were losers. Look at all the costs to make
this determination. Decide whether to continue or stop this
Wal-Mart is an example of a company that has excellent financial
results, in both profits and asset turnover. Wal-Mart's motto of
everyday low prices means its demand is relatively stable and
predictable. They can therefore serve their customers with far lower
levels of inventory than their competitors who roil the demand with
on again, off again promotions. Check whether the Wal-Mart motto
would be better for your business..
To be Continued
For balance of this article, click on the below link:
Lean Manufacturing Articles and go to Series 01
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