Periodic Sales Targets
Most sales people are measured on the sales they get in a period,
such as a month or quarter. Many commission plans have a period
ending date in them.
Actions prior to this date are what are figured into the bonus plan.
A large computer manufacturer in the Northeast has the following
quarterly sales pattern: 20% of the quarter's revenue target in the
first month, 30% in the second, and 50% in the third. How's that for
a nice stable demand? And this has nothing to do with the true
underlying demand for computers. It is simply extra effort applied
near the end of a measurement period to meet a target. You cannot
afford the flexibility in the factory to respond to swings of this
Let's be clear now on what stable predictable demand means. It means
the same amount of demand every day. So sales objectives should be
daily. It is the way we measure the plants, production per day. In
some cases it's production per shift. So why not measure sales per
day? It will smooth out a lot of the end of period demand if you
change to this measurement and reward process.
A large division of a huge European company only issues invoices
twice per month to its customers, around the 10th of the month and
the 25th. Payment terms are from the date of invoice, not the date
of shipment. This company produces products to stock.
As you can imagine, most orders come in on the 11th and 26th of the
month. This way, customers get 15 days' free ride on this company's
money. On the 9th and 24th, the warehouse is dead, with everyone
standing around waiting for work. Overtime is high right after the
invoice date, but even so, many orders get shipped late compared to
their quoted delivery schedule.
The solution, invoice daily, is obvious. And maybe with longer
payment terms to keep the customers whole. They have, after all,
been getting 15 days more use of this company's money than the
quoted payment terms.
Inventory Replenishment Systems
A company in the Mid West makes drill bits. It has charted its sales
on such bread-and-butter items as 1/4-inch diameter twist drills.
The demand is unbelievably erratic. This company has also charted
sales on large families of products. The sales are still dynamic.
What do you think about the number of 1/4-inch diameter holes that
are drilled in America overy day? About the same? So the consumption
of drill bits must be about the same, every day. How can the
manufacturer see erratic demand? The answer is inventory
The tool room in the factory probably reorders drill bits
periodically. This may be as infrequently as quarterly. So here
comes 90 days worth of real demand in one order.
The distributor who services a number of tool rooms in its area also
probably orders periodically. The distributor combines the erratic
ordering of the tool rooms into one large erratic order. If the
distributor is ordering from a regional distributor, this only
compounds the problem as the regional distributor orders from the
factory's central warehouse. Campbell Soup sees the same phenomenon
for basic soups from its wholesale distributors and grocery chains.
Inventory systems' impact on demand is made even worse by inventory
planners. They decide to carry extra inventory so order more than
demand. They decide to reduce inventory so order less than demand.
The solution is to replenish inventory more often. Get closer to the
actual demand. Campbell Soup has started a quick-response
replenishment system, in effect, an electronic kanban. Whatever a
customer sells today, we will replenish tomorrow. This has smoothed
out the demand, reduced total inventories in the pipelines, and
resulted in higher customer service. How's that for progress?
Measure to Control
"You cannot control what you do not measure" is a tried and true
management adage. New measurements have played a significant role in
enhancing the flexibility of manufacturing.
New measurements are required to get stable, predictable, growing
demand. But I repeat, stable predictable demand is the same amount
of sales every day. Stable, growing demand means slowly increasing
Chart your daily sales in total and by product line. Identify causes
of peaks and valleys and remove or reduce them unless they give you
more total value than penalty. Incentivize your customers, sales
people, order entry, and any others influencing demand to make sure
it is stable, predictable, and growing. You'll be amazed at how much
improvement you will make in a few months.
Making manufacturing more flexible is a great idea. In today's
buyers' market, flexibility is mandatory to win your share of
business. But flexibility cannot be indefinite. Above a certain
point, it also gets very expensive.
Marketplace dynamics come from two sources, the inherent underlying
dynamic plus induced dynamics, induced by our policies, programs,
All business managers would like stable predictable growing demand.
The return on assets of such a business would be phenomenal.
Start a program to challenge all induced marketplace dynamics.
Eliminate or reduce worthless causes of peaks and valleys. Your
improved financial results will speak for themselves about the
impact of this change on your business.
For balance of this article, click on the below link:
Lean Manufacturing Articles and go to Series 01
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