Bill Gaw's Triple-Step, World Class, Lean Manufacturing Training Program
World Class Manufacturing

Increase the effectiveness of your
Lean Manufacturing Training Program
Lean Manufacturing Simulation Game 

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 magnitude.

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.

Payment Terms

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 replenishment systems.

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 sales everyday.
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.

Summary

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, and techniques.
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.