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Integrating the Value Chain
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The next task is to connect the demand value numbers to supply capabilities. A customer may have a high demand value by requiring a large portion of the existing capacity. An important question to ask is, what is the cost of supply to achieve this demand? Infinite supply capacity does not exist. Somewhere in the supply chain there will be constraints that limit today's supply. This could be in the physical plant itself, with a supply of critical ingredients, or in people skills necessary to produce the product. At this point, the amount of capacity that is required to deliver the customer demand value would be measured for each customer. Figure 5 shows the percentage of capacity required to meet each customer's demand. To determine the relative contribution of capacity to demand value for each customer, the demand value is divided by the percentage of capacity required obtaining that value. Figure 6 shows the indexed demand value divided by capacity for each customer. This figure displays a much different view than that of figure 2. High demand value at a higher supply capacity will yield a lower indexed rough-cut demand value. Likewise, maybe a somewhat lower demand value, but a much smaller capacity requirement will yield a much higher indexed value. This indexed value then is directly reconciled with the business strategy. This will result in a rough-cut view of the customers' business that provides the extremes of value for your total business. The top 20 percent of the customers are customers who recognize value in doing business with you and provide the incentive for you to expand the business for this group. The bottom 20 percent of the list are customers that may need to have prices increased, or the value-added services decreased. These customers do not generate as much value as the top group does, and they may need to be ultimately pruned from the list of customers if their value index cannot be improved. There will always be an upper and lower 20 percent on the list. The middle 60 percent should be left as is for the moment, and more time should be spent on learning what it is that allows some customers to add more value and others to do less. A monthly sales and operations planning meeting would be a suggested format to periodically review the progress that the business is having in moving the lower customers up the list, while at the same time growing the business with the upper section. REWARDS AND RECOGNITION Using this new approach in customer selection requires the development of a new performance evaluation system. The business strategy must recognize that the reward and recognition systems must be compatible with those of individual functional areas. For example, if the sales personnel are recognized by the positive variance to their revenue objective, then they will achieve the revenue goals. However, does this by itself help to achieve the strategy goal of maximizing demand value? Revenue goals must be tied to the growth of economic value of the business. Gaining more shares in a less valued segment does not add value. The reward process should not encourage this type of performance. Metrics with only one dimension will only yield partial results and sometimes may work against the goal. Where revenue is measured, it should be measured against the plan as opposed to rewarding for exceeding the forecast. The sales department that repeatedly exceeds the forecasted volumes may create problems in the production department such as higher cost, lower efficiency, and more bottleneck operations. Moreover, integrated metrics work better to drive overall business value rather than maximizing individual functional gains. Production may have been rewarded for producing record production pounds. However, if this results in filling up warehouse space, or forcing the sales department to provide unplanned volume discounts, then perhaps the overall business has not really seen a benefit. Forcing year-end sales promotions to reduce inventory year-end goals merely reflects poor planning rather than business excellence through a record sales month. The aggregate portion of inventory should be in raw materials rather than finished product. To make better performance measures, one must address the actual performance to plans, continue to look at individual metrics in concert with other measures and in aggregate numbers, and avoid reacting to a single number alone. To Be Continued For balance of this article, click on the below link: Lean Manufacturing Articles and click on Series 11
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