Business Basics
Home Page

Who is Bill Gaw?
And why should we
listen to him?


lean manufacturing principles and techniques training

How to implement, optimize and sustain
a lean manufacturing program
The Lean Manufacturing Toolbox

Add pizzazz to your lean training
program with participative exercises.

Manufacturing Simulation Game-Plus

Integrating the Value Chain
Part 4 of 5

privacy policy

To review our training
packages, simply click
on any of the links below:

Training Materials and Options

Lean Manufacturing Solutions

Lean Manufacturing Toolbox

Performance Measurement Training

Poka-Yoke and
Process Improvement Training

Lean Manufacturing -
Small and Medium
Sized Businesses

Supply Chain
Inventory Management

Lean Six Sigma

Strategic Planning Training

World Class Manufacturing

Continuous Process Improvement

Kaizen Training

Kaizen Blitz Event


Best-In-Class Manufacturers

Best of Gaw Lean Management Articles

Golf Training Program

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.


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

A Gift for You

Need help in bringing this training to your company, may I suggest that you forward this Web page to your leader. If you do, we'll send you our Power-Point presentation, "7-Rules for Surviving in an Entirely New Economy."

To open the
"Forward to" form:



To stay current on Lean Management Basics and Best Practices, subscribe to our weekly MBBP Bulletin... and we'll send you our PowerPoint presentation, "Introduction to Kaizen Based Lean Manufacturing™." All at no cost of course. 


First Name:
Your E-Mail:

 Your personal information will never 
be disclosed to any third party.

privacy policy

Here's what one of our 13,000 plus subscribers
wrote about the MBBP Newsletter:

"Great manufacturing articles. Thanks for the insights. I often share portions of your articles with my staff and they too enjoy them and fine aspects where they can integrate points into their individual areas of responsibilities. Thanks again."

               Kerry B. Stephenson. President. KALCO Lighting, LLC

"Back to Basics" Training for anyone ... anywhere ... anytime

Business Basics, LLC
6003 Dassia Way, Oceanside, CA 92056
West Coast: 760-945-5596 

© 2001-2009 Business Basics, LLC