Lean Manufacturing-Operations Excellence, Best Practices Bulletin
Demand Driven Manufacturing
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, because 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.
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 after all.
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
Watch your inbox this Thursday for Part 2 of 2
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