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Lean Manufacturing-Operations Excellence, Best Practices Bulletin

Demand Driven Manufacturing
Part 1 0f 2

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.

Volatility Inducers

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.

Discount Structures

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.
This is looked upon as a win-win situation for the customer and us, but it is more often lose-lose. The customer has to pay for, handle, and store excess materials. We have unpredictable demand, so are often out of stock or scram­bling to replenish after this large order has hit.

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

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 activity.
Wal-Mart is an example of a company that has excellent financial results, in both profits and asset turnover. Wal-Mart's motto of everyday low prices means its demand is relatively stable and predictable. They can therefore serve their customers with far lower levels of inventory than their competitors who roil the demand with on again, off again promotions. Check whether the Wal-Mart motto would be better for your business..


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