Operations Payoff

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How Managing Customer Demand Can Reduce Materials Cost Volatility

There are a number of ways to reduce materials costs or at least make them more predictable in volatile times. A method that world class companies use is managing customer demand. It seems counterintuitive to be able to manage demand, but companies like Toyota do it all the time.

Managing demand is the process of matching your capacity, output and lead-times with the customer’s needs. It is essentially an available-to-promise approach to providing product/services to the customer. By providing that, you smooth the flow, which is essential to cost reduction.

From Sales Force to Demand Management Force

The first people who must be convinced that this is possible are your own sales force. They may be so accustomed to responding to customer’s needs that they don’t bother to inquire about alternative solutions.

In my prior position, we sold lock-boxes to auto dealers to keep the keys for the car on the car. This way the auto salesperson didn’t have to leave the customer to get the keys for a test drive. We knew our capacity was 800 units per day, so to smooth demand we set up a schedule bucket system to provide the sales people (mostly telemarketers) with detailed demand/capacity status. They knew minute by minute how much of today’s and tomorrow’s buckets were available. Once full, that bucket was no longer available and the ship date would move out appropriately. What we found is the customer didn’t care (within reason) how long it took, so long as they knew when they would get it. Our lead times were typically 3 – 4 days.

Using this bucketed demand smoothing system had several benefits:

1)     The customer could rely on when they would get their product

2)    We could smooth our production and significantly reduce production costs

3)    We provided steady demand to our suppliers and significantly reducing their costs. It was a win/win/win in every way.

© 2012 – Rick Pay – All Rights Reserved

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