To raise profits, many companies turn to across-the-board price increases. They analyze the business’s performance, decide that profits aren’t high enough, and then implement a price increase to produce higher returns. The problem is, all products don’t perform the same, and this kind of price increase can actually reduce profits by driving away business, and reducing total return on your best products.
Examine the Data
In order to maximize profits, seek first to understand. One of the most powerful tools I use to help understand materials and product flow is the “Turn and Earn Report.” This report lists revenue, cost, inventory levels, turns, margins and several other key metrics by stock keeping unit (SKU) or part number. It’s used mostly in wholesale distribution environments, but it can also benefit manufacturing companies to help assess return on products.
Increase or Decrease?
First, look at which products comprise the top 10% of total profits and those that yield the bottom 20% of profits. Often you’ll find that the bottom items actually have negative margins. When you adjust prices, you might actually try reducing prices on the top items, as it may cause them to sell even faster, raising the total profit produced.
Raise prices on the lower profit items, which will either raise profits, or drive demand from the lower demand items to the higher demand items that have better margins. Then you might be able to eliminate the lower items, which will reduce costs and create even more profit.
Don’t just take the easy way out. Examining the data can help you make smart choices about pricing and increase your profit without increasing prices on every item.
© 2016 – Rick Pay – All Rights Reserved.
The Great Alexander generates a sales forecast
Some say “accurate forecasting” is an oxymoron. How often have you heard, “We can’t develop a good plan because we can’t get an accurate forecast from sales!”
Many companies base their purchasing plans on forecasts, those always inaccurate, often sandbagged predictions of the future that the sales team occasionally generates so as not to put too much pressure on themselves to meet their budgets. Right out of the gate, purchasing and supply chain planning is a seemingly impossible task.
But wait, there really is a way to overcome that gargantuan obstacle! If supply chain can be extremely flexible and responsive with only high level indications of planned sales, it is possible to provide exceptional customer service with low inventory and maximum profit.
There are four things supply chain and purchasing must manage to achieve the impossible:
1) Supplier performance
3) Product portfolio
In order to become highly flexible and provide world-class service, supply chain must make sure suppliers get the right material, at the right time, to the right place at the lowest possible cost. Next, supply chain must work with sales to manage demand. Toyota does this very successfully even though they have over a million possible permutations of their products. Third, the product portfolio must be managed to assure that products that actually sell are produced and kept in the warehouse. New product introduction and old product elimination must be handled deliberately. Finally, the inventory you do have must be accurate. You need to know what you have, where it is and its availability to be shipped.
By focusing on these four elements, supply chain and purchasing teams can overcome inaccurate forecasts and accelerate profit and growth.
© 2015 – Rick Pay – All rights reserved
One of the big issues in inventory management is volatility: the variation in demand for a part or product. But volatile demand is more than just variable demand. It includes rapid and unpredictable demand, the worst kind. Most purchasing departments respond to volatility by bringing in more inventory to buffer the fluctuations. This not only consumes cash, it hurts profitability and increases risk.
There are three ways to manage volatile demand. The first is by partnering with customers to improve predictability through more accurate forecasts, smoother value chains and auto replenishment systems such as Kanban.
The second is to review the revenue flow from volatile items to see if the profit they generate is worth the risk and cash flow they bring. Simply put: if they don’t produce value, eliminate them.
The third is to manage demand the way Toyota and other companies do. Determine what’s available to the market place, decide how to allocate it, and that is what you ship. Demand management is actually a very effective means to manage volatility and improve profitability. The potential lost sales from underestimating demand is usually outweighed by the profit increase that demand management generates.
Are you managing demand effectively? Do you have excess inventory because of efforts to guard against volatility? Contact me to discuss volatility solutions for your business.
© 2015 – Rick Pay – All Rights Reserved
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
To help keep your Operations Plan as accurate as possible, consider the following:
- Clock speed, which is the life span of a product relative to other products. For example, cell phones are high clock speed products: they come into production and are quickly replaced by newer versions. Think of how many versions of the iPhone have come onto the market recently. A fire hydrant, by contrast, is a low clock speed product. The technology rarely changes and the product lasts a long time.
- Variation of demand, which you can see by plotting the demand history of a product.
Why C Items are Important
About six months ago I worked with a large distributor who was trying to determine if they needed a distribution center. They had 20 branches scattered throughout the area, all of which frequently ran out of products, causing lost sales. They believed they were losing as much as 20% of their sales because they were out of C items (non-critical, low-cost items). The purchasing department didn’t see why running out of C items was a problem. The reality was that if the store was out of a C item, the customer would go to another store and buy their entire order there.
After analyzing all of their products by clock speed and variation of demand, we opened a distribution center and stocked it with the products that had high variation in demand and low clock speed (all the B and C products out of 14,000 SKUs). We could get these products from the DC to a branch within 12 hours. Sales in the two months following setting up the DC were the highest on record.
© 2011 – Rick Pay – All Rights Reserved
Last week I watched Fed Chairman Ben Bernanke testify in front of Congress about the state of the economy. He mentioned a number of times that volatility was making things difficult to predict and plan. Volatility is present in the financial markets, world wide credit markets, currency markets and raw materials. Business is hesitant to invest in labor, materials and overall growth partly because of the uncertainty this volatility brings.
In Supply Chain Management, two of the vital factors in planning are clock speed and volatility. Clock speed is the length of a product’s life in the market. Computers have a very fast clock speed while fire hydrants have a very slow one.
Volatility is the variability of demand for products and services. A highly volatile demand product is very difficult to forecast and plan, so businesses often respond with extra inventory to cover their exposure. However, agile supply chains are another way to deal with this. The ability to quickly flex both up and down is critical to supply chain management success. Being agile helps muffle the effects of volatility in the market place.
© 2011 – Rick Pay – All Rights Reserved
The July heat wave in the Northeast was a challenge for everyone, but perhaps most of all for the people in charge of regulating the region’s electrical supply. According to a July 30, 2011 article in the Boston Globe, ISO New England (Independent System Operator) oversees the power grid for the six New England states, connecting power suppliers, local utility companies, and demand response companies, “which pay customers to reduce their energy use during peak demand periods, then sell that extra capacity back to the grid” to manage consumer demand, which was sky-high during the recent heat wave.
But how high is high, and how can an ISO predict demand accurately enough to avoid black-outs but also avoid overcharging utility customers? By creating an accurate forecast. Now in this case, the ISO forecast was based largely on the weather forecast, but it didn’t end there. ISO took an approach to creating an accurate demand forecast that other companies – whether they are manufacturers, distributors, retail or service organizations – can use as a model. Here is what they did:
- They looked at the weather forecast and took into account the various conditions that affect power consumption, like humidity, cloud cover and temperature.
- They examined the historical record to find out how much energy customers used in similar situations in the past.
- They communicated regularly with their network of suppliers about the current state of supply and demand.
- They relied on flexibility in their supply chain, which enabled them to switch power from one line to another, reach out to power suppliers in other states and Canadian provinces, and manage demand through demand response companies.
While some aspects of business are unpredictable, we can create a good forecast if we look at conditions, examine demand history, and establish flexibility. When the lights stay on and the air conditioner keeps running, we have accurate forecasts to thank.
© 2011 – Rick Pay – All Rights Reserved
Authors: Paige McKinney, Rick Pay
Last week NPR reported on an unexpected US manufacturing success story: Georgia Chopsticks, a new company that produces chopsticks for – you guessed it – export to China. When you consider that one third of the world’s population uses chopsticks, it comes as no surprise that there is plenty of room in the market for new producers. Indeed, Georgia Chopsticks plans to ramp up production within the year from two million pairs per day to 10 million per day.
Why Move Production So Far Away From the Consumer?
From a supply chain perspective, we have to ask: why make chopsticks in the southern US, so far from the primary market? In this case the answer is threefold: raw materials, labor, and quality. Clearly China is capable of making chopsticks, but when Georgia Chopsticks’s owner looked for a place to set up his production facility, he found that the small town of Americus, Georgia offered plenty of trees of a type that yields good chopsticks, had a 12% unemployment rate, and while labor is more expensive than it would be in China, the quality is better.
Why It Works in this Case
In this instance, finding raw materials, labor and the potential to produce a high-quality product made it worthwhile to set up production far away from the customer. This is working out because chopsticks are not perishable, demand doesn’t fluctuate, and is it unlikely that chopstick design will change anytime soon. After all, they’ve been around for over three thousand years.
© 2011 – Rick Pay – All Rights Reserved
Authors: Paige McKinney, Rick Pay
When companies consider moving production off-shore, there are many factors to take into account. Here are just a few:
- Core competency. If what you’re doing is a core competency in your country, don’t take it offshore. Boeing made the mistake of off-shoring 80% of their 787 Dreamliner to factories in the Far East. While they were investigating the move, one of their engineers spoke out against it, citing inadequate vetting of suppliers and no plan to protect Boeing’s core competencies. A senior manager disagreed, and it has cost Boeing $12-18 billion to recover from their decision to move production of just the tail section offshore.
- Access to technology. Right now you can’t buy a pearlescent black Toyota because the factory that makes that particular paint is within the area of the Fukushima nuclear plant in Japan. The microchip industry has also lost access to the technology it requires – there are two plants in the entire world that make the coating for silicon wafers, both of which were affected by the tsunami in Japan.
- Clock speed. Clock speed is the speed at which a product becomes obsolete, so laptop computers, for example, have a very high clock speed. Fire hydrants have a low clock speed. If your product goes obsolete quickly, you’ll need engineers and supply chain professionals at your suppliers’ location to continuously check products coming off the line. Dell, who has been successful off-shoring, has a significant supply chain management team on the ground in Taiwan to keep track of things. It takes significant resources to support that effort.
- Variability of demand. Older, more established products are better candidates for off-shoring because you can more accurately predict demand. Making the effort to move off-shore for a new product may be risky if the demand fluctuates or drops within two years.
© Rick Pay, 2011 – All rights reserved