In most businesses today, the number projections per department seem to be pulled out of thin air. Each department tends to live in their own little world and the departments respond to problems within their department differently from each other. Is this profitable for a business? Of course not! But, how do you get everyone on the same wave length and make the numbers real? This article explains a method that has been used to do just that in many large size companies. In a business where customers expect immediate shipment when an order is placed… why can’t businesses deliver in a predictable way? Let me see if I can clear the air and sum up how the demand and supply organizations talk about each other when they are each out of the room.
Demand organizations (and you know who you are) will say that “the supply organization is unpredictable because they are not flexible enough to keep up with the every changing marketplace. They either have too much inventory that we can not sell or they do not have any of the inventories that we can sell. The supply organization is unable to support the needs of the marketplace fast enough.”
Supply organizations (and you know who you are) will say that “the demand organizations do not supply accurate forecasts; thus making the whole supply chain unpredictable. The product forecasts that the demand organizations submit are not accurate enough to execute against. We either have too much inventory that we can not sell or we do not have any of the inventories that we can sell. The demand organizations do not have a handle on the marketplace.”
There is an answer to why both the demand organizations and supply organization come to the same conclusion of “we either have too much or not enough inventory to support the marketplace.” The business process that balances demand and supply is completely wrong! This is a global problem and every business makes this mistake.
Allow me to explain. Most transactional systems in businesses today are set up to import a sales forecast, net out inventory safety stock and current orders, and then account for order-lead times and in-transit times. These netted numbers are sent back through the supply chain as required demand and the factory or supplier will solve/create a production schedule to support the numbers that are sent from the transactional system. Every time the forecast is changed or reality changes, the signal that is sent to the factories and suppliers move up and down erratically just like the marketplace. Talk about chasing the numbers! The factory and/or suppliers really do not know what numbers to chase because the numbers are significantly changing regularly. The transactional systems throw the forecast over to the supply side of the business, and now the supply side of the business must efficiently run its assets while looking at numbers that move all over the place.
So what do the factories do? How do you utilize a factory to run efficiently? You level-load the factory as much as possible to make the same quantities every week. Factories and suppliers want consistent volume week after week. The demand forecast is going up and down all of the time. So, the factory or supplier will “judge” the erratic demand forecast and then level-load the factory as much as they can. Then, we all complain about how unpredictable the business executes… because it is!
In a business where customers expect immediate shipment when an order is placed, a business must hold inventory. If we break down the business into three variables of demand, supply and inventory… I can explain the issue clearly and solve the problem for all of us. Let me knock out the first variable called demand. Marketplace demand is not a smooth activity. Demand will flutter, enough said. Let’s talk about the supply variable. Supply is a smooth activity. We want to produce in a smooth linear pattern over time. So why do we send an erratic signal to factories and suppliers? Because of the third variable… inventory. Our transaction systems are wired to hold inventory at a constant level. The issue is just math. If we hold inventory at a constant level and demand flutters over time; then, the supply must flutter along with the demand signal. Fluttering supply is not natural for the supply organizations, they want and require smooth.
Now for the solution… let the demand variable flutter naturally with the marketplace and hold the supply signal constant and smooth… allow the inventory variable to flutter within a range. In my book Make the Numbers, Don’t Chase the Numbers, I explain how to efficiently manage and balance the demand and supply activity of a SKU driven volume business by using a new methodology called MTNA (Make the Numbers Approach). This “how to” book is set up to be an efficient use of your time. I will define the business problem, and then move quickly into the solution, which is MTNA. I will explain how to implement it in your business. I will end the book by summarizing the benefits and results MTNA bring to those who implement it fully.
Make the Numbers, Don’t Chase the Numbers will help get businesses out of unpredictable execution patterns and into a balanced and profitable state. ©2007 Mark Payne
About Mark Payne
Mark is the author of "Make the Numbers, Don't Chase the Numbers" and has led several strategic programs and initiatives that have helped streamline companies like Linksys, Polaroid, Hewlett Packard, Compaq, and Uncle Ben’s Rice.
He has been responsible for a broad range of business functions including: sales, marketing, product development, market intelligence, manufacturing, logistics, procurement, and forecasting and planning. He received his Bachelor of Business Administration from Baylor University and majored in Quantitative Business Analysis.
“Make the Numbers, Don’t Chase the Numbers” is available online for individual or bulk purchases at www.MakeTheNumbers.com. Published by Penworth Publishing, Humble, Texas, ISBN #978-0-97531-396-1, LCCN # 2006937247, $34.95. For additional information on other upcoming products, seminars, certifications, or consulting, contact Mark Payne at Mark@MakeTheNumbers.com or Penworth Publishing at (281) 404-5019.
