Every company seeks a competitive edge. But past advantages such as cheaper raw materials, lower labor costs, and superior technology have largely balanced out in the world market. And improving product quality-the rallying cry of the 80s-has become a corporate sine qua non.
What’s left? Companies need to delight-not just satisfy-their customers. The customer paid to be satisfied; there is no edge in giving customers what they expect. On the down side, there is considerable risk in failing to measure up: Far more people tell others about their bad experiences in the marketplace as opposed to their good experiences.
In striving to transform satisfaction into delight, it’s perhaps most crucial to deliver a product or service on time. One way to do this is to enhance the flexibility of the factory. But there’s another approach: Eliminate demand instability.
Of course, no company is completely immune to demand volatility. But shifting lead times, restructuring sales targets and promotions, and revising invoicing schedules can all help to level the peaks and valleys of demand. Following are some surefire strategies to differentiate your company from its rivals-and to chalk up maximum profits from customer delight.
FLEX THE FACTORY
In general, marketplace demand is dynamic. It’s a rare company that has stable demand from the standpoint of both volume and product variety. But one way to minimize the problem of market dynamics is with a flexible factory. Most of the approaches embodied in the just-in-time philosophy address this problem. However, this response is limited. While most JIT ideas add flexibility to mix dynamics, volume dynamics is a different story. Few companies are able to quickly adjust volumes up and down because of the ramifications for employment levels and the need for extra capital equipment.
What to do if you have tried to increase factory flexibility, in terms of both volume and mix, but still fall short in adapting to marketplace dynamics? First, you can de-couple the factory from the marketplace with inventory. This is risky in a dynamic marketplace because forecast error increases with the amount of volatility. And if you can’t have the right inventory in place, you will fail to delight the customer as you increase assets.
Another option of limited value: Decouple the factory from the marketplace by revising lead times. As business increases, quote longer lead times; as it contracts, shorten them. This means you deliberately plan not to delight all your customers with availability or delivery when needed, which results in lost business.
But there’s an alternative to these approaches: See what you can do to reduce marketplace dynamics to the flexibility of the factory. You won’t need inventories or excess capital equipment, and you will increase sales from delivering to all of your customers when needed. You will delight all your customers-and earn a high profit.
Ask any business manager about the ideal type of demand, and most will say: “Stable, growing at a pace I can accommodate.” Ask them about demand patterns that are most difficult to satisfy, and they will often cite peaks and valleys, a “feast or famine” scenario.
The volatility managers are up against is volume dynamics. This is the toughest type of demand instability to handle because it can wreak havoc with the required amount and type of capital equipment, and man-hours. Mix volatility is much easier to handle, especially with JIT approaches.
Volume volatility means demand is unpredictable. You will not be able to delight your customers with the right product delivered at the right time, and all your attempts to do so will be costly. Raising inventories or purchasing excess capital equipment may allow you to adjust outputs, but usually at a high price.
There are two causes of market volatility. First, there are changes caused by economic flux, customers’ buying habits, and seasonal influences. Second, there is an induced dynamic, or that caused by policies a company or its rivals introduce into the marketplace. Companies can most effectively manage this second kind of volatility. Here’s how.
REVISING SALES TARGETS
Sales and marketing are at once the perpetrators and victims of induced dynamics. Such departments often work against profitably delighting customers. As a result, they may end up hurting customers or incurring excess costs and assets in their efforts.
One reason: Most sales departments measure their order intake against a budget figure for a month, quarter, or year. The tactic may give rise to sharp increases in demand late in a budget period as staffers scramble to meet their targets. The experience of a large computer company headquartered in the northeast illustrates the cyclical swings caused by periodic sales targets.
This company tries to deliver its products within 48 hours after receipt of an order. Hence, order booking and planned shipment are almost synonymous. In the first month of every quarter, the company books 20 percent of that quarter’s revenue target. In the second, the figure rises to 30 percent. The remaining 50 percent comes in the last month. This pattern repeats itself every quarter.
How does that hurt customer service? In the first month of every quarter, the factory produces about one third of the budgeted sales for that quarter. This means 13 percent of the quarter’s revenues flow into inventory. This inventory is produced based on the sales forecasts of future orders.
In the second month, meanwhile, the factory again produces one third of the sales budget. Sales sells 30 percent, so the inventory changes only slightly. But then comes the third month. The factory produces one third of the budget, then has to reconfigure all the inventory made to sales forecasts. Overtime swells, chaos reigns, and mistakes skyrocket.
These problems can be traced to the periodic sales targets. Invoice errors occur in the last month of the quarter because many of the special deals the sales people make to get the order don’t get transmitted to the billing department. The credit memos are written during the first month of the next quarter. Even though there is huge effort and expense, some customers still do not receive their computers when promised.
The solution? The company must elicit stable, growing sales through the use of daily targets. After all, production targets for most plants are daily, and there are just as many things that could go wrong in a factory to hurt daily production as there are in the marketplace. In sum, reward stable, growing sales and penalize peaks and valleys, especially those that are self-induced. The difference in demand patterns will astound you.
Here’s another example. A billion dollar division of a large European electronics company invoices customers only twice a month, around the 10th and 25th. The idea is to minimize work in accounting and data processing. Payment terms are from the date of invoice, not the date of shipment. The products they sell are consumer goods, so they are made to stock and shipped out of a central warehouse.
When do most of the orders come in? On the 11th and 26th. That way, customers get a free, 15-day ride on the company’s cash. But picture the workload in the warehouses. Immediately after the invoice date, workers have to put in overtime to try to deliver products on time. Needless to say, the company fails a good percentage of the time. Later, prior to the invoice date, the workload in the warehouses is minimal. The employees try to look busy or even call in sick to rest up for the coming peak.
The outcome: This company also fails to profitably delight its customers. The solution is to invoice daily, with payment terms from the date of invoice. If daily invoicing were to become the norm, the company would see a significant leveling of demand, with subsequent improvements in customer service .
Virtually all companies use promotional techniques to stimulate sales. We are familiar with many of them, including two-for-one arrangements, rebates, or the extension of more favorable credit terms.
But periodic promotions, too, create peaks and valleys of demand. Take, for example, domestic car manufacturers’ on-again, off-again rebate programs. One can’t help but wonder whether these concerns wouldn’t make more money if they priced their cars more reasonably and spent promotion dollars on advertising to stimulate increased showroom traffic.
Of course, the hope is that sales peaks will be higher each time, and that market share will increase. But if a company’s competitors also use promotions, isn’t this simply roiling the marketplace and losing money in the process?
To be sure, some promotions are beneficial. When a company has excess inventory, any device to clear the shelves can be more desirable than the static alternatives. But promotions must be structured such that they end when excess inventory has been eliminated. Moreover, there are alternatives to incessant sales pitches. For example, some companies-retailers in particular-these days promote so-called everyday low prices.
BARGAINS IN BULK?
In another type of discount, many companies charge less per unit on high-volume purchases. But this approach, too, sparks demand volatility.
At one company in the
Consider the ramifications. When a big order came in, this company pulled its entire inventory and shipped a partial order to the customer. As a result, they now were obligated to fill a back order to this customer-along with back orders to others who want to buy this item, many of whom are paying higher prices because of smaller discounts.
The net result: The company loses business because of the back orders, and it must rearrange its production schedules to replenish inventory. When back orders are filled, at some incremental cost, the company ships at the lowest possible price to the largest customer who bought at the largest discount.
Obviously, the company loses under such an approach, as do most customers. A better approach would be to provide discounts based on annual volumes, not individual shipments. Under this strategy, a company would still get a peak towards the end of the annual period as customers buy extra to attain the next discount level. But such fluctuations might be evened out by staggering different year ends for different customers.
VARIETY: A DOUBLE-EDGED SWORD
Variety is a parameter that can be beneficial or detrimental to a business. Increasing variety is good if the benefits of doing so pay for the incremental costs and assets in heightened ROA. Variety is detrimental when the costs or assets make the benefits negative.
In terms of end-product variety, the question for a business is this: What range of products must we offer to delight the customer? The answer: Every product that does not enhance profitability or ROA must be challenged and justified.
If we bring assets into the picture, probably no more than 15 percent of products are contributors, while the balance are not. Of course, the product line needn’t always be drawn at the 15 percent mark. Some losing products are new, and thus need to be initially subsidized; others are needed to sell winners-the “linked sale” idea.
Nonetheless, it is essential that the variety of products offered be carefully monitored. The goal is to ensure that losers are tolerated only for good business reasons. The result, again, is maximum corporate profit and customer delight. That is a winning situation for both parties.
Dan Miller is president of Alemite Corp., a Charlotte, NC-based manufacturer of industrial and automotive lubrication equipment.
Hal Mather is president of Hal Mather Inc., an Atlanta, GA-based international management consulting and education company.