A CFO, a CEO and a COO walk into a bar. Actually, they walked into my office, but that’s not as interesting. I asked them, “What are the areas of greatest risk to your business?”
The CFO said, “Not having the money to pay our bills, including worker salaries.”
The CEO said, “Not having enough sales, including the pipeline.”
The COO said, “Not having the production capability to meet our customer demands.”
I summarized by saying, “Your company’s greatest risk is that your competition will make the right investments and decisions, driving them to have greater capabilities and more satisfied customers than your company.”
The CEO, COO and CFO thought for a minute and then said, “OK, let’s say we agree to that statement of our greatest risk.”
“Then how are you measuring your business to protect against this risk?” I asked.
“We’re focused on Cost Reduction, Inventory Reduction and Operating Efficiency,” they replied.
“Does that tie directly to having the right inventory? Does it result in having the right capabilities? Does it lead to a reduced customer lead time? If not, then why is it your focus?” I responded.
“We are focused on our Customer Service and Return on Investment,” They cried.
“Customer Service (or On-Time Delivery) and Return on Investment are results,” I said. “You need to find the leverage points that result in good customer service or higher ROI. But focusing on the result does not ensure achieving it.”
If you have product available, then sales will result. You will only maintain that level of sales if you have the capability to produce to the customer demand. And if you produce only what the customer is buying, then you will have the money to pay bills, including worker salary.
They thought for a moment and then asked, “Which metric should we focus on?”
“It varies with your business, but the general rule is that it has to be a flow-based metric,” was my vague reply. “It needs to answer a question, like, is my product flow interrupted or improving? Measuring schedule adherence or the number of parts that drop below the minimum or rise above the maximum expected levels, for example. Measuring stock outs, or stock outs with demand can be a measure of progress, but again, that’s a result. You want a metric that will warn you before disruption and give you a chance to prevent, not just react.”
“The crazy thing is that improving the overall flow of your business will naturally lead to reduced costs too.” That got them interested in a follow up.
Are you trying to stay just one step ahead of your competitors? Or are you trying to be the leader in your industry? To lead, you need to be an innovator, not a follower. Make sure you’re not just blindly doing what has always been done.
Take a step back and review your metrics and your actions. Doing the wrong things faster is not the solution. Understanding Demand Driven Material Requirements Planning (DDMRP) can lead to huge success.
For more information or to further the conversation, register with Become Demand Driven for free.