As Captain Kirk demands more power, Chief Engineer Montgomery Scott, in his classic Scottish brogue, delivers the iconic line, “I’m givin’ her all she’s got captain!”. Facing the impending doom of a Klingon Death Ray is not a good time to discover a capacity constraint, but fortunately for Captain Kirk and the rest of the Starship crew, crisis is miraculously averted and the crew lives on for another episode.
For mid-market manufacturing firms, when customer fulfillment problems and past due order issues arise, a CEO may act like Kirk and “ask for more power”. New equipment, a bigger facility, new technology systems, a new production line, etc. are all natural requests when these problems occur and capacity appears constrained. While these are viable solutions, increasing capacity is costly, takes a long time to implement and may not be necessary. Before committing to more capital expenditures, look for other ways to fix the problem.
In Part 2 of this month’s Hidden Value Series on Past Due Orders, we will dive deeper into the root causes of persistent fulfillment and past due order problems … what to look for and how to devise creative solutions.
Part 2: Getting to root causes
Start with culture: If your corporate culture is built on a company-wide commitment to continuous improvement, then you are poised to successfully deal with any past due order problem that might occur. Corporate cultures focused on continuous improvement start by asking “What happened? How do we fix it? And how do we ensure it never happens again?”.Asking these questions – without placing blame – should be the first step in getting to the root cause.
The process: In addition to a great corporate culture, here are some techniques to employ when searching for root causes:
Cross-departmental Working Group. Don’t look at systems and processes in isolation. Bring your leadership team together and get them focused on creative ways to address the issue. A dedicated, cross functional working group is a powerful force in driving organizational change.
Data Analysis. Use data, not opinion. Bring your IT team into the working group to bring real data into the discussion. Using data to drive decision making is critical.
Workflow Analysis. Mapping the order/product journey through the facility can often show bottlenecks, inefficiencies and sources of delay.
Third Party Review. No matter how great your team, it’s easy to get focused on the trees and not the forest. Neutral, third party experts can shine a light on overlooked areas of opportunity.
Where to look: Before committing to more capital expenditures, look for other ways to fix the problem. Here are some places to look for efficiency gains BEFORE approving that capex spend:
On-time Delivery and Schedule Attainment: Are we measuring these accurately? Are we monitoring them closely? Are we course correcting regularly?
Variations: Does performance, quality or output vary across different shifts, supervisors, lines, facilities, etc.? If so, this is a big opportunity to improve throughput.
Performance degradation: Has operational throughput declined over time? If so, what has changed (e.g. management, staff, product mix, etc.)?
Labor Issues: Has employee turnover increased recently? Do we have the right staff on the floor with the right training and the right skillset at the right time?
True Production Capacity: Are we accurately capturing the true maximum capacity of current operations? What factors are constraining our ability to reach maximum capacity?
Data Accuracy and Integrity: Are the BOMs, routings and inventory levels accurate? If the perpetual inventory, BOM’s and routings are inaccurate, then the MRP system will fail … period.
Inventory Planning: Stockouts, inventory delays, quality issues and supplier challenges can lead to Past Due Orders. Focus on inventory planning processes and supplier management techniques to minimize inventory issues.
Documented Processes and Procedures: Reliance on tribal knowledge leads to the company being vulnerable to tight labor markets. Improve consistency and minimize the impact of employee turnover by clearly documenting processes and procedures and reducing tribal knowledge.
Start with corporate culture. A customer-centric culture built on a commitment to continuous improvement is critical.
Find answers … don’t assign blame. Instead of getting mired in the details of who caused what, concentrate on teamwork and permanently fixing the problem.
Creativity before capital. Root cause analysis often highlights internal processes ripe for change that require no capex and yield huge returns.
Experience matters. Leverage your internal experts and senior leaders, but consider outside experts to take a neutral, third party view of the situation. The combination is powerful.
Pop open your Uber app and the nearest driver is 10 minutes away. While not ideal, you don’t have much choice. You need a ride in a hurry and a cab is nowhere to be found. You request your driver and pray they’ll be early. When 10 minutes turn to 15, then 30 (!!), you are seething and pacing, vowing never to use Uber again. In today’s on-demand, 24/7, “want it now” culture, few things will kill a customer relationship faster than asking a customer to wait.
The same is true (if not more so) in more traditional manufacturing and distribution businesses. Order delays, long lead times, and missed shipments lead to lost sales and unhappy customers. If you see past due orders increasing, you will likely have unhappy customers and a threat to your underlying business. It is time to jump into action.
In this month’s Hidden Value Series, we will dive deep on the topic of backlogs, specifically:
Part 1 – How to identify problems in your backlog
Part 2 – Getting to root causes
Part 3 – Case studies and results
Part 1: How to identify problems in your backlog
To be clear, having a backlog of pending and future orders is definitely not a bad thing for a manufacturing business – for many industries it is common to have future orders that stretch out for six months or more. But when your backlog is growing because you cannot produce product fast enough (defined as when your customer wants it!), your backlog becomes a liability, negatively impacting customer satisfaction and your financial performance.
First things first, if you’re not reporting on Total Backlog and Past Due Orders by product family and facility in your quarterly board packet, change that asap.Be sure to trend these metrics over multiple years and set benchmarks for what is an “acceptable” percentage. Any appreciable increase in Total Backlog and/or Past Due Orders above the benchmark is a signal to dive deeper.
Note that many backlog increases are often just temporary and readily explainable. For example, a large increase in sales will often cause the total backlog to increase temporarily. A quality problem, natural disaster, or key supplier delay can also lead to spikes in past due orders. Temporary spikes should clear up rapidly. However, meaningful, persistently elevated backlog or past due order levels indicate a major operational health issue that should be addressed quickly.
Other signs of a problem: What else should you monitor to identify problems in your backlog? Including the following key metrics in your board packet will help you proactively identify operational issues BEFORE they impact the health of the business. Key metrics to track include:
Lead times: Are lead times increasing?
On-time Delivery %: Are your on-time delivery percentages declining?
Inventory Turns: Are inventory turns declining?
Expedited Shipping Costs / Frequency: Are your margins shrinking due to higher costs of expedited shipments?
Order Discounts: Are you issuing more discounts to help assuage unhappy customers?
Employee Turnover: Is employee turnover increasing (sign of high stress to expedite orders)?
New Customer Sales %: What percentage of orders / sales are from new customers vs. repeat business? An increasing percentage of sales to new customers might indicate a customer retention issue
Customer Satisfaction Scores: Are your customer satisfaction scores declining or persistently below par?
Customer Complaint Reasons: Are you receiving a higher percentage of customer complaints about order delays and on-time deliveries?
Be smart: When the metrics and indicators start flashing, management may fall back on some tried and true root causes. Here are some common refrains when backlogs increase and performance lags:
Supplier performance is to blame
Customers are hard to forecast
It’s a product mix issue
We need another production line / a bigger plant / new equipment
A tight labor market is creating a labor issue
Here’s where you earn your keep as a board member / investor. Management may be right, but instead of just accepting management’s explanation, spend some time probing deeper into the metrics. Don’t underestimate the power behind candid conversation. Here are some specific questions you can use to challenge the conclusions reached by management and get to root causes:
How are our metrics defined? For example, growing lead times with consistently high on-time delivery reveals a mismatch in what is being measured.
Who owns addressing the growing quantity of past due orders
Why have specific orders not yet shipped? This may seem too granular for a board discussion, but this question is a good way to dig into underlying causes, such as why materials are late from a supplier or what quality issues caused rework.
Backlog problems have material impact on the performance of the business. Fixing them leads to EBITDA gains, improved customer satisfaction / retention, lower working capital levels, and improved competitiveness
Proactively monitoring key indicators can identify issues early … before they impact the health of the business
Ask smart, probing questions in the board room to help get to root causes
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