The Biggest Threat to Uber?

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.

Key Takeaways:

1. 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
2. Proactively monitoring key indicators can identify issues early … before they impact the health of the business
3. Ask smart, probing questions in the board room to help get to root causes