Early in my career, I was tasked with outsourcing a product we were producing at an internal factory. Leadership expected to realize a number of benefits by outsourcing the product including opening up capacity in a constrained plant, achieving product cost savings through economies of scale, reducing inventory dollar and space burden, and reducing customer lead time. The first three benefits – capacity, cost savings, and inventory reduction – were tangible and quantifiable. But, the benefit of reducing lead time was going to be more difficult to quantify.
Predictability Does Not Equate to Forecasting
To achieve economies of scale, shrink inventory and reduce lead times, we developed an agreement with the vendor, giving them blanket orders. There are many advantages to this type of agreement that I’ll go into in another blog. This particular product that I was involved with was considered a commodity in the market, and demand was fairly predictable. (My apologies to any product managers reading this who despise products being referred to as commodities.) Predictable situations still require an effective forecasting process. Fortunately, we already had an effective and powerful forecasting process in place, so my job as a sourcing person was instantly that much easier.
Establishing a Process
Critical language in the vendor agreement included orders that were placed with the vendor by noon would be delivered within 30 hours. For example, if I placed a PO with the vendor by noon today, they would deliver it tomorrow by end-of-day. Giving myself a bit of an insurance policy, I set the available-to-promise (ATP) lead time in SAP to two days. So, let’s say it’s Wednesday and a customer order comes in today and there is no inventory on hand, we would promise to ship on Friday. After completing the vendor verification process, and ensuring they could produce the product to our quality standards, we were off to the races. Cool, process established.
When Operations Positively Impacts Sales Numbers
At the time of sourcing and forecasting this product line, I had a sort of hybrid-job. After the first month, I noticed sales were increasing on this particular product, exceeding my expectations. But, one month a trend does not make so I noted the anomaly and checked it again the second month. Sales increased again. And again the third month. After the third month, I spoke with the product manager to understand if something in the market had changed that resulted in an increase in demand. None of the other products in this line were increasing at the same rate (or at all for that matter). He said that nothing had changed, this was an old product and he had no idea from a market perspective why this would have changed.
I then called someone in the customer service/order entry group to see if they had any insight. What they told me was a real eye-opener. She said that when we were producing the product in-house, lead times were set at 30 days. A customer would call and ask if we had the product. If it wasn’t on hand, they would get the lead time, 30 days. Unfortunately, a significant percentage of the time, the customer would hang up and call a competitor (again, this was a commodity product) and purchase it from the competitor. We didn’t even know we had “lost” the sale. But after we reduced the lead time from 30 days to 2 days, the customer was willing to wait the 2 days and placed the order with us. Sales on this product went up ~30% and maintained that level. So now our lead time reduction had a tangible benefit, increased revenue! Who would have guessed? Couple the increased revenue with the increased margin from the sourcing activity and the inventory reduction saving us space and working capital, we had a win/win/win/win!
Superior Service & Identifying Trends Are Key
In today’s world of Amazon and other e-tailers delivering the product the same day or next day, this solution may be more obvious (or maybe it isn’t). At the time it wasn’t obvious. Today in a B2B world, we can learn a lot from these companies in providing better service to our customers. Don’t give customers any reason to call someone else! And if one of our competitors can’t deliver, then we have a process in place where we can and we gain market share. In this case, it was really just an investment of sourcing time and process development.
So there you have it, those operations guys can help the company improve sales!