So, I’ve been discussing Eli Goldratt’s It’s Not Luck, in which our hero desperately seeks out-of-the-box ways for his three companies to dramatically improve their profits. What do the three companies do?
When last we looked, Pete was lamenting the fact that his printing company did not have the bigger, better, faster machines of his competitors. The obvious solution to his problem: focus on small jobs. The bigger, faster machines are only better for big jobs; they have a longer setup cost.
The not-so-obvious solution goes further. It involves recognizing that customers don’t actually want to order candy wrappers in huge quantities; they just want the low prices that come with ordering in huge quantities. In fact, Pete digs up some statistics from an industry journal showing that customers who order a six-month supply of wrappers only use the whole six months’ worth about 30 percent of the time. Most of the time, something changes — an ingredient, a promotion, a legal labeling requirement — before they’ve used up their whole stock.
So Pete’s company can offer its customers a two-month supply of wrappers, which gets completely used 90 percent of the time, for less per usable unit than the big printers can provide a six-month supply, once obsolescence gets factored it.
And that’s the deal that saves the company.
Bob’s cosmetics company, meanwhile, comes up with a solution based on the fact that its customers, the stores, have to discount obsolete products, are often out of the products that consumers want, and have difficulty making payments to their suppliers — companies like Bob’s.
Since these stores are given discounts for ordering in bulk, they tend to order in bulk — which explains why they didn’t take advantage of the new distribution system. So Bob shifts the discount policy to work off of the dollar amount the store orders per year, not per order. Further, Bob shifts to daily replenishment. The stores were ordering two to six months’ stock.
But that’s just the beginning. The big change is giving the merchandise to the stores on consignment — no obligation when it ships, just when it sells. The stores, which are perpetually short on cash, are delighted, but they actually end up paying sooner, because they have to pay to get their stock replenished.
Stacey’s pressure-steam company comes up with its own solution: selling pressure-steam as a service, for a monthly and per-unit-of-steam fee, not as a machine with high-margin spare parts. This means that they bring all spare parts in-house, rather than asking clients to pay huge mark-ups on a lot of safety stock. After all, it costs the pressure-steam company much, much less to maintain aggregated safety stock for all of its clients.
Ah, another win-win deal.