Demand-Driven Performance FAQ
Providing customers what they need, when they need it, while lowering the overall cost of delivery and improving ROI
04. Policies, Measures, and Organizational Alignment Issues (DDPSC04)
Are there any other policies and measures, besides Efficiency and Utilization that result in significant organizational misalignments?
As we discussed in DDPSC01, any type of policy or measure that views the performance of a link within the chain as if it were an independent link will cause some degree of organizational misalignment. Those organizational misalignments create delays in the movement of material and/or information. Here are examples of such sales policies, resource management policies, incentives, and overtime policies.
Sales polices that try to drive product sales by putting products "on sale" generally sell the product at a reduced price. These sales cause the customer to delay their next purchase waiting for the "sale" to start, and at the same time cause the customer to buy in larger quantities. The result: a time delay until their next purchase. This translates into is a demand pattern with larger peaks and longer valleys than what the customers' natural buying patterns would yield. Bigger demand peaks usually require larger inventory buffers.
While product promotions can benefit the introduction of a new product, products sold via promotions experience many of the same effects in terms of demand variability, as do products sold "on sale."
Another such sales policy is one where the customer is offered a discount based on the volume they buy during a given period of time. What often happens in this case is that the supplier doesn't require the customer to provide them with daily consumption information and as a result the customer places orders more in accordance with the volume discount quantities. The result is a demand pattern with larger peaks and longer valleys than what the customers' natural consumption patterns would yield. Bigger demand peaks usually require larger inventory buffers.
Resource management policies, such as resource efficiency, often results in the batching of parts and/or information in order to save setups, and can enable one link to be seen as performing well while work and information flow is delayed in reaching other links. Resource utilization, on the other hand, tries to fully utilize each resource as if they were the only link in the chain, often requiring work to be released early to keep resources busy. The result, in both cases, is a delay in the movement of materials with a corresponding increase in work-in-process (WIP), longer lead times, delayed delivery, more expediting, higher costs, etc.
Incentives are sometimes used to cause workers to produce more, and are often measured in units such as pounds, tons, feet, etc. and frequently yield exactly what is measured, more pounds, more tons, more feet, etc. but not the necessarily the "right" pounds, tons, or feet - the ones the customer wants to buy. The result is an increase in inventory of some items, an out-of-stock condition for other items, longer lead times, delayed delivery, more expediting, higher costs, etc.
Overtime policies are generally put into place to enable temporary increases in capacity for resources experiencing temporary capacity overloads. Sometimes you may find certain resources are constantly working overtime and have been doing so for years. That generally means overtime for those resources has become a part of their standard of living, and is no longer viewed as temporary. Less WIP can cause those resources to slow down to ensure they get a "full weeks pay." Asking them to help increase the speed at which work flows, by getting more work done in less time is like asking them to reduce their standard of living for the benefit of the company. In such cases, it is usually best to acknowledge reality, and simply include the overtime in their base pay in exchange for speed and a variable work hour week.
While this not a complete list, it does provide an ample spectrum of polices and measures that put more emphasis on the performance of a link as opposed to the chain.
Next: Addressing the Challenges of Inventory Management and Operational Performance in Supply Chain Management (DDPSC05)
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