Resolving "Like To Do" vs. "Can Do" Conflicts

by Dave Garwood

WizBang Manufacturing is engaged in an interesting situation. Everyone at WizBang is excited about the Model 7000, a new product that was launched into the marketplace three months ago. They expect to sell a ton of the 7000s this year and make a significant contribution to the financial report for the current fiscal year. The initial sales projections were 800 units in the first month, 1100 the second month and 1500 each month thereafter. Unfortunately, the sales group has run into a few obstacles getting customers to share the enthusiasm for this new product!

In the first three months, sales have only totaled 300 units. But Harry, the Sales VP, is convinced that as soon as the demo units are available to all sales people and the customers complete their initial testing on a few units, sales will take off, exceeding the initial projections. He is confident there is a huge pent up demand for the Model 7000. Harry claims, "sales will explode any day now!"

Patty, the Purchasing Manager, just had a call from the OT Company -- the supplier of a key component that goes into the new Model 7000. This component also goes into products made by other companies. Worldwide demand for this component has exceeded world wide supply. OT Company can only allocate 500 components per month to WizBang at the current contract price. However, WizBang can get an additional 800 per month of these components for an additional $3 each - a 25% premium. This component accounts for 30% of the total cost of the Model 7000. Therefore, WizBang has two problems. They can't get enough of the components to meet the forecasted demand. If the demand does happen, they won't be able to keep up with customer demand.....a bad position for a new product that is critical to the financial health of the business. The second problem is keeping up with the demand and still making money. If WizBang buys more than 500 of the components to meet the anticipated demand, they will have lower profit margins on the additional sales.

Walter, the CFO, is very concerned about the potential financial impact of this dilemma. If they don't sell and ship near the original forecast, revenue will suffer. If they pay a 25% premium, profits will suffer. If they continue to plan and make 1500 units per month, they will drive in 1500 pieces of all of the other components that go into the product and only use between 500 and 1300 of them. Inventory will soar.

Patty has to tell OT Company something today or WizBang will lose more time and the problem will get worse.

What To Do?

This is a situation that has no right answer. WizBang has to decide on the "least worst" choice.

Several questions need to be discussed with everyone present. How confident are we in the sales increasing from the historical 100 per month to 1500 per month? What are the marketplace risks if we have to extend deliveries because we don't have enough of the 7000s to meet demand? Can we put pressure on the supplier to allocate more to WizBang? Can we find an alternate source? What are the risks of using an untested supplier? Is this something WizBang can make? At what cost? Should we go ahead, pay a premium and run the risks of building an excess inventory of products that cost more and we make less profit when we do sell it? Should we raise the price to protect our gross margin? Can we quickly redesign the product to use an alternate component? How much would that cost and how long would it take? Getting answers to these questions isn't easy and the answers almost always have risks associated with them.

Here is what WizBang can't afford to do -- do nothing, hoping the problem will go away. And they only have a few hours to decide. They need to get every functional department together in one room at the same time to understand both the risks and impact of each alternate solution. They need to reach a consensus decision quickly on the plan to follow and get everyone committed to execute the plan. A bright future for the business depends on it. While they are all together, they might as well discuss some issues with a few other products like ...

Sales have exceeded forecast on the Model 2100 by 35% over the past 2 months. Is this additional demand for the year?

The EOL (end of life) plan for the Model X11 that is being replaced (so they say!) by the Model Y11 isn't working. They had two large orders for the X11 last month that drained the inventory. Should they extend the EOL plan for X11s since they are still selling above forecast?

Manufacturing can only meet the increasing demand for Model AB24s if they work overtime. Is this profitable or should they extend delivery dates to the customer?

Inventory is rising rapidly on the Model 310s as sales are under forecast and manufacturing has overproduced for two months in a row. Will the sales be made up in the near future? Should they keep going or cut back production in the factory?

And there are similar issues on 5 other product families!

WizBang has these types of issues to face every month. Timely resolutions are needed. The permanent fix to this problem is to establish a monthly forum to deal with these issues. That is the reason for the "Partnership Step" in the SOP process.

Partnership Step

SOP (Sales and Operations Planning) is a proven 5-Step process. The fourth step in SOP is the Partnership Step to establish a "horizontal" partnership -- an agreement among every functional area across the organizational chart on a plan to overcome issues. The leadership in each department needs to bring these issues out on the table, reach a common understanding of the problem and look at alternative solutions. Then they need to agree on an action plan, share the responsibility for it, thus becoming partners, and commit to executing the plan. The conclusions, recommendations, impact and risks are then presented to executive management.

The effectiveness and success of this process depends on each functional area attending the meeting and being prepared. Here are a few of the typical questions each functional area needs to answer in preparation for the Partnership meeting ...

Sales and Marketing must answer these questions:

• Any significant demand changes since last month for any of the product families?
• Are there any customer orders at risk of being delayed or canceled?
• What are they key assumptions used to reach the demand plans?
• What are the risks to the demand plans?
• What action could be taken to minimize these risks? What resources will be required?
• Are there any customer delivery lead time issues?

Manufacturing and Purchasing must answer these questions:

• What are the key assumptions used to commit to executing the supply plans?
• What action could be taken to minimize risks, if any, to execute the supply plans?
• What are the resources required to execute the plans?
• Are there any supply plans that need to be rescheduled because resources will not be available to meet them? Which customer orders or other demands will be affected?

Finance must answer these questions:

• What impact does the proposed plan have on revenue, inventory and profit?
• Are there any significant risks to the financial projections?

An effective monthly Partnership Meeting can go a long way to eliminate surprises. Make sure each functional area understands their role and comes prepared. The results will be impressive!