0 penilaian0% menganggap dokumen ini bermanfaat (0 suara)
32 tayangan12 halaman
Last month I had to face a case where it was apparent that I had deviated from that rule. The renewed analysis yielded not one but three additions to the body of knowledge. In the past few weeks I have already used these additions effectively in two other cases.
Last month I had to face a case where it was apparent that I had deviated from that rule. The renewed analysis yielded not one but three additions to the body of knowledge. In the past few weeks I have already used these additions effectively in two other cases.
Last month I had to face a case where it was apparent that I had deviated from that rule. The renewed analysis yielded not one but three additions to the body of knowledge. In the past few weeks I have already used these additions effectively in two other cases.
Never say, I know! Page 1 Eliyahu M. Goldratt, 2006
Never say, I know!
Eliyahu M. Goldratt, 2006
If there is a rule that Mickey and I try to drill into everyone who is doing two-hour meetings, it is: check and cross-check the key data on which our suggested solution is based. Last month I had to face a case where it was apparent that I had deviated from that rule. Of course the consequences were embarrassing, but that is not the reason Im now forcing myself to sit down and write this document (Im not a masochist). The main reason is that the renewed analysis showed me (again) the extent to which there is no end to deeper understanding; we have embarked on a journey that does not have an end, just exciting and rewarding stepping stones.
Maybe I was hit by this case because the company is producing sporting apparel. If there is an industry that I fooled myself that I know inside and out, it is the apparel industry. Nevertheless, the renewed analysis yielded not one but three additions to the body of knowledge. The importance of these additions can be evaluated by the fact that in the past few weeks I have already used them effectively in two other cases.
Here are the details. Eighty-five percent (85%) of the companys sales is to brand companies (companies like BigBrand which was the subject of the analysis described in a previous document). But unlike the cases we see in China and other places, this company has over 10 brand companies as clients, none of them dominating its sales. Therefore I wasnt overly surprised to read that raw material out of the selling price is only 50%. (When you are in the hands of one dominate client expect your prices to be squeezed and therefore expect that materials will represent a higher percent of your sales.) The other 15% of sales are their own collection, their own brand, that they sell through their own 10 shops and 4 franchised shops, all located in their small country.
A text-book case. In the two-hour meeting I just verified that their production lead time is two months (very common in the apparel industry) and yes, they produce for the entire season in one batch. I also verified that every client has its own collection and as a result there is no aggregation. The template was obvious; the new awakening of the THIS IS AN INTERNAL GOLDRATT GROUP DOCUMENT. IT IS NOT INTENDED FOR GENERAL DISTRIBUTION Never say, I know! Page 2 Eliyahu M. Goldratt, 2006
brand companies will guarantee that they will welcome a VMI offer. No real risk here since it will be enough to convince just 3 or 4 of the existing (huge) clients and we can increase sales as much as we want. Of course it will take one or two seasons for the clients to realize the amazing benefits a VMI contractor brings to them and as a result to get much more work.
There is no real set-up in production of sports apparel, so it should be easy to cut the lead time to less than a week. Transportation time to the central warehouses of all their clients is only few days. It should be a walk in the park to bring them to excellent performance on a VMI offer.
Increasing capacity is easy; there is no shortage of inexpensive labor to sew the goods and the machines are just sewing machines. At 50% material out of selling price the VV seems relatively easy to reach, especially when we have four years. Next case please.
During the 4x4 it turned out that a key element was wrong raw- material is not 50% of sales, rather it is 75%. This, as you know, changes the entire picture. Lets substantiate this last sentence. When RM is 50%, to reach a VV, we have to triple the volume. Baring in mind, the existing access capacity and the substantial improvements we bring in logistic (it is an A plant), the required increase in volume translates into a manageable increase in just direct labor (~ 50% or less). But when RM is 75%, to reach a VV, we need to multiply the volume by a factor of 5. Under the same realistic assumptions, that will necessitate increasing direct labor by about 150%. Such major increase will require increase in supervision, administration etc. That is no longer negligible in its impact on the company OE. To compensate for the increase in OE, and since the margins are small to start with, we need to increase sales much more. The downward spiral is evident. The only way to get out of this spiral is to find a way, not just to increase sales, but to significantly increase margins as well. In short, kiss good-bye a VV which is based on straight VMI.
Two different questions should be answered. To avoid running again into such a dead-end we need to know: how come such a basic piece of data was wrong? To ensure that we do have VV for contractors to brands we should also try and answer a more interesting question: is there a feasible way to increase margins?
As for the first question, it didnt take long to reveal the source of the mistake. The number was derived from their financial statement and therefore it represents an average over the two channels of sales. THIS IS AN INTERNAL GOLDRATT GROUP DOCUMENT. IT IS NOT INTENDED FOR GENERAL DISTRIBUTION Never say, I know! Page 3 Eliyahu M. Goldratt, 2006
Even though the other channel direct sales through their own shops is relatively small (just 15%) it had a major impact on the average percent of RM. Simply, for the channel of direct sales, the TVC represents much, much less than 50% (margins in the direct sales channel are composed of the huge markup of a brand plus the substantial markup of a shop). The other distortion was due to the fact that they pay by piece for the people who sew, turning most direct labor into (by TOC definition) raw-materials.
We now understand the source of the mistake. But it doesnt help us to answer the much more interesting question: what can we do to increase margin?
Moving to rapid response is the first thing that jumps to mind, especially when one considers the current production lead-time of two months and the ease to cut the production lead time to be, at most, one week. Well, in their environment there is a limitation that makes it difficult. Dying the fabric is a batch process. You need much more than willingness to pay slightly higher prices to convince a supplier to cut all the batches to be in line with one week consumption (cutting the batches to be less than one tenth of what they are now). Such a change will necessitate a super culture revolution. Moreover the supplier is not willing to guarantee the same color in subsequent batches.
Knowing the amazing benefits that moving from producing to forecast to producing for replenishment brings the brand companies, I first concentrated on finding a way to solve the problem of large batches of dyed fabric. Instead of buying dyed fabric in small quantities, maybe we can still buy it in the same large quantities and, relying on the fact that the same dyed fabric is used for more than one SKU, we can use the fabric according to actual demand.
The extent to which we can do this depends on the magnitude of the aggregation that exists at the dyed fabric level. We know that there is aggregation since all sizes of the same model use exactly the same dyed fabric. Unfortunately, in sporting apparel there are only five sizes per model (as compared to over 30 sizes in formal suit jackets). Moreover, there is a high chance that if one size is a high-runner, the other sizes are not slow movers; there is a correlation between the demand for one size and the demand for another size of the same model. Therefore, the aggregation that we get through different sizes will not help us much there is no point to divert dyed fabric to one size just to find, a month later, that we cannot provide another needed size. THIS IS AN INTERNAL GOLDRATT GROUP DOCUMENT. IT IS NOT INTENDED FOR GENERAL DISTRIBUTION Never say, I know! Page 4 Eliyahu M. Goldratt, 2006
So, it all depends on the commonality of the dyed fabric (magnitude of aggregation) between different models where there is almost no correlation between the demand for one model and the demand for another. For that I checked the number of different models they produce per year (35,000) and compared it to the number of different dyed fabrics they use per year (4700). The ratio is one to seven. Is it enough?
We know that, in general, about 30% of the SKUs are depleted before the massive end-of-the-season clearance sale starts the high runners. Another 30% are sold mainly in the end-of-the-season sales (and in the outlets) the slow movers. That means that in a group of seven models there is a high chance that at least one model will be a high runner while at least another model will be a slow mover. So even though we start with a given (forecasted) amount of dyed fabric, still, in most cases, the magnitude of diversion that we can do (from the actual slow movers to the actual high runners) will help. How much will it help?
To answer this question we have to realize the non-linear nature of the damage shortages are causing. Suppose that a particular SKU has been depleted after one month and the season is four months. How much are the lost sales relative to the amount that was sold? One doesnt have to be a trained mathematician to answer this question; the lost sales are 300% relative to the actual sales. What about an SKU that is completely sold out after three months? The lost sales are just 33% relative to the actual sales (less, if one takes into account that in the last month of the season prices are lower). That means that even though we work with restricted availability of the colored fabric we do get most of the effect, in terms of percent increase in sales, since most lost sales are prevented. The same goes for reducing the bad effect of obsolescence, especially when we consider that the longer it takes until the slow mover is sold the lower the price at which it is sold.
How can we take advantage of it? How can we turn it into a mafia offer to the brand companies? Currently the brand companies order the full amount per SKU and demand delivery before the beginning of the season. Once they get the goods they immediately push about 40% into the retail to fill up the pipelines with the new collection. Lets not try to change these big companies. Lets give them an offer that does not require any real change from their side and that the advantages of what we offer will be apparent to them.
THIS IS AN INTERNAL GOLDRATT GROUP DOCUMENT. IT IS NOT INTENDED FOR GENERAL DISTRIBUTION Never say, I know! Page 5 Eliyahu M. Goldratt, 2006
What do you think about the following offer? As it is currently done well get the orders per SKU (based on forecast) enough time before the season. Based on the orders well buy the entire quantity of dyed fabric, as we currently do. But, we will cut, sew and ship only half the quantity of each SKU. Now we wait for the orders to come to the brand company from the retailers. The first orders are apparently orders for high runners. We are informed of each order that the brand gets, and, as long as we still have that colored fabric, we will replenish within a time period which is very small relative to the period of the season (two weeks should be enough for a system that is used to minimum two months). Six weeks before the end of the season, the brand should instruct us what we should do with the residual fabric. Should we turn it into goods or should we hold it for the next year (on the brands expense)? I think that if such an offer is presented well (in the SFS way) the chances are very high that each and every brand will gladly accept.
As a matter of fact, knowing that all brands are currently struggling to find ways to increase their inventory turns I think that they will be interested in such an offer to the extent that we can use it effectively to increase our margins. Here Im going into the speculative mode; the following should be checked with the brands and modified according to their response.
Brands that operate on three seasons a year have about 6 inventory turns. For them, increasing to nine inventory turns is a major achievement, and I doubt that anyone in those companies thinks that twelve inventory turns is realistic for his company. Therefore, requesting a bonus based on actual inventory turns might fly, something along the lines of: right now, in sporting apparel you have 6 inventory turns. With our offer, which is based on the mammoth effort that we have done to reduce our reaction time from over two months to less than two weeks (including transportation), we think you can enjoy higher inventory turns. Lets take the conservative assumption that fluctuations (and a lot of luck) might bring your inventory turns on our goods to eight. So lets acknowledge our contribution to your improved results only if inventory turns go up to the delightful number of 9. But then compensate us for our unique contribution. For example, for each inventory turn starting at 9 give us a bonus equal to just 5% of our price.
Since the mark-up of the brands is usually around 400% of the price they pay to their contractors and since increasing their inventory turns is of such importance to them, such an offer has a real chance of being accepted (at least by 3 or 4 of the 12 clients the company has). Of THIS IS AN INTERNAL GOLDRATT GROUP DOCUMENT. IT IS NOT INTENDED FOR GENERAL DISTRIBUTION Never say, I know! Page 6 Eliyahu M. Goldratt, 2006
course to conclude such a deal well have to climb the ladder, from the purchasing person to a relatively high-level manager, so dont expect a quick deal.
What impact will it have on our margins? My founded expectation is that such an offer will actually bring the inventory turns of a brand (without any action from the brand to change the way it does business with retail) from 6 to 15* turns. The offer has the potential to double the companys margins while increasing dramatically its sales.
[*At first glance 15 inventory turns seems optimistic but, actually, it is very conservative. Just consider that right after the beginning of a season a brand currently holds 60% (100%-40%) of the goods (this number is going down slowly during the season) while using our way the brand will hold just 10% of the goods. So we can expect the inventory turns will increase five fold and that is without taking into account that sales will go up 15 inventory turns is very conservative.]
You have probably noticed that I have some slight hesitations. Simply we havent yet tried getting bonuses for improved inventory turns, or anything similar. So I kept on thinking of additional ways (to be done in parallel) to increase the companys margin while increasing dramatically their sales.
How to get higher margins? I couldnt think of an additional way to get a higher price from the companys clients - the brand companies. So what about bypassing them and selling directly to the retail stores?
Usually, this avenue is not really feasible for a contractor since it actually demands building a new type of a company. It is one thing to have the ability to cut and sew fabric into garments according to given designs, it is a totally different ability to design new collections of garments and to do it three times a year in pace with the changing fashion. But in this particular case our company already has this ability. They do have their own collections and in their country their collections compete well with other brands collections. As a matter of fact, in their country they are number three in selling their own sports apparel, ahead of many, much better known and much bigger brands. So if we want to increase the companys margin, we just have to concentrate more on sales directly to the shops. And since they have almost saturated their small country - they have their shops in every major location - they will have to approach shops outside their country. Considering the markup of brands, this will not just increase the companys margins, it will explode them. THIS IS AN INTERNAL GOLDRATT GROUP DOCUMENT. IT IS NOT INTENDED FOR GENERAL DISTRIBUTION Never say, I know! Page 7 Eliyahu M. Goldratt, 2006
Isnt it obvious? Well, from harsh experience, Ive learned to be very careful in answering this question. On the one hand I do recognize that all good solutions have one thing in common, they are obvious but only in hindsight. Always, once I finally verbalize a good solution to a major problem, Im disappointed with myself for wasting so much time until I reached the obvious. But, on the other hand, I also learned not just to respect, but actually to admire, peoples experience and intuition. If the solution is correct, if the solution is really so obvious, how come that people havent used this solution a long time ago? It must be that something, an erroneous assumption that they took for granted as an undisputable fact of life, caused them to dismiss this solution; blocked them from even trying to implement it. So until I clearly recognize and verify such a blocking assumption I dont know if my new solution is obvious, or just stupidly wrong.
Why hasnt this company tried to sell directly to shops outside its own country? It must be because they have the name recognition, the brand name, mainly within the borders of their own country (in other words, outside their country they are a non-brand company). And the managers of the company had learned that to build a brand-name takes time, a lot of time, and money, a lot of money. The bigger the country the bigger the sums of money required. It is obvious that to build a brand name in a sizable country is beyond their current financial (and managerial) abilities.
But why is having a brand name so important? Why are they convinced that as long as the company hasnt yet established a real brand name, in the territory in which a shop is located, it will not be economical to try and persuade the shop to carry the companys collection?
It is, probably, because shops know that merchandise that carries a known name will sell and they are reluctant to take the risk of buying non-brand merchandise, merchandise that might not sell well enough. The shops' reluctance is logical because the constraint of most shops is display space (and cash). Carrying merchandise that might not sell well is actually wasting the constraint (the opposite of exploit) and therefore reduces the throughput of the shop.
We can proceed from here in two ways. One is systematic, logical and meticulous. The other is bold, aggressive and not less logical. (Actually there are many ways to proceed, but since they are not logical Ill ignore them.)
THIS IS AN INTERNAL GOLDRATT GROUP DOCUMENT. IT IS NOT INTENDED FOR GENERAL DISTRIBUTION Never say, I know! Page 8 Eliyahu M. Goldratt, 2006
Do you know Robert Frosts poem The road not taken?
Two roads diverged in a yellow wood, And sorry I could not travel both And be one traveler, long I stood And looked down one as far as I could To where it bent in the undergrowth.
First, lets look down the meticulous road as far as we can (it is meticulous and also boring, so please dont fall asleep before we start to travel the other, much more exciting, road).
Shops might be reluctant to carry non-brand goods but it is a fact that many shops do carry a lot of products which are non-brand products. So, it must be that the managers of our company know that it is possible to sell to shops outside their country but they don't really try to do it because they are convinced that it might lead to losses rather than profits. Let's carefully examine this conviction because the alternative is simply to give up on the idea of selling directly to shops.
First, let's get rid of the more banal way. If the shops are reluctant to buy non-brand merchandise because it is too risky, the company should reduce the shops' risk by offering the goods on consignment. This is a lousy suggestion. Offering the goods on consignment is very risky for the supplier, since there is a high chance that most of the merchandise will be shipped back at the end of the season. And it is bad for the shop because, consignment or not, blocking a shelf with merchandise that doesn't move well is reducing the throughput of the shop.
The shops that do carry non-brand merchandise are aware of the risk of holding too much slow-moving merchandise. They reduce the risk through lowering the price of those goods to the end consumer; they increase the chance of sales of the non-brand products by fixing the end price of non-brand products to be substantially lower than the brands prices. But, at the same time, the shops are also making sure that their margins will be adequate, which means they are willing to pay much lower prices to the non-brand providers. How low can our company go, and still make nice profits?
Currently, as we said, most of the sales of the company are not to shops but to the brand companies. The current sales price of a garment to the brand companies is (lets say) P, on which the companys margins are about 0.25xP. The markup of the brand is about 400% which means that the shop is buying that garment at 4xP. The markup of the shop is about 100%, which brings the price the end consumer THIS IS AN INTERNAL GOLDRATT GROUP DOCUMENT. IT IS NOT INTENDED FOR GENERAL DISTRIBUTION Never say, I know! Page 9 Eliyahu M. Goldratt, 2006
pays for that garment to about 8xP (the margin of the shops is about 50% of the selling price). As we discussed, when the company sells directly to a shop which is outside their country, the garment is a non- brand garment and therefore, to increase the chance of selling the sales-price for the end consumer must be substantially lower than 8xP. Half the price can be reasonably called: substantially lower. That means that to allow the end selling price to be just 4xP the company price to the shop will have to be just 2xP. Since the totally variable cost of the company is 0.75xP it leaves a margin of 1.25xP, a margin which is 5 times bigger than the current margin. This straightforward calculation suggests that the company could make a fortune by selling directly to the vast number of shops located outside their country.
Lets not be too hasty to jump to such a conclusion. Remember, the managers of the company do have a lot of experience and intuition. Therefore, we can assume that they are oblivious to the obvious only in cases where we clearly pin-pointed an erroneous assumption that blocked them from seeing the obvious. In our case, did we identify such a blocking erroneous assumption? No! So it must be that something is wrong; that Ive ignored something essential in doing the above calculation.
We are so used to getting much more from existing resources that for us it is natural to first consider just the Variable Cost (TVC) just the margin. But that doesnt mean that we are blind to the fact there are circumstances where Operating Expense (OE) must be increased and therefore must also be considered when evaluating impact on net profit. Is the move to sell to shops in other countries associated with an increase in OE? Of course it is. Sales costs will go through the roof. Will they go up to the extent that it will consume the huge difference in margin? Unlikely.
Are we sure? The expected margin is based on the assumption that the likely selling price to the shops will not be less than 2xP. Is this crucial assumption solid?
As we said, when the company tries to sell in other countries it is a non- brand company; it does not have any real competitive edge. Are there other non-brand companies that sell in those countries? Many. Many non-brands, none having a competitive edge, create the ideal conditions for the buyers of the shops to try to squeeze down the purchase price. And they are experts in squeezing. Under the reality of a price-war market, can we safely assume that the selling price to the shops will be 2XP? Lets ask it in a different way. Are the existing non-brand companies making a fortune? Not at all. Some make a living, some THIS IS AN INTERNAL GOLDRATT GROUP DOCUMENT. IT IS NOT INTENDED FOR GENERAL DISTRIBUTION Never say, I know! Page 10 Eliyahu M. Goldratt, 2006
struggle, some are going out of business, but rarely do we hear about non-brand companies in apparel making a fortune unless they succeeded to build something specific that gives them a competitive edge in a niche market. A price of 2xP seems a little too optimistic.
What is behind the bent in the undergrowth? The tendency is to still do some checks. To check the price the shops are paying for non-brand garments, to check what will be the cost of putting a sales force, etc. It will take time, efforts and some investments but there is a chance that as a result of such extensive checks the conclusion will be that it is a (somewhat) viable road.
Now lets go the other way, the aggressive one.
As we said, the main reason that shops are reluctant to buy from a non- brand company is that the risk that the merchandise will not sell well enough is much higher than for brand merchandise. Lets not try, as before, to reduce the gap between the respective risks. Instead lets shoot for a much more ambitious target, a target that seems impossible lets try to reverse the gap. In other words, lets try to find a way to make the risk of the shop buying from our company to be much smaller than the risk that shops take when they buy brand garments. Aggressive? You bet. If we succeed then there is no doubt that we have found an excellent solution. Choosing this way, lets concentrate on the only remaining question. The big, very big, question: Is it possible?
To answer this question we'll have to first assess the risk the shops are taking when they carry a brand garment.
Is there any risk for the shop when it buys a brand garment? If we think in terms of exploit the shelf space, there is definitely a risk. We do know that even when we deal with brand garments there are a lot of relatively slow movers, some are so slow that a shop has to carry them for a few months and even then, for a major portion - about 30% of all merchandise - the shop is able to sell (at a loss) only through the end of season clearance sales.
Knowing the TOC solution for distribution the company can offer a much better deal. Using replenishment, return for full refund and the mechanism of return this, take that instead we can reduce the shops risk to a bare minimum, while improving substantially the exploitation of shelf space. This will ensure that (when the sale to the shop is done in the SFS way) most shops, which are not dedicated to specific brands, will accept the companys offer. Most probably, they will start with a THIS IS AN INTERNAL GOLDRATT GROUP DOCUMENT. IT IS NOT INTENDED FOR GENERAL DISTRIBUTION Never say, I know! Page 11 Eliyahu M. Goldratt, 2006
test collection but within weeks that test will expand creating a happy (and loyal) outlet.
For those of you that are still not convinced lets do some calculations. We know that the amount of shortages the shop has in the middle of the season is about 30% (to prove it to the shop it is enough to take the list of SKUs the shop is supposed to hold and compare it to the actual inventory the shop has). When we use the TOC replenishment, shortages drop to almost zero and as a result sales increase by over 30%. Yes, eliminating 30% shortages increases sales by over 30% because the missing SKUs are the high runners (otherwise they would not be missing).
On top of the sales increase due to elimination of shortages, sales increase even more because of another reason. Conventionally, as we said, the shop carries a lot of slow movers. When the shop realizes what SKUs are the slow movers it will do whatever is necessary to sell them. That means that there is great pressure to give the slow movers more and better shelf space and more attention by the sales force. Since shelf space is the constraint this is done at the expense of the better moving SKUs. Using the TOC replenishment mode the amount of slow-moving inventory is dramatically reduced. Less slow moving inventory, less pressure to waste the constraint and therefore more sales. Add to it the mechanism to replace slow SKUs with faster moving SKUs and you get an effect on sales which is probably larger than the impact of eliminating shortages.
Lets conservatively estimate the total increase in sales to be just 50%, what is the impact on the shops profitability? Even though most shops mark up the price by 100% the vast majority of the shops do not make more than 5% net profit on sales. For such shops, a 50% increase in sales means that their profit will increase by at least a factor of five. With the understanding of such an impact do you doubt that: most shops, which are not dedicated to specific brands, will accept the companys offer.? Most probably, they will start with a test collection but within weeks that test will expand creating a happy (and loyal) outlet.
What about our companys investment? With such a mafia offer, the company should choose to concentrate its sales efforts on a densely populated area that can be served by one regional warehouse. The amount of sales (potential sales are larger than several times what their capacity can supply) and profits will easily dwarf the relatively small investment in inventory.
THIS IS AN INTERNAL GOLDRATT GROUP DOCUMENT. IT IS NOT INTENDED FOR GENERAL DISTRIBUTION Never say, I know! Page 12 Eliyahu M. Goldratt, 2006
We are not the first one to look for a solution to selling non-brand directly to shops. Many, who are not less bright or less meticulous than us, have tried to solve it. How come that we have succeeded where they all failed? They tried to find the way to reduce the gap. We have approached it differently. We first increased the challenge to the level of impossibility instead of trying to reduce the gap, we dared to think about reversing the gap.
Two roads diverged in a wood, and I-- I took the one less traveled by, And that has made all the difference.