Mickey Granot, Managing Partner Next-Era Consulting
I’ve been working with a customer for a while now on an assignment designed to grow sales and profitability. It started with reorganizing the manufacturing and within a short while the company realized a meaningful jump in their performance; production lead time went down from 28 days to 10, and reliability from about 70% to consistent 100% on time delivery. Now it was time to convert this new ability to a market advantage.
A new value proposal was designed, target market identified and a rigor pipeline management process introduced resulting in a constant stream of incoming opportunities, some better than others. In parallel the sales team went through training, sales process defined and sales aids created. Still, some skepticism stayed with the sales team.
When sales meetings started, conversion rates were far from meeting expectations. Of course, this can be a result of; poorly chosen targets (did happen), inappropriate value proposition and/or inadequate execution of the sales process. Clearly the sales people would like to believe that the reason is the first and/or the second. And, of course it is not an unlikely hypothesis. Still, my natural tendency is to believe that if we did do a good analysis of the market, identified a meaningful enough problem we can solve for the market and designed a robust enough sales process it is more likely that the reason is the latter. Thus, we decided to make a test; to prepare thoroughly to a specific meeting, have a “cheat sheet” on the table (luckily the Corona situation forces video call meetings) and stick to the process at all cost so that we can validate.
And that way, on a nice Wednesday afternoon the sales person – Dan, was sitting on side of the computer and John the strategic purchaser and Linda the purchasing manager of the prospected customer on the other side. The meeting started:
Dan greeted, “Hello John and Linda, it is a pleasure to see you today and thank you for taking the time to meet us. Let me start by a quick introduction. Global Manufacturing Services – GMS is in the business of service manufacturing of processed steel products. We provide an array of services from engineering, through variety of steel processing capabilities, through painting, assembling and packaging. We’re in business for more than twenty years and have been working with some of leading companies globally. I assume you saw our presentation, or website so please allow me to ask you to make a short presentation of your business.”
Linda answered “Thank you for the introduction, Troplex is in the business of industrial equipment that we build to specific designs we make for our customers for variety of usages. We’ve been in business for more than thirty years, have a factory in Denmark and sales presence across the globe. We did review both your presentation and website and we do purchase such services today from some existing suppliers. I would like to emphasize that we are pleased with our existing suppliers and we are most likely going to consider adding another supplier only if price wise it’ll be justified”
“Thank you” Dan said, “I do understand your price consideration, nevertheless, now that we know a bit more on each other, I would like to focus on you. We have been investing a lot of time, effort and thought into trying to design a service for our customers that provides them with exceptional and surprising value and in order for us to be able to tailor it to you, I would like to ask you some questions., Would that be acceptable to you?”
“Of course,” Answered Linda
“Very good. Could you please give an estimate of your annual value of purchasing our type of services? It’ll help me in making sure I can provide you with the offering most suitable to your needs.”
“This is, clearly not information we can share, but as you asked for an estimate what I can tell you is that we purchase between €600K to €1M a year.”
“It is important for us to understand your operational model. When you purchase from your existing suppliers are you purchasing to stock, meaning that you receive products to a defined inventory target, then consume from your inventory as needed, and finally reorder when needed. Or, you only place orders upon your suppliers when you have a specific order from your own customers?”
“We do not hold inventory; our products are customized to customer needs and as such inventory is not an option for us. We place orders upon all of our suppliers in synch with the orders we get from our customers.”
“I understand that you currently are working with some suppliers in our domain, I am sure that they are good suppliers. And the questions I am going to ask are not asked in order to suggest otherwise. I am interested however to know a few things about the current services as you are experiencing them. Commonly, what is the supply lead time you are getting from your suppliers?”
“Our agreement with all of our suppliers in this area is for a four-week delivery time, plus transportation from their locations to our factory warehouse. The transportation time, obviously varies according to the location of the supplier from 1 week to 4 weeks.”
“Interestingly, our delivery times to our customers are also four weeks, and it has been our promise to the market for ever. As you already know, we have been in the business for more than twenty years, and I can say that sadly, in most of these years we did not always sand up to our four-week delivery promise. Sometimes, we delivered later, sometimes the quantity was not the full quantity and even sometimes the quality was not the quality promised. Do you ever experience such occurrences with your suppliers?”
“Of course, we do. It is life. No supplier is perfect. We accept this as an unavoidable reality. “
“it sure does seem to be unavoidable. Can we try and understand how this reality affects you?”
“What do you mean? It is definitely not positive.”
“True, but with your permission, let us try to get a grasp of to what extent it is not positive. So, for example; When a shipment due at a given date is not present at your factory on that date. How it affects your production?”
“As we plan our production in cycles of two weeks, when a shipment is not available it means we cannot execute our production plan. When this happens, we need to reschedule our production immediately, find materials we can work with or it even happens that we need to totally stop some of our production while we expedite the late shipment, or an alternative to it.”
“Interesting, let me just summarize what I understood, possible effects of a late delivery are; production rescheduling, compromising on the product using substitute materials, production stop and expediting. Is that about correct?”
“Yes, it is. Now that we talk about it, it sounds worse than we treat in day-today.”
“I think it is worse. Can I ask you to try and make a rough estimate of the financial effect of these events? I mean, it costs money, isn’t it?”
“It definitely does, I cannot estimate it all, but I do know we pay about €50K a year on expediting shipments, and that we lose about 6% of our production capacity due to stoppages and rescheduling. So, all together possibly more than €100K a year.”
“I think this is not all. When items are missing, and as you mentioned earlier you work to specific customer orders. Does it ever effect your delivery to your customers?”
“It seems you are determined to push your finger to all pain point possible, don’t you? Yes, it does happen that we deliver later to our customers as a result of late deliveries of parts and components. And it annoys them. Sometimes to the extent that we must compensate them, and even lose them.”
“And, this also has a cost, doesn’t it? What do you estimate your compensation costs to be? Lost business?”
“We pay yearly about €300K for compensation, and I cannot give any number on lost business, but I am confident it is in higher numbers than that.”
“In that case, it seems to me that on annual basis, for parts and components that you purchase for €600K to €1M, you are accumulating negative financial effects to an extent greater than €400K a year. Isn’t it?”
“It sure does seem that way. I do not think we ever looked at it this way. It does not make me happy, but I am thankful for this insight. I am not clear however, where is it leading to? If you wanted to demonstrate how difficult purchasing job can be and how frustrating, you did a good job.”
“No, no. It is not what I want. I actually want to offer you a new service that will eliminate totally this €400K a year damage. Would you be interested in that?”
“Would I? I assume you are kidding. Still, as mentioned earlier, it is fact of life. All suppliers are like that. I guess that the €400K is the cost of doing business.”
“Maybe it is. However, you might change your mind as you hear our proposal. Still, before our proposal I would like for us to agree on the criteria you should be using to evaluate not only our proposal, but anyone’s proposal for a solution. I suggest that the if there is a solution, the solution must; Eliminate all the negatives related to late deliveries, enable building the confidence, do not increase (substantially) the buying cost, and do not require any additional hassle from your hand. Does this make sense to you?”
“Yes, it does. Sounds a bit unrealistic though. I have to say.”
“I understand that. As I mentioned earlier, over the last year GMS made substantial effort to change and improve its production. We shifted our production to a new system that is totally focused, measured and aligned with our due date commitment to our customers. During this period, we have been able to demonstrate and deliver, consistently almost 100% of the orders on time. Yes, it does happen to us that we fail, but less than 1% of the time. Please take a look at our On-Time-In-Full performance graph:”
“Impressive”, Linda said.
“It is, and this is why we feel very comfortable on giving you our proposal. What we are offering you is a guaranteed 4 weeks delivery time. What does that mean? Every time you will place an order with us, the order will leave our factory exactly in four weeks from the order date.”
“I have heard this from all of my suppliers. As we already seen earlier in our discussion, life is very much different than the promise.”
“You are absolutely correct. This is exactly why, we are committing to pay a self-imposed penalty of 10% of the order value, for every day we deliver later than promised.”
“10%? You are serious? This is a heavy commitment. If you are late, you can rapidly lose money, can’t you?”
“Yes, we can. Frankly, we are so confident in our system we do not think it is likely we will need to pay. But promising is easy. Now you can be confident that when you order from us, deliveries will always arrive on time. We will do whatever it takes not to need to pay a penalty. Other than that, we do not ask you to change anything in your procedures or practices of purchasing. And clearly, we can start with a pilot order so we can demonstrate our prices, quality and impeccable service. Would you be interested to try?”
“I most definitely am interested. If you can deliver, as promised I can envision moving most of our business in this area to you. Shall I send you a first drawing to start with?”
“looking forward to it”.
