Must What Goes Up Come Down?

By: Henry F. Camp

 

Clients tell me that they can get fill rates up but they can’t keep them up, even if they throw inventory at the problem.  When fill rates drop so do sales and turns.  It is possible to get both fill rates and turns up and keep them up.  Read on to understand the unexpected culprit that often blocks us.

Most companies are caught in a delivery performance range that isn’t good enough to set them apart.  Their customers, in other words, don’t see their fill rate as clearly better.  It doesn’t matter what products or industry.  Even in the 21st century, Murphy is not only still alive but healthy.  He crows “If it can go wrong it will!”  We know he’s right.

The shoe store doesn’t have my size.  The bearing I need to stay in production is on backorder.  My new home is delayed some more because the mill work is way past its due date.  The grocery is out of 2% milk.  My stocking distributor is out of stock.  The container from China is stuck in customs.  The company sold my work-in-progress inventory, so I can’t meet my promised date to a customer who ordered in advance.  Just-in-time became just-ran-out.

Sound familiar?  We expect it.  It is normal … more than normal … universal.

It makes me think of a story that was told by a client back when they were a prospect.  The client’s Operations Manager, Steve Cochran, had an insight.  Steve said “We average 96% availability.  It moves between 94% and 98% and we can’t break out of that range.  When it goes up to 98%, our sales go crazy.  When our sales go crazy, we start running out of product.  When we run out, our fill rate drops down to 94%, which kills our sales.  When our sales fall off, our fill rate improves back up to 98% and the whole cycle starts all over again.”

What Steve saw so clearly was how big the impact of availability is.  What I call the Cochran Relationship is: For every 1% change in availability there is a 10% change in sales.  We have observed this at many clients.  I wrote about it in my white paper The Illusion of Service Levels in the 98th Percentile.

Like many Operations Managers, Steve was measured on fill rate and inventory turns.  When asked about his measurements, he said that he was expected to get fill rates above 98%, which his current system could only briefly touch, and that the goal for turns could only be reached when sales were at the “crazy” level they only saw when fill rates were at their highest.  He said “It is a self-fulfilling prophesy.  What goes up comes down.  I’d be golden, if I could just get my average to my peaks.”

At Steve’s company, business is seasonally dependent on growing conditions.  Since we can’t predict the weather, forecasts at the beginning of the season for each product are always too low or too high.  However, once the season starts the forecasts start correcting based on the actual sales levels.  In other words, the forecast lags reality.  This means that the forecast is always behind.  Is it true in all systems?  Well, except when there is no variability in the system – no fluctuation in the rate of sales and absolutely reliable delivery from suppliers or manufacturing.  Wait a minute!  The only constant is change.  Murphy is alive and well.  Things go wrong.  Therefore, it follows that forecasts must be wrong, at least by some amount, in all cases.

Forecast error adds to the normal variability that is built into system.  This is what W. Edwards Demming tried to teach us.  If the forecast is excellent it may only be 2% off.  But, that 2% is the difference between a 98% and a 100% fill rate.  And, according to the Cochran Relationship, that 2% is the difference between your current sales levels and 120% of those levels.

Relying on forecasts robs companies of sales that could boost their profitability, depending on their margins, by 2% to 10% of their current sales.  Changing to a “Pull” supply chain and managing inventory buffers dynamically according to actual demand, allows companies to ignore their forecasts (except for rare extreme situations).  Stop adding forecast error into your system.  Start satisfying your customers so well that they notice and talk about it.  Be the competitor in your market space that has banished Murphy.

Availability is a solution for all seasons.  Push fill rate up; it doesn’t have to come down.