Uncommon Sense: Manage by Activity
Too many organizations believe that being customer-focused means never saying "no" to a customer request. That is a sure way to have too many customers, too many products, and too little control over your manufacturing operations. This leads to increased complexity and cost, and poorer service to all customers.
Creative and logical thinking about how to satisfy customer requirements is critical to operational and financial success. The key is to find a rational way to offer customers what they want, in ways that allow you to make money doing it. Pareto's 80-20 rule can help you determine when to say yes, no or maybe. At the same time, it is helpful to use activity to identify the critical components on which to focus improvement efforts. Without this focus, organizational energy is wasted battling exceptions and problems endlessly. Here's how to combine the 80-20 rule with activity.
Sort products and customers by sales to create the "stoplight table" shown here. The green square in the upper left-hand quadrant denotes the product and customer combinations that account for 80 percent of sales and profits. Focus your process improvement efforts here, so you make these products, and serve these customers, as efficiently and profitably as possible. The two yellow squares denote cautionary combinations of products and customers, and the red square denotes product and customer combinations you should probably avoid.
For product and customer combinations in the upper right-hand quadrant, you may offer different services, such as longer lead times and smaller minimum orders, or different options such as an upgraded product for the same price. You might have to alter your run strategy to make and hold inventory for products that cannot efficiently be made to order. In the lower left-hand quadrant, you already make the products regularly for high-volume customers, so you can supply those products direct, or through distributors, to smaller customers.
The product and customer combinations in the lower right-hand quadrant are most likely low- or no-profit situations, despite what your standard cost system may tell you. In fact, most of the business in the lower right-hand quadrant really loses money; if you do nothing but stop selling that stuff, your profits will improve. Better yet, reassign those resources to high-volume customers and products, and watch your profits soar.
Activity-based management has shown consistent results and flexibility in application. It is a powerful tool that can help integrate and focus improvement initiatives into a coherent, strategic improvement plan. Though many companies have some elements of this concept in place, a broad organizational implementation yields the greatest results.
What's your opinion? Whether you agree or disagree, Bill Roper will welcome your comments. You can contact him via the Bourton Group's Web site. Just point your browser to www.bourtongroup.com and click on "Contact Us."