Satisfying customer requirements is essential to success. However, too many organizations seem to believe that being "customer focused" means never saying "no" to a customer. This is a sure way to lose control over your own operation, which leads to increased complexity and cost, and poorer service to all customers. Here's how a commercial refrigeration product manufacturer used activity-based management concepts to simplify operational management and improve performance in satisfying customer requirements.

The company is a premier supplier with a broad product line, but each product is unique, incorporating customer-specific features and customer-specified components. Customers resisted standard products, so the company couldn't produce in advance and sell from stock. Long lead times for components often allowed customers to change designs late in the cycle. Consequently, the company was losing sales to smaller, more focused competitors who could supply certain products to customers more quickly, at lower prices.

The challenge was to reduce lead time and simplify the business, which required high overhead levels to support all the variety. Analysis indicated that although demand for the final product could not be predicted, major component needs could be predicted reliably. For example, only 30 of the 330 available compressors accounted for 90 percent of total usage.

Customers prized design flexibility, but they frequently specified the same components. So by stocking the most used components, the company could effectively remove component lead time from products built with standard components. Even though they weren't building a standard product, the company could take advantage of inherent, customer-driven standardization to improve service and operational effectiveness. The results were striking:

• Sales and application engineering now had some leverage with customers. While the company would always build what the customer specified-a perceived strength-lead time and price advantages could be offered if standard components were used.
• Manufacturing could improve flow through the plant by focusing operations around products using standard components and designs.
• Purchasing could more accurately and aggressively negotiate price and delivery of standard components with vendors.
• New products could be designed using standard components.

Activity-based management provides significant benefits. High activity products provide the logical place to focus improvement efforts related to service, cost and inventory performance. Their predictability makes them excellent candidates for pull-based replenishment. Simplifying a large portion of business activity can free resources to better serve the less predictable portion of the business, which typically requires more attention. Finally, activity-based improvements can be implemented incrementally, providing a logical migration path for an organization.

Implementing activity-based management is not usually complex, but it is difficult in most organizations because it contradicts the common wisdom and falls victim to the old trap of "we never did it that way." Strong leadership is essential to get it started and keep it going.