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Products above projections:
Products below projections:
We were (above/below) projections for the month by %.
New accounts this month:
Attachments to this report: Dollar Sales Month-to-Month.
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Mastering the Art of the Sale




W H AT ™ S N E X T

Sales is the big driver of your business on the revenue side, but op-
erations, the subject of the next chapter, is a big driver on the ex-
pense side. You must do both well to maximize profits. Next, we
look at the reality of the consequences of how you produce your
product and deliver it to your customers.
5
ACHIEVING QUALITY
AND QUANTITY



Our main business is not to see what lies dimly at a
distance, but to do what lies clearly at hand.
”Thomas Carlyle




T he goal for operations is to achieve the highest possible efficiency,
making the best use of equipment and human resources”in other
words, to reduce costs without damaging sales. Therefore, operations is
the natural choice to see to it that the business attains your goals for
gross margin. Operations implementation entails looking at ways to con-
stantly improve your process”to seek to make the time in production
less and the quality higher. It means constant measuring and setting
new standards.



SETTING THE RIGHT STANDARDS

Benchmarking is the art and science of setting a standard of performance
by looking at what others in your industry do. It™s straightforward and,
when properly focused, highlights the important tasks that operations
must accomplish. However, benchmarking doesn™t automatically set the
right goals. Would Federal Express have built its business with bench-
marks tied to the performance of the U.S. Postal Service? It might have
offered four-day delivery to beat the Postal Service by one day. Instead, it
targeted a revolutionarily higher standard and gave us overnight deliv-
ery, forcing the Postal Service to measure itself against that (and setting
a new benchmark).


145
146 Build Long-Term Growth



The point is that market-based benchmarks”those pegged to the perfor-
mance of your competitors”serve as minimum standards, not as the be-
all and end-all. They work for starters, and only if you can™t come up
with better standards to measure your own performance. You do better
to identify best-case performance standards and aim for those, irrespec-
tive of what your competition does.

It™s easy to find performance standards for operations. How well your
operations people meet deadlines measures time management. Actuals
versus budgets measure cost control. Random sampling measures qual-
ity control.



In setting performance standards for operations, consider the fol-
lowing five items:

Five Critical Measures of Operational Performance

1. Customer satisfaction.

2. Productivity and efficiency.

3. Companywide (or total) quality.

4. Innovation.

5. Financial performance.



In operations, the fundamental objective of making money translates into
production, inventory, and operational expense. Making money means
keeping production high and inventory and expenses low.

Although operations is a greater focus in product-based companies, it is
still important to service companies. Operational decisions are much
more focused on people in service companies”such as the cost of
salaries and benefits and unused time or unproductive time.



Defining Quality

The Malcolm Baldrige Quality Award has set the standard for defining
quality for U.S. companies. The award was initiated in 1987 to make U.S.
147
Achieving Quality and Quantity



companies more competitive in the world market. The seven categories
in which companies are judged are:

1. Leadership.

2. Strategic planning.

3. Customer and market focus.

4. Measurement, analysis, and knowledge management.

5. Human resources focus.

6. Process management.

7. Business results.

Process management includes both processes that create value for
customers, giving you a true competitive advantage, as well as those
support processes that make sure you are running as efficiently and ef-
fectively as possible. The selection criteria looks at how companies did
in these categories measured by an assumption that this is what it takes
to be a quality-driven company: visionary leadership, customer-driven
excellence, organizational and personal learning, valuing employees
and partners, agility, focus on the future, managing for innovation,
management by fact, social responsibility, focus on results and creating
value, and a systems perspective.

Looking at these standards, notice that quality is no longer defined
by looking at a single product output from a manufacturing line.
Quality is inherent in the entire process from the first time a cus-
tomer sees one of your brochures, through the first phone call to
your salespeople, to a shipment to their location, and beyond. How-
ever, it doesn™t stop there”quality also means meeting your cus-
tomers™ expectations that you will be there for them in the future
when new technology brings new needs for them.



The Deming Approach to Quality

The inventor of Total Quality Management, W. Edwards Deming, began
preaching his gospel of quality in Japan, where he went after World War
II to help conduct a census. He had helped devise sampling techniques
first used in the 1940 U.S. census, and in Japan Deming lectured to top
148 Build Long-Term Growth




A H I G H E R STA N DA R D
In mid-1999, the Air Transport Association, the trade group of
America™s major airlines, released a plan called “Customers First.”
The plan was the culmination of talks between the airlines, Con-
gress, and the Department of Transportation regarding the lack of
customer service among many of the airlines. Customer First was
conceived to address this problem. Most U.S. airline companies have
subsequently adopted the voluntary plan. It will be available to con-
sumers via web sites and at airport ticketing areas.
The customer service reforms in this plan call for airlines to:
• Tell passengers about the lowest fares available.
• Notify customers of delays and cancellations as early as
possible.
• Make a greater attempt to find passengers with lost luggage.
• Do a better job meeting passenger needs during long waits
aboard an aircraft.
One of the first airlines to adopt these procedures was Dallas-based
Southwest Airlines. In business since 1971, Southwest holds the air-
line industry™s best cumulative consumer satisfaction record, a
measurement kept and published by the Department of Trans-
portation. Southwest™s mission statement reads:
The mission of Southwest Airlines is dedication to the highest
quality of Customer Service delivered with a sense of warmth,
friendliness, individual pride, and Company Spirit.

Southwest outlines its Customer Service Commitment to passen-
gers in a 26-page booklet, which promises to share with its cus-
tomer how it operates. It also say, “Foremost, we want you to know
that it is never our wish to inconvenience our Customers. We tell
our Employees we are in the Customer Service business”we just
happen to provide airline transportation.”
Southwest knows that situations will arise that aren™t of its making
such as weather delays, problems at terminals, and so on. But it also
knows that Customers will look to Southwest to make sure these
problems are minimized or that they result in minimal inconven-
ience. The airline has taken a proactive stance toward serving
Customers, even when problems aren™t their fault. They anticipate
problems and have worked out solutions to be followed by their Em-
ployees before the unexpected happens.
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Achieving Quality and Quantity



business leaders on statistical quality control. He told the businessmen
that Japan could dominate world markets if they stressed his definition
of quality in their manufacturing operations.



Deming identified three phases of change that companies go through
on the road to improved performance measurement systems:

1. Tinkering with the existing measurement system (e.g., the
cost accounting system).

2. Cutting the “knot” between accounting and performance
measurement.

3. Embracing change in strategies, actions, and measures.



Deming believed in online quality control rather than end-line control.
To achieve it, analysts sample products during manufacture to deter-
mine the product™s deviation from an accepted range of errors. As Dem-
ing saw it, any deviation is the result of one of two kinds of variables,
either a special cause stemming from random events or a common cause
arising from faults in the system. Deming argued that special causes ac-
count for only 6 percent of all variations and common causes account for
94 percent. In his view, most companies spend too much time trying to
determine the nature of special causes rather than examining the system
to find out what™s behind the common causes.

Deming™s analysis relies heavily on mathematics”a product of his back-
ground as a government statistician. However, anyone can understand
Deming. One of his most simple underlying premises was that quality
improves as variability decreases. To monitor variance, he advocated a
statistical method of quality control. He argued that companies should
strive for continuous improvement using statistical methods and analy-
sis to maintain quality, instead of inspecting products en masse for de-
fects once they have been manufactured.

Deming™s work remained theoretical, but his many students have assem-
bled a body of literature and consulting advice that gives the concepts a
practical spin. His disciples identify 10 elements of total quality manage-
ment. His statistical control theories may not apply to your operations,
but you can use these points as a kind of diagnostic checklist.
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On a day-to-day basis, which of the following things do you
emphasize?

1. Customer orientation. Methods, processes, and procedures
are designed to meet both internal and external customer
expectations.

2. Leadership. Top management understands the quality process
and supports the strategy through both words and deeds.

3. Full employee participation. Everyone in the organization is pro-
vided quality training. From top to bottom, everyone has the
perspective, goals, and the necessary tools and techniques for
improving quality.

4. A sensible reward system. There is a system in place that rewards
quality to ensure continuous support for the overall effort.

5. Reduced cycle time. There is a strong effort to reduce the cycle
times, in product or service output as well as support functions,
following the maxim: “If it cannot be done any better, focus on
doing it faster.”

6. Prevention, not detection. Quality is designed into the product or
service, so that errors are prevented from occurring rather than
being detected and then corrected.

7. Management by fact. Managers use databased feedback to mea-
sure progress; intuition and gut feeling are put on the back
burner.

8. Long-range outlook. There is a constant monitoring of the exter-
nal environment to answer the question: What level of quality
or service must we provide to customers over the next 12 to 36
months, and how can this goal be attained?

9. Partnership development. The organization promotes cooperation
with vendors as well as customers, thus developing a network
system that helps drive up quality and hold down costs.

10. Public responsibility. Corporate citizenship and responsibility
are fostered by sharing quality-related information with other
organizations and by working to reduce negative impacts on
the community by eliminating product waste generation and
product defects or recalls.
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Achieving Quality and Quantity



The lesson is that operations cannot be considered alone without
looking at the interaction of all of the aspects of running a company.



ADDING NEW VALUE

A long tradition buttresses this thinking, but these days most managers
with responsibility for operations spend their time doing three things”
administering production, responding to crises, and improving perfor-
mance. In other words, this means doing the job, putting out fires, and
adding new value. However, experience suggests that we spend most of
our time doing the first two and not enough time doing the third. On the
contrary, we must do all three, and we need a great deal of information to
bring it off, including data detailing what happens and why during the
production cycle.

The just-in-time inventory control system popularized by Japanese
manufacturers shows how this information can pay off. In traditional
manufacturing, someone would deliver a big load of, for example, car
bumpers to the people on the production line who installed them”
more bumpers than the workers needed for the day™s output. Most of
the inventory would sit on racks off to one side, waiting to be used. The
thinking here was that the company gained something by making one
delivery of many bumpers. It did not consider the other side of the
equation”namely, the cost of a fat inventory. It did not measure the
benefit of the single delivery of bumpers against the cost of loading up
with more than necessary.

Japanese managers were the first to make that measurement, inventing
just-in-time inventory control and saving themselves a good deal of
money in the 1950s and 1960s. They accomplished this by measuring, by
gathering information about the production process, and asking what it
meant. American managers followed suit in the 1970s, though it took
them a while to overcome the biases of their traditional methods. For ex-
ample, one management consultant tells of working as a summer intern
at an appliance manufacturing plant in the Midwest. Detecting some in-
efficiencies in the plant™s painting methods, he implemented a simple
quality-control standard. He gathered data on the number of appliances
that passed paint inspection and plotted a defect rate chart that he
posted on a bulletin board. Workers had never seen their defect rate
graphed before and were riveted by the charts. Their defect rate dropped
from about 30 percent to about 5 percent.
152 Build Long-Term Growth



Unfortunately, the story doesn™t end there. After several weeks of im-
proved performance, an upset operations supervisor tracked down the
intern and asked about the charts. The intern, expecting praise, instead
got a hot lecture about the problems he had caused down the line. Be-
cause the defect rate in the painting operation had dropped so dramati-
cally, the company would have to lay off its rework people, who had no
screwups to fix. The supervisor told the intern to take his charts off the
bulletin board.

Information generates improvements, but not without cost. The intern™s
charts threatened the jobs of the rework people down the line”a bad
outcome to the angry supervisor. However, that doesn™t mean that you
choose not to act on the information you gather, only that you know to
expect that improvements of this sort will not always be welcomed im-
mediately by the staff.

Critical thinking and the kind of innovation of the sort required to over-
come the resistance to change are both key management duties.



WHAT YOUR INVENTORY TELLS YOU

To return to the idea of controlling the inventory, this makes a big target
when operations sets out to improve your company™s efficiency, but it
presents managers with some hard questions. “It™s good to think of in-
ventory as a liquid force,” says one New York-based consultant. “It pours
around the decisions you make about your business. You can™t make
hard policies about how your inventory will be. The best you can do is
have a few priorities and use inventory as a kind of ongoing barometer of
what™s going on in your business.”

With service companies, inventory is people and the hours they are
available to work with clients. Increasing efficiency leads managers to
embrace nontraditional employment and compensation structures, in-
cluding part-time or contract workers and flexible teams operating as so-
called virtual corporations.

With manufacturing companies, some studies argue that you can re-
duce operating costs by more than 25 percent by managing inventory
well. Things on shelves tie up cash; you spend money to make and
maintain them”and then face the risk of damage or loss. Managers
153
Achieving Quality and Quantity



keep inventory as low as they can, at the risk of revenue-killing backlogs,
spikes in supply costs, and production scheduling nightmares.

Leaving extra products on your shelves also tests the effectiveness of
your marketing efforts. A quick walk through your warehouse, for exam-
ple, tells you a great deal. Losing products accumulate, while winning
products disappear; products that don™t sell take up storage space that
could go to faster movers. If your shelves groan under products that you
expected to sell, ask your sales force and marketers why. Don™t stockpile
losers passively”which means don™t ignore your inventory mix. You can
cut inventory by 50 percent and still have piles of things in your ware-
house that no one wants”in effect, you have a permanent inventory and
an expensive one at that.

Some inventory problems have to do with the mix of products you stock,
not with quantities. Retailers learn this the hard way. They balance the
need to stay in stock against the need to turn inventory”a crucial mea-
sure of success in retailing. Most try to hit annual sales between 12 and 20
times inventory, which puts pressure on managers to keep only the best
products in stock. A big mix of products makes their problems worse by
lowering storage capacity for any single product, and retailers must re-
main open to buy”ready to purchase and stock hot items.

Managers in other businesses keep themselves open to buy by remaining
flexible and market-responsive even when it means taking less of a profit
than you want from one item to free up money and space for another.
Growth also makes for complications in inventory control. You can™t grow
faster than you can deliver product to your customers. You may have to re-
plenish inventory more often or stock more units of fewer products.

It™s hard to quantify the connection, but some managers see inventory
numbers as a reflection of accounts payable and receivable. Government
contractors, for example, wait 60 days for payment, sometimes 90 days,
and their accounts receivable run a deep negative. As a result, they rarely
keep inventories larger than the value of their receivables minus payables.
As a Maryland-based consultant to government contractors says, “You
need to figure out where all the money has to go to make the business
function and know what the timing has to be. If you™re fronting a lot of
money to payroll and product development, you™re not (going to have
much left for carrying) a big inventory. Make sure you can absorb the
growth until it is paid for.”
154 Build Long-Term Growth



SUPPLIER CONCERNS

Another aspect of quality control is keeping a close eye on your suppli-
ers. Over reliance on one supplier or source could be risky if it could
suddenly not provide raw materials, inventory, or something else critical
to your business. Get in the habit of monitoring with whom your com-
pany spends the most money each year as a supplier of critical materi-
als. You may be on the list of this supplier™s most important customers
and represent a relationship they would like to expand. Take advantage
of this.

You can”like some aggressive managers”tell suppliers that you know
you spent $20,000 (or more) with them in the past year and that they
might get more of your business if they™re willing to negotiate on price
discounts and/ terms. It is also a good practice to look at what you are
or
spending with any given supplier for a whole year. We often don™t realize
what we spend in total when we receive monthly invoices. Taking a look
at top suppliers also helped my company set limits for how much we
wanted to spend in particular categories.



TOOLS FOR ACHIEVING QUALITY AND QUANTITY

In operations, as in financial matters, you can bring about a substantial
improvement by using a series of basic analytic tools. The worksheets in
this section provide the basics:

• Unit output by product.

• Units shipped.

• Average days to ship.

• Returns analysis.

• Backlog of orders.

• Inventory control report.

• Business partner (supplier) survey.

Ask yourself if you need improvement in your operations area:

• Do you self-audit your records and the maintenance of equipment?
155
Achieving Quality and Quantity



• Are you reliant on only one supplier for a critical element of your
business? Do you have backup plans in case that supplier goes
out of business or is otherwise unable to supply what you need?

• If you have done business with the same supplier for three years
or more, are you certain that it still produces the best value or the
most state-of-the-art product?

• Do you have adequate internal quality controls, or are your cus-
tomers the first to know if one of your processes failed?

• Are the facilities you use, which are adequate for today, also
equipped for your growth plans?

• Do you have a working just-in-time inventory system?

• Are you making the best use of available new technologies in
manufacturing?

• Are you tailoring new operations strategies for use on the Inter-
net or for sales via e-commerce?

• Do you regularly chart and review operational performance?

• What is your biggest cost reduction opportunity?

• Have you adequately protected your intellectual property (with
patents, trademarks, or copyrights)?

• Are your operations flexible enough to change when your cus-
tomers™ needs change?

• Can you manage the operational “what ifs” of the business?

” What if a major source of supply were no longer available?

” What if suppliers increase their prices on items important to
your manufacturing?

” What if you experience the loss of a lease, tools, or inventory?

” Are your facilities and information systems prepared for a natu-
ral disaster or other physically destructive force?
156 Build Long-Term Growth



UNIT OUTPUT BY PRODUCT

Worksheet 5.1 gives you a method by which to monitor production output
by product for each month, year-to-date, and on average. You can use this
worksheet to compare how many units you produce each month with how
many units you sell of each product. It also allows you to see for which
products you™ve increased production and for which you™ve decreased
production (presumably because of increases or decreases in sales).

If output exceeds sales by a wide margin, you are increasing your inven-
tory. If sales exceed output, you are using up inventory and run the risk of
back orders over time.

The main benefit of doing this analysis is to post the numbers. This lets peo-
ple know someone is paying attention to what they are doing. There is also
the natural tendency of people to want to outdo themselves. Posting these
numbers allows people to see their progress in increasing productivity.


Making It Happen

List each product you manufacture and, at the end of each month, enter the
number of units produced. Keep a running tally of total year-to-date output
in the first shaded column. Enter the average for the year in the last column.

Do this three times: once for last year, once to make projections for the
current year, and once over the course of the year with actual numbers
month-to-month. Last, enter the output numbers for the prior year at the
bottom of the page.


Reality Check

Consider these questions about your completed worksheet:

• Is output on the rise for all products?
• Does output approximately match sales numbers?
• Is output up over last year?
• Are any of the trends indicative of factors that might affect pro-
duction cycles in the coming year?
• How do unit-output figures compare with unit-revenue figures?
In other words, which are your most cost-effective products?
Actuals Last Year
Worksheet 5.1
Projections for This Year
Unit Output by Product Actuals for This Year
Month Unit Output Average Unit
Product 1 2 3 4 5 6 7 8 9 10 11 12 Year-to-Date Output by Month*




*Divide total year-to-date unit sales by current month number.

Total Unit Output Last Year
Month
1 2 3 4 5 6 7 8 9 10 11 12 Total




157
158 Build Long-Term Growth



UNITS SHIPPED

Worksheet 5.2 tracks the number of products shipped each week and
each month.

Another way to get a feel for sales each month is to know how many units
were shipped. Even taking into consideration the variety of prices charged
for different products, if units shipped are up, sales probably are, too.

Units shipped is also a good gauge for determining whether to hire new
production and fulfillment personnel. After using this form for a period
of time, it is possible to determine how many units an average person can
ship. If your totals get over this number, you may need to hire temporary
help or even hire regular help for an ongoing need.



Making It Happen

List your products in the left-hand column. Track the number of units
shipped each day for each of your products and enter the number once a
week. At the end of the month, total the columns for each week in the
total shipped column. Divide this total by four or five to determine the
average number of units shipped per week. Enter this number in the last
column. At the bottom of the worksheet, list units shipped in total for
each month of the current year and the prior year.



Reality Check

Consider these questions about your completed worksheet:

• Are total units shipped up from last year?

• Is there a seasonality to your sales that means you have more
units to be shipped at certain times of the year?

• How much of your weekly and/or monthly shipments were back
orders? What™s your current backlog?

• How do spikes in the units shipped figures alter your inventory
control systems? Can you absorb some fluctuation? How much?

• Do these numbers seem to track with expectations based on sales
figures for the same period of time?
Worksheet 5.2
Units Shipped
for (Month/ Year)
Total Units Average
Shipped for Units Shipped
Product Week 1 Week 2 Week 3 Week 4 Week 5 the Month per Week




Totals

Items Shipped This Year
Month
1 2 3 4 5 6 7 8 9 10 11 12 Total


Items Shipped Last Year
Month
1 2 3 4 5 6 7 8 9 10 11 12 Total




159
160 Build Long-Term Growth



AVERAGE DAYS TO SHIP

Worksheet 5.3 helps you determine how long your customers have to
wait between the time they place an order and the time the product is
sent to them. This worksheet will be most useful if you set a standard to
meet. Use the average number of days to ship as a tracking for a service
standard that you want to meet or beat.

Many companies try to ship off-the-shelf products within 24 or 48 hours
of the order.




Worksheet 5.3
Average Days to Ship
for (Month/ Year)

Days from
Order Number Order Date Order Shipped Date Order to Ship




Total days from order to ship/Total number of orders = Average days to ship
161
Achieving Quality and Quantity



Making It Happen

Identify your orders (usually by order number) in the first column of
Worksheet 5.3. For each order, enter the date the order was placed by the
customer. In the third column, enter the date the order was actually
shipped. Enter the number of days difference between the order date and
the date shipped in the last column.

At the bottom of the worksheet, take the total number of days from the
shaded box at the bottom right and divide by the number of orders you
have listed in the first column. This number is the number of days on av-
erage between the time the customer placed the order and the time it was
shipped.



Reality Check

Consider these questions about your completed worksheet:

• Is your current average number of days to ship an acceptable
number to you? What is standard in your industry?

• What can your company do to decrease that number?

• Does seasonality or any other external factor influence turn-
around time? If so, what can you do to anticipate this?

• Can you make a short turnaround time a stated goal for your
company? Can you do this effectively?

• Again, how do these figures affect your inventory control?

• At what point does the time it takes you to ship an order start to
interfere with sales?

• To what extent do different products require different turn-
around times? Can you segregate shipping functions to handle
these variations more efficiently?
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RETURNS ANALYSIS

Worksheet 5.4 helps you determine how many of the units you send to
customers are returned to you and why they are returned. It™s a diagnos-
tic tool.

As with many other worksheets in this section, it is important to track
measures of productivity. If employees know you are paying attention to
this measure, they will seek to improve the statistics themselves over
time.



Making It Happen

List your products in the far left column of Worksheet 5.4. Then list the
total quantity returned for each product in the second column. The third
column has 10 separate sections. Each section has a reason for return
code number that is explained to the right.

Enter the total quantity returned for each reason in this section. At the
bottom of the columns, enter the total numbers for reasons 1 through 6
and reasons 7 through 10.

Reasons for return numbers 1 through 6 are errors on the part of the
company. Use this worksheet to track these numbers, set goals, and de-
crease them over time.

On the bottom of the worksheet, enter the total units shipped. Calculate
the percentage of shipments returned by dividing the total returns in
the first shaded box by the total number of units shipped. Calculate the
percentage of shipments returned for reasons 1 through 6 by dividing
the second shaded box by the total number of units shipped.

Enter the number of shipments returned for reasons 1 through 6 for each
month this year and last year.
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Achieving Quality and Quantity



Worksheet 5.4
Returns Analysis
for (Month/ Year)
Returns by Product
Quantity Returned by Reason*
Total Quantity
Product Returned 1 2 3 4 5 6 7 8 9 10




Totals:
Total Returns for Codes 1“6 and Total Returns for Codes 7“10

Total Units Shipped Shipments Returned
(from Units Shipped Worksheet) Shipments Returned (%) for Reasons 1“6 (%)



*Return Codes
1 = Product 2 = Shipment 3 = Wrong Product 4 = Wrong Product 5 = Product Defective
Not Ordered Received Damaged Received Received
(order entry error) (shipping error)
6 = Quality Not 7 = Ordered Too 8 = Customer 9 = Exchange 10 = Other/Don™t
as Expected Much Changed Mind Know
about Product

Percentage of Shipments Returned for Reasons 1“6 This Year:
Month
1 2 3 4 5 6 7 8 9 10 11 12 Total


Percentage of Shipments Returned for Reasons 1“6 Last Year:
Month
1 2 3 4 5 6 7 8 9 10 11 12 Total
164 Build Long-Term Growth



Reality Check

Consider these questions about your completed worksheet:

• Overall, are your returns increasing or decreasing?

• Is there any meaningful link between types of product and num-
bers of returns? Does this suggest anything for marketing or
product development projects?

• Are many of the returns caused by problems on your end (reasons
1 through 6), or are they mostly due to customer needs changes?

• Do you think the number of returns could be lowered? If so, how?

Would returns be lower if customers better understood your product at
the time they ordered?
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Achieving Quality and Quantity



BACKLOG OF ORDERS

Worksheet 5.5 helps you determine whether any orders have not been
shipped by the end of the week (or other period of time that you choose).
This is very important as a diagnostic monitor of production bottlenecks.
A backlog occurs when an order is not shipped, which could be for a va-
riety of reasons: The product may not be available, packaging may not be
available, or shipping may be too busy to get it out.

Any items on this list should be investigated. The dollar volume column
totaled on the bottom of the sheet will really focus your attention. Like
excess inventory, backlog orders sap a company™s productivity. Knowing
this report will have to be made each week will usually prompt the ship-
ping department to get all the orders out that it can.



Making It Happen

Worksheet 5.5 should be completed by shipping or customer service per-
sonnel every Friday. Any order not shipped by the end of the week
should be documented by order number and customer name. Also en-
tered should be the dollar volume of the order and the date the order was
placed. The expected ship date and comments should indicate why the
order was not shipped and when it will be. The total dollar volume of all
the orders not shipped should be entered at the bottom of the worksheet.



Reality Check

Consider these questions about your completed worksheet:

• Are there orders backlogged every week or only occasionally?

• Are the reasons for backlogs usually the same?

• Are these problems that can be corrected? If so, how?

• How many of these orders will be canceled because of product
unavailability?

• Has this problem gotten worse over time? With the same products?
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Worksheet 5.5
Backlog of Orders
Week of .
Order Volume of Expected
Number Comments Order ($) Order Date Ship Date Comments




Total:
167
Achieving Quality and Quantity



INVENTORY CONTROL REPORT

Worksheet 5.6 helps you determine total inventory over a set time period
and where inventory is inadequate to meet sales needs. This is another
very important indicator of production bottlenecks.

Any items listed at the bottom of the page should be questioned. Asking
the right questions at this stage could prevent these products from show-
ing up on the backlog list later.



Making It Happen

In the first section of Worksheet 5.6, enter the total inventory numbers
from the Year-at-a-Glance Financial Analysis Worksheet (3.3) for each
month this year and last year. In the next section, list all products with
less than two months™ inventory at current sales levels, quantity cur-
rently on hand, and date that restocking is expected. This worksheet is
an essential step in any move toward a just-in-time inventory manage-
ment system.



Reality Check

Consider these questions about your completed worksheet:

• Is total inventory going up or down?

• Does inventory fluctuate in a cyclical or seasonal pattern? If so,
can you use these patterns to manage inventory in the future?

• Does this increase or decrease fit with your cash management
strategies?

• Will your restocking dates allow you to replenish your inventory
supply before you run out of product?

What do inventory fluctuations suggest about your market sector? Your
customers? Your internal operations?
168 Build Long-Term Growth



Worksheet 5.6
Inventor y Control Report
for (Month/ Year)
Total Inventory This Year
Month
1 2 3 4 5 6 7 8 9 10 11 12 Total



Total Inventory Last Year
Month
1 2 3 4 5 6 7 8 9 10 11 12 Total



Inventory at Low Level
List any items with under two months inventory on hand.

Quantity Expected
Product Description Currently on Hand Restock Date
169
Achieving Quality and Quantity



BUSINESS PARTNER (SUPPLIER) SURVEY

Worksheet 5.7 assesses how your suppliers feel about their relationship
with your company. Using this data to improve your business relation-
ships may lead to lowering your costs as well.



Making It Happen

You may get back only a small percentage of surveys sent. You can in-
crease this response rate if you call ahead and tell your supplier contact
to expect it or if you send the survey with an order. Try to specify a date
by which you would like to have it returned. The larger the number re-
turned, the better the data you have from which to draw conclusions.
You might consider asking that the form be returned directly to the com-
pany president by including a self-addressed, stamped envelope. You
will get a better response and the responses will be more meaningful if
suppliers believe their survey comments will be read by the president of
the company.

Tabulate responses by taking each question individually, totaling the 1 to
10 score received, and dividing that number by the number of surveys re-
ceived with that question answered. This will give you an average score
for each question.

Distribute your scores throughout the company. Congratulate yourself
on scores of 8 to 10. Continue to improve on scores of 5 to 7. Consider
scores of 4 or under to require immediate attention focused on those
areas of your company. Put together interdepartmental task forces to de-
vise action plans to increase your levels of service.

In particular, consider the remarks in the comments sections. Call any
suppliers who requested it within a week of receiving their completed
survey. Be sure to send a thank you message to all suppliers who pro-
vided their name at the bottom of the survey.

This survey should be done annually and results trended over time.
170 Build Long-Term Growth



Worksheet 5.7
Business Partner (Supplier) Survey
Please help us improve our business relationship by rating us in the following categories (10 = best).
Question 1“10 Comments
Do you enjoy doing business with us?
Do you feel we treat you as a vendor or as a
business partner?
Do our employees treat you courteously?
Are you paid on time?
Are we a larger or a smaller customer
(10 = largest)?
Do we supply you with enough information
about our business for you to do your best work
with us?
Do we give you enough time to fill our orders?
Could we make any changes in our business practices that would help us reduce your costs
and result in lower prices for us?




How could our relationship with you be changed to benefit us both?




Other comments about areas we missed in this survey:




There is more to say and I would like you to telephone me. The best time to call is .
Name and Company Name (optional)
171
Achieving Quality and Quantity



Reality Check

Consider these questions about your completed worksheet:

• Are you making it easy for suppliers to do business with your
company?

• Are your employees creating partnerships with suppliers or treat-
ing them as vendors?

• What can you do to immediately change supplier perception for
the better?

• Have suppliers told you anything that surprises you about the
ethics of their communications with your employees?

• Are your scores trended up or down over time?



W H AT ™ S N E X T

Many managers begin their efforts at overall improvement with op-
erations because they see the most money to be saved and the great-
est improvement to product quality. Marketing, stimulating future
growth, and generating new products are all crucial functions re-
lated to managing your operations, which is the subject of our next
chapter.
6
GROWING PROFITABLY
WITH MARKETING AND
PRODUCT DEVELOPMENT
I have learned, that if one advances confidently in the
direction of his dreams, and endeavors to love the life
he has imagined, he will meet with success unexpected
in common hours.
”Henry David Thoreau




G rowing a business means deepening your understanding of what
drives the business, the market for your product or service, plan-
ning on the fly to take advantage of significant opportunities, and con-
tinuous product innovation. In addition, delivering better products
faster and more efficiently to your customers requires a great deal of in-
formation. Marketing”in its broadest definition”is that information.
It™s a means of figuring out what works and doesn™t work in attracting
profitable customers for your business.

Few business factors challenge owners and managers more than market-
ing”perhaps because the term covers so many activities and disciplines.
In many companies, marketing includes sales, customer research, and
new product development. This confusion leads some managers away
from giving marketing the attention it deserves.

Some companies boast that they are “market responsive” or “market
driven,” but in truth, in a world that depends on information, all com-
panies must be market responsive. Your customers don™t buy your
products or those of your competitors for mysterious reasons; and
whether you make hardware for cars, disk drives for computers, or
movies for Hollywood, you must know who your customers are and


173
174 Build Long-Term Growth



what they want. You have to respond when their wants and needs
change.

Marketing well may take more planning than any other area of your
business, and most businesses have a specifically developed marketing
plan. Marketing plans include not only an assessment of the world at
large, but also activities you will undertake to impact that world and
reach your customers. Your customers™ perception is critical; your mes-
sage to them about your product must be clear, have impact, and allow
them to immediately see the benefit in buying your product.

Your marketing plan covers questions such as: How will you get that
message out to them? What media will you use? How will you distribute
your product? Furthermore, good marketing research often leads to new
product development, answering questions about what else your cus-
tomers expect for you to provide them and what risks there will be in
launching a specific product.

This chapter takes you through the critical information for creating a
marketing plan and covers the following topics:

• Determining your industry˜s potential and your competitors.

• Determining who your customers are and are not.

• Reviewing marketing activities to date.

• Looking at the development of new products.

• Looking at your industry.

To start planning your marketing efforts, first, you must consider how
large or small your market is and who the other players are in that mar-
ket. You learn much from the people in the marketplace who love your
products and even more from those who don™t. This means taking a hard
look at your successes and your failures. It also means researching how
well others are doing and analyzing that data to see what will be useful
in your marketing efforts.

The details of your marketing plan will vary greatly depending on the
industry. In publishing, for example, marketing entails huge expenses
for advertising, publicity, and distribution because selling books or data
relies on thousands of small and sometimes impulsive transactions.
Marketing in the defense industry, on the other hand, entails meeting
new customers face to face and networking on Capitol Hill and in the
175
Growing Profitably with Marketing and Product Development



Pentagon, because defense contracting relies on a few huge and lengthily
considered transactions.

Industry information may also give you an idea of your market share. It
may also tell you when developing new products may be most beneficial.
Sources of industry information include trade associations, the U.S. Com-
merce Department, Standard & Poor™s Industry Report, Dun & Bradstreet
(many of these can be found in local libraries), annual reports of publicly
held companies, online data services such as Lexis/Nexis and Dow Jones
news services, and by talking to industry experts.

What you need to consider about the data on your competitors is whether
this is an industry that offers opportunities for your company now and in
the future. You also need to decide whether growth prospects are limited
and, thus, if you should consider moving out of that market.



1 0 T H I NG S YOU SHOU L D
K NOW A BOU T YOU R I N DUST RY

1. What is the total buying power by number of potential cus-
tomers and estimated dollar-buying volume?
2. Is this a mature or start-up industry?
3. What are the barriers to entering the industry?
4. Who are the industry leaders and why?
5. What is your position in your industry?
6. How many companies operate in this industry? Is the number
increasing or decreasing?
7. Is there room for your company to expand its market in this
industry?
8. Are there seasonal buying patterns in the industry?
9. Can you find projections of growth trends for the industry from
trade groups, security analysts, or the federal government?
How is the industry expected to change in the next year and in
the next five years?
10. Are there factors that will affect the demand for products in the
entire industry”technological innovation, government factors,
or social or economic factors?
176 Build Long-Term Growth



RESEARCH YOUR MARKET

It™s easy to pose the questions you want to answer about your market and
your competitors”and difficult to answer them. Managers must usually
do more with less when looking outside the organization for factors influ-
encing sales. Begin your market research by asking everyone in your com-
pany to write down everything they know about your competition and its
products. From this, expect to pull a variety of impressions; your sales
staff will probably have a perspective different from your technical peo-
ple. In addition, order your competitors™ products, call their salespeople,
visit them at trade shows, and look at their web sites. Make a point of col-
lecting and discussing this data at least annually. The object is to build a
universe within which you can place and define your product and how
your customers perceive you. You want to understand your competition so
as to differentiate your product. The questions to answer include:

• What are the strengths and weaknesses of your competitors™
products? Of their management teams?

• How do they mix quality, value, and service?

• Can you bring new products to market more quickly than your
competitors?



CUSTOMER MARKETING DATA

In addition to researching your competition, you should also research
your customers™ buying patterns. Pinpoint what data you need and don™t
get bogged down in just having a lot of information. You need data from
customers you have as well as customers you don™t yet have, relevant to
your particular product or service. That will be plenty to focus on.

Getting data is becoming much less difficult with the services available on
the World Wide Web. It is possible to collect so much data on customers
and their buying patterns that consumer groups have become alarmed
and have tried to stop it. For most small businesses, the best sources of
data are paying attention to your customers™ comments and complaints.
Really listen to how customers use the product and what would make it
easier for them to buy and use in their setting. This data is available from
your sales and customer service reps and can also be accessed directly
through questionnaires and focus groups. This information is important
to get for a new product in the design stage, the testing stage, and after the
177
Growing Profitably with Marketing and Product Development



product is launched. Be creative by using your web site, contests, and dis-
counts to get customers to provide information on your service, pricing,
product quality, and their overall satisfaction with your company, person-
nel, and product.

Bear in mind that if customers offer solicited suggestions, they will be-
come impatient to see solutions. Therefore, don™t ask for information you
don™t plan to use. If you aren™t intending to allocate resources to make cus-
tomer service changes, don™t ask customers™ opinions on your service”
you will just draw attention to the problem.

It™s important to be discriminating when determining who your cus-
tomers are and are not when preparing your marketing plan. According to
one California-based marketing consultant, most companies use market-
ing information weakly and ineffectively. “Many businesses don™t focus
on who their real customers are because they are afraid to turn away busi-
ness,” she says. “It™s important to identify who you don™t want to sell to, so
you don™t squander your resources.”

To do this, you need good trend information about your sales and cus-
tomers. It is important to chart the information about sales and customers
through time by week, month, or year; by product type; by location; by
customer type; by marketing method; by dollar volume; and any other
way that fits with your business.


T H E M A R K E T I NG GA M E P L A N

Jeffrey Schmidt and Clark Greenlee, who together started a success-
ful espresso bar in the Country Club shopping district of Kansas
City, had a clear eye on their market when they started out. Working
as architects in Washington, D.C., they saw running an espresso bar
as a good way to put their design skills to practical use. Coffee bars
had proliferated in Washington, and Schmidt figured that Kansas
City, his hometown, might prove a good market for a business rely-
ing heavily on atmosphere and inexpensive extravagance.

He and Greenlee did some basic market research. They went to
espresso bars whenever they had the chance. They enrolled in
Small Business Administration classes on starting a business and
writing business plans. They contacted officials in Kansas City.

(continued)
178 Build Long-Term Growth




Because Schmidt and Greenlee came to know their customer pro-
file, they were able to use this information to open doors for their
business even before they enacted any marketing efforts. For in-
stance, other potential espresso bar owners had tried to get their
plans approved by the large real estate holding company where the
partners eventually opened their business. Schmidt and Greenlee
stood out because their plan reflected their clear understanding of
the market and their customer, forecasting sales and cash flow,
and analyzing the Kansas City marketplace and the performance
of analogous cafes and restaurants. This grasp of their customer
also enabled Schmidt and Greenlee to secure a generous bank
loan. As their bank officer said, “They had a great business plan,
they came in and presented it very well and they seemed sharp
and on the ball, qualities we look for in a borrower.”

Latteland Espresso opened in spring 1993. By the end of the year, it
had become one of the most thriving locations in the shopping
plaza. Sales ran 50 percent ahead of projections, and the place
turned a healthy profit. By the end of the decade, they had two lo-
cations in the city. In fact, their locations continue to do so well
that Starbucks recently opened a store within a block of one of
them. Sometimes your success inadvertently suggests a new mar-
ket opportunity for your competition.




MARKETING ACTIVITIES

Sales are the best tool for measuring the effectiveness of your marketing
activities, but they don™t tell you everything you need to know. If sales
increase, it probably means you™re doing something right, but it some-
times takes some digging to find out what. You want to make the best
and most effective use of your sales resources, and you need to analyze
your numbers so that you know what “best” and “most effective” mean.

This includes looking for the highest margin. Find out what the average
gross profit margin is for your industry and market, and see whether you
expect to outdo or fall below the standard”and whether you can stay in
business at that margin.

However, immediate profit isn™t everything, especially when you under-
take a long-term marketing program. Such a program might call for you
179
Growing Profitably with Marketing and Product Development



to cultivate satisfied customers who believe they get their money™s worth
and will come back a second and third time. This may require you to sac-
rifice short-term profitability”a good sacrifice if you like your chances
over the long term.

There are many ways to reach customers; the key is to know which way
to reach the customers who will be interested in what you have to offer.
Marketing activities include these and more:


• One-to-one sales.

• Direct mail.

• Personal phone calls.

• Brochures and catalogs.

• Classified ads.

• Yellow Pages.

• Newspaper display ads.

• Newspaper articles.

• Magazine ads.

• Magazine articles.

• Radio.

• Cable TV.

• Network TV.

• Web sites and Web ads.

• Billboards.

• Direct mail.

• Promotional items.

• Seminars.

• Demonstrations and contests.

• Trade shows/fairs.

• Catalogs.

• Telemarketing.
180 Build Long-Term Growth



• Newsletters.

• Public relations.

Great effort will likely be spent, whatever activity or combination of ac-
tivities you choose, on telling the customer about your product. Tell your
customers how your product will enhance their lives, and show them
your empathy for their exact situation.

In addition, know what you want to accomplish with a specific market-
ing activity: Do you want to increase awareness? Draw someone into
your location? Have them call your sales office? Buy from your web site?
Order from your catalog?

Be sure to give customers the right way to get in touch with you, and
don™t neglect to track your results meticulously. In the course of my busi-
ness, I did a lot of direct mail. It was critical to know not only what
worked and what didn™t, but also when it worked”as in when the cash
would come in from each effort.



PRODUCT DEVELOPMENT

How you define your product will have much influence on how you ap-
proach product development and marketing. If you think you sell cars,
you might not think of yourself as the provider of a moving environment.
You might think your customers are simply coming to buy a car, but
what would they ask for if a car did not exist? They would want some-
thing that could comfortably, safely, and reasonably inexpensively move
them from one place to another”anywhere, even difficult to reach loca-
tions. Defining your product by solving customer problems is essential.

Product development is the incremental process by which you make an
idea into a product”and thereafter increase the product™s quality and
usefulness to your customer as time passes. Thus, product development
has to do with existing products as well as with new; indeed, most com-
panies develop their best new products from ones they already sell.
They begin developing successor products the moment they think of
the original.

Truly new products are rare, and no prudent manager waits for a brain-
storm before making improvements to existing products.
181
Growing Profitably with Marketing and Product Development



However you get to the new product, the generation of new ideas is the
most interesting part of product development. In many ways, it™s the most
creative work of the company”and as many people as reasonably can
should take part.



SOURCES OF INNOVATION

The sources of innovation at your disposal include your employees as
well as your customers. Innovations often come from routine customer
comments. The company that translates the wishes of its customers into

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