Monday
Oct112010
The 7-F's of Lean Demand Planning
Monday, October 11, 2010 at 5:40PM
Per our discussions it is clear that Ace Metal Crafts has a front end order management opportunity. The job shop nature of your production process coupled with an increase in customer demand over the last year has created a risk filled order management challenge. This reality has resulted in a large past due situation and the need to manage orders reactively and by exception.
It is also clear that there is no discrimination relative to establishing a customer due date. At present all customer orders regardless of their importance are accepted with a standard lead time and without consideration of available capacity. By not consistently meeting your delivery requirements on time and in full, Ace Metal Crafts is exponentially increasing the likelihood for unhappy customers and lost sales.
Not only does a weak demand planning process undermine customer satisfaction and revenue performance, it also undermines gross margin performance. The constant starting and stopping of orders to meet new priorities adds to your companies cost of goods sold. A company operating in this manner typically sees their cost increasing at a higher percentage than the percentage increase in revenue. Assuming pricing and product mix remain constant a well managed demand management coupled with an equally well managed fulfillment process should realize a straight line increase in material costs and a decreasing labor cost as a percentage of sales. Overhead in most instances should remain flat.
PROJECT OVERVIEW:
This project will be based on a methodology we have been using for nearly 20 years. The 7-F’s of Lean Demand Management is a set of rules and principles that help guide an organization to design and implement processes that coordinate demand with supply. We also couple this methodology with our DemandCaster Demand Planning software to visualize the effects of the current order management process, model the new process, and assess the impact of the changes over the course of the project.
When used in combination with Lean, the 7-F's streamlines a manufacturer’s or distributor’s demand fulfillment process by eliminating non-value added steps and coordinating front end office activities with back end fulfillment activities. It also serves as the basis for a Sales and Operations Planning Process.
The 7-F’s of Lean Demand Management are as follows:
1. Formulate the Rules: Apply the 80-20 rule, categorization, and other common sense rules to determine the basis to which demand will be entered and fulfilled. This includes identifying true capacities and establishing customer prioritization to allocate capacity to the most important customers or products. If available, use methods to visualize demand and capacity to promote informed decision making.
2. Forecast Demand: In your world of finite capacity and capital, forecasting is one of those necessary evils. As long as your customers expected delivery time is less than it takes to order the products or purchase material and manufacture the goods, forecasting is necessary. The current capabilities of the organization are compared against a short and long term forecast of the market(s) the company serves or wants to serve. This can be performed at a macro level or at the granular item level. Including the input of sales via a formal sales and operations planning process or informal information gathering process is strongly encouraged.
3. Fill the Buckets: Enter customer requests with appropriate delivery dates based on the rules established above. The dates must be based on the truth. Often companies agree to customer orders even though they know they will not be able to meet the delivery. It is perceived that it is easier to say yes and deal with the repercussions later than say no and work to establish an acceptable compromise that can be met 100%. The latter is the desirable option since customers often place a high value on on-time delivery. In addition, the process must allow a customer the opportunity to change their order requirements within reason up to the point of release.
4. Figure the Release: The process of deciding what is to be released to production. The understanding is that once the items are released the due dates may not be changed. Consideration for key customer expedites is included. Often companies release orders indiscriminately which increases WIP and causes traffic jams to occur in the fulfillment process. An item should be released at the last possible moment with the goal of promoting on time performance and throughput. Remember, you are only as fast as your slowest step. Assure material, manpower, and machines are available. If the orders are entered with a consideration of capacity, the release process should be a relatively straightforward date drive process.
5. Focus on Speed: Follow a process that promotes fulfillment in batches of one or a few at time in a continuous manner. Apply lean methods to further reduce WIP and increase the speed of fulfillment. Speed is directly correlated to healthy financial performance. Additionally, the faster the production process the less time you give a customer to change a due date or delay delivery.
6. Finish What is Started: The fastest way to expedite is to finish what is started in the order of release - no starting and stopping. Follow the established rules, roles, and responsibilities.
7. Frequent Measurement, Communication and Collaboration: Measure performance regularly (even daily) and use the data for decision making that promotes continually improving performance. Post data for all to see. Actively communicate through organized meetings and other methods to promote performance and continuous improvement. We like a daily review meeting with a simple agenda: did you do what you said you were going to do. Identify customer order, production, and supplier related issues and implement methods to balance inputs with outputs. This is done internally via sales and operations meetings and externally via supply chain partner collaboration.
In summary, the 7-F’s methodology is based on a few simple ideas:
1. Make scheduling and inventory decision considering customer and/or product prioritization.
2. Commit to orders based on realistic due dates and then perform to meet those due dates.
3. Don’t be afraid to say no when you are unable to meet a customer requirement. Honest due dates with reliable delivery is what customers ultimately want.
4. Control WIP. Release orders to fulfillment at the last possible moment. This promotes fulfillment speed by controlling work in process and keeping workers focused on the orders that generate revenue. Production constraints become easier to identify and address. Labor is allocated only where truly needed and not applied as a shot-gun approach which increases cost without increasing throughput.
5. Keep a certain percentage of capacity free to accommodate last minute “A” customer orders or accommodate production shortfalls.
It is also clear that there is no discrimination relative to establishing a customer due date. At present all customer orders regardless of their importance are accepted with a standard lead time and without consideration of available capacity. By not consistently meeting your delivery requirements on time and in full, Ace Metal Crafts is exponentially increasing the likelihood for unhappy customers and lost sales.
Not only does a weak demand planning process undermine customer satisfaction and revenue performance, it also undermines gross margin performance. The constant starting and stopping of orders to meet new priorities adds to your companies cost of goods sold. A company operating in this manner typically sees their cost increasing at a higher percentage than the percentage increase in revenue. Assuming pricing and product mix remain constant a well managed demand management coupled with an equally well managed fulfillment process should realize a straight line increase in material costs and a decreasing labor cost as a percentage of sales. Overhead in most instances should remain flat.
PROJECT OVERVIEW:
This project will be based on a methodology we have been using for nearly 20 years. The 7-F’s of Lean Demand Management is a set of rules and principles that help guide an organization to design and implement processes that coordinate demand with supply. We also couple this methodology with our DemandCaster Demand Planning software to visualize the effects of the current order management process, model the new process, and assess the impact of the changes over the course of the project.
When used in combination with Lean, the 7-F's streamlines a manufacturer’s or distributor’s demand fulfillment process by eliminating non-value added steps and coordinating front end office activities with back end fulfillment activities. It also serves as the basis for a Sales and Operations Planning Process.
The 7-F’s of Lean Demand Management are as follows:
1. Formulate the Rules: Apply the 80-20 rule, categorization, and other common sense rules to determine the basis to which demand will be entered and fulfilled. This includes identifying true capacities and establishing customer prioritization to allocate capacity to the most important customers or products. If available, use methods to visualize demand and capacity to promote informed decision making.
2. Forecast Demand: In your world of finite capacity and capital, forecasting is one of those necessary evils. As long as your customers expected delivery time is less than it takes to order the products or purchase material and manufacture the goods, forecasting is necessary. The current capabilities of the organization are compared against a short and long term forecast of the market(s) the company serves or wants to serve. This can be performed at a macro level or at the granular item level. Including the input of sales via a formal sales and operations planning process or informal information gathering process is strongly encouraged.
3. Fill the Buckets: Enter customer requests with appropriate delivery dates based on the rules established above. The dates must be based on the truth. Often companies agree to customer orders even though they know they will not be able to meet the delivery. It is perceived that it is easier to say yes and deal with the repercussions later than say no and work to establish an acceptable compromise that can be met 100%. The latter is the desirable option since customers often place a high value on on-time delivery. In addition, the process must allow a customer the opportunity to change their order requirements within reason up to the point of release.
4. Figure the Release: The process of deciding what is to be released to production. The understanding is that once the items are released the due dates may not be changed. Consideration for key customer expedites is included. Often companies release orders indiscriminately which increases WIP and causes traffic jams to occur in the fulfillment process. An item should be released at the last possible moment with the goal of promoting on time performance and throughput. Remember, you are only as fast as your slowest step. Assure material, manpower, and machines are available. If the orders are entered with a consideration of capacity, the release process should be a relatively straightforward date drive process.
5. Focus on Speed: Follow a process that promotes fulfillment in batches of one or a few at time in a continuous manner. Apply lean methods to further reduce WIP and increase the speed of fulfillment. Speed is directly correlated to healthy financial performance. Additionally, the faster the production process the less time you give a customer to change a due date or delay delivery.
6. Finish What is Started: The fastest way to expedite is to finish what is started in the order of release - no starting and stopping. Follow the established rules, roles, and responsibilities.
7. Frequent Measurement, Communication and Collaboration: Measure performance regularly (even daily) and use the data for decision making that promotes continually improving performance. Post data for all to see. Actively communicate through organized meetings and other methods to promote performance and continuous improvement. We like a daily review meeting with a simple agenda: did you do what you said you were going to do. Identify customer order, production, and supplier related issues and implement methods to balance inputs with outputs. This is done internally via sales and operations meetings and externally via supply chain partner collaboration.
In summary, the 7-F’s methodology is based on a few simple ideas:
1. Make scheduling and inventory decision considering customer and/or product prioritization.
2. Commit to orders based on realistic due dates and then perform to meet those due dates.
3. Don’t be afraid to say no when you are unable to meet a customer requirement. Honest due dates with reliable delivery is what customers ultimately want.
4. Control WIP. Release orders to fulfillment at the last possible moment. This promotes fulfillment speed by controlling work in process and keeping workers focused on the orders that generate revenue. Production constraints become easier to identify and address. Labor is allocated only where truly needed and not applied as a shot-gun approach which increases cost without increasing throughput.
5. Keep a certain percentage of capacity free to accommodate last minute “A” customer orders or accommodate production shortfalls.
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