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Efficiency is not everything

Recently I read an article[1] entitled "3 Ways Manufacturing Companies Can Boost Efficiency with ERP." The opening line really shocked me: "For those that operate in the manufacturing industry—efficiency is everything."

Now, in an age and time when manufacturing capabilities fell well short of demand for manufactured goods, one might have made the argument successfully that, in manufacturing, "efficiency is everything." However, that world has not existed for some time now.


Things are different now

Compare the circumstances in the table[2] below:


In 1965


Supply chain complexity Low. Supply chains looked like chains—they tended to be linear, vertically integrated and domestic. High. Supply "chains" is, for the greater part, a misnomer. The supply chains of yesteryear have become the supply "webs" of today, and those webs extend around the world in many cases.
Product life cycles Long. Product life cycles were quite frequently measured in years. Short. Product life cycles are now often measured in months, and some products don't make it to market before they are obsoleted by new technologies or a competitor's product.
Customer tolerance times Long. Customers for many products were willing to wait several weeks or months for delivery. Short. Customers increasingly are asking for virtually immediate delivery.
Product complexity Relatively low. High. Many products today incorporate complex mechanical, electrical or electronic components.
Product customization Low. Only a few products offered options or custom features. High. The Web-empowered customers are now expecting—and frequently getting—the opportunity to customize each unit of the product delivered.
Product variety Low. Most products offered only a single variety. For example, in 1965, Colgate and Crest each produced only one variety of toothpaste. The variety of cigarettes ranged to a couple of dozen popular brands. High. Product proliferation has dramatically increased. Even Coca-cola now comes in multiple flavors and a large variety of packaging options. Today, you can get a bottle of Coke with your own name printed on the label.
Long lead-time parts Few. Most parts were domestically sourced and, therefore, lead-times tended to be shorter. Many. The globally extended supply chain accompanied by highly diversified and specialized manufacturing partners, more and more components tend to have long lead times relative to customer tolerance times.
Forecast accuracy High. Less product variety, longer product life cycles, and longer customer tolerance times tended to limit dramatically the impact of forecast errors. Frequently, there was time to make adjustments. Low. Increasing product variety, mass customization, high levels of product complexity, shortened product life cycles, and supply chain complexities all combine to multiply the negative impacts of forecasts. Improvements in forecasting methods are offset continually by increases in market variability.


Flow is everything

In the midst of such conditions, more and more companies are proving again and again that it is not efficiency that is the creator of their success. Rather, FLOW is everything.

Efficiency may help companies make more and more of the products that customers are not buying a lower cost to the firm. This is particularly true when replenishment orders are based on forecasts, rather than being demand driven. Unfortunately, that simply increases the flow of irrelevant materials in response to irrelevant information.

Unfortunately, while resources are being "efficiently" employed in the production of goods that are not needed in the supply chain, their utilization is simultaneously preventing the production of goods that consumers really are demanding.

The net effect of all of this is what companies driven by traditional MRP and ERP systems are experiencing almost everywhere: too much inventory on the one hand, while experiencing dramatic shortfalls and out-of-stocks on the things that customers are actually demanding.

Unlearning what we think we know

It is, unfortunately, the deeply held truth that "efficiency is everything" that keeps companies mired in this experience in today's world economy. When companies begin to understand that FLOW is everything, they have a real opportunity to increase profits and become leaders in their markets.

Dramatically improved profits come from discovering ways to become demand-driven, and not by simply eliminating paper (the fictional "paperless office"), improving communications (especially if you are merely improving the communication of irrelevant information), or making sales simpler.

Let us know your experiences with seeking real improvement in today's demand-driven world economy.



[1] Cebull, Kyle. "3 Ways Manufacturing Companies Can Boost Efficiency with ERP." Smart Data Collective. May 27, 2015. Accessed May 28, 2015. http://smartdatacollective.com/kyle-cebull/320566/3-ways-manufacturing-companies-can-boost-efficiency-erp.

[2] Table adapted from Smith, Debra, and Chad Smith. Demand Driven Performance: Using Smart Metrics. New York, NY: McGraw-Hill Education, 2014.

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