W&WP March 2004
Part 1 - Backlogs Are Poison!
By Tom Dossenbach
Editor's note: This and the next two installments of Management Matters are intended to stimulate readers to make the changes necessary to compete in today's global market.
There are many reasons to explain why a lot of North American manufacturers are not effective in their efforts to become more competitive today. Often, these are the result of old paradigms or, if you prefer, an old way of looking at things. Too many owners or managers of companies -large and small -have been doing business the same way for so long that they no longer have the ability to recognize new opportunities.
As the often-overused adage states, many are incapable of 'thinking outside of the box.' There is no better example of this than order backlogs. A lot of companies have looked at backlogs as the lifeblood of their business and continue to do so, but excessive backlogs can be poison to a company and eventually lead to its death!
Before we go any further, allow me to define what a backlog is. It is the list of confirmed customer orders for products that have been entered into your system and are thus putting future demands on your manufacturing capacity. If you are a supplier or re-seller, your backlog is putting future demands on your inventories and/or procurement of products for resale.
For a factory, these demands are in the manufacturing queue even if they only exist on paper or in a computer. Each order may already have a requested shipping date or a specific production date assigned to it. These same demands may have already been forwarded to some of your suppliers as requirements for ordering for their products -further contributing to their backlogs.
I can't even begin to describe the expression on Janet's face when I suggested that she needed to work on reducing process time to two to three weeks and thereafter prevent build up of backlogs greater than four weeks. She had to sit down when I told her that attaining a four-week backlog was just the first step. The true goal, I told her, would be to get process time down to one week and to inch backlogs under two weeks if the company was going to be able to compete in today's marketplace.
Janet's face was literally pale as she responded in all sincerity that she could not sleep at night if her backlog was not at least eight weeks.
I stuck to my guns. I reassured her that if she could improve process efficiency to the point that her company could deliver orders within two weeks, then the ideal backlog would be two to three weeks because this would mean that no customer was waiting longer than necessary to get his order filled. This does not mean that a two-week backlog was ultimately acceptable -only that this was where the company needed to be at that point in time.
I'm sure that many readers can recall the days when the company with the greatest backlog had bragging rights with such comments as: "Oh, we're sold out until next market!" and "We've got a 90-day backlog and are running all the overtime we can muster."
Guess what? Those were the 'good old days' and they are gone forever! Janet's company and others - perhaps yours -can no longer afford the luxury of long backlogs as an indication of having a good business climate or to use them as a security blanket.
Another reason for extended lead times is that some manufacturers like huge backlogs because it allows them an easy way to plan and schedule purchasing and production for 'maximum efficiency' - or so they think. In the good old days, large batches of products were made only after a significant backlog was built to 'justify' a cutting. But those days are going fast and are already gone for most.
Customers today don't want to order and hold inventories or to speculate heavily on the sales they might make. Rather, they want to sell an item and give the customer immediate delivery and then repeat the sale the next day without carrying any appreciable stock.
Nevertheless, I still run into companies that are determined to sit on orders until they accumulate enough to justify manufacturing the product while their customers wait, and wait, and wait!
Wood products manufacturers have used backlogs for too long as a hedge to their own inefficiencies of running large batches of a single item through plants that are configured in such a way that it takes weeks to get all of a product's parts through the plant. While some are meeting the challenge, many still cling to their old habits and thus continue to fall behind their competition in finding ways to operate with micro-lead times and micro-backlogs.
He has found a new upholstery company located 50 miles away that will make sofas that are smaller in scale than the big boys are willing to make. These mini sofas are hot sellers and the retail customer can choose from a nice selection of fabrics. If Alan places his orders before 3 p.m. on the day of the sale, they are ready for pick up the next afternoon if required. Normal lead time for this factory is three to four days.
This custom upholstery manufacturer has carved a product niche that larger competitors have ignored. It has succeeded by developing a business structure that allows it to provide incredible service for a limited regional market. To keep its backlog down, it effectively forecasts sales by keeping in constant contact with its customers and keeping its factory focused on producing a limited selection of frames as needed. In short, it is applying the "Antidotes for Excessively Poisonous Backlogs," boxed above.
In this example, the larger upholstered furniture manufacturers are losing out on business for two reasons. First, they are inflexible on designs for the market in making only big, chunky sofas and chairs. Second, their lead times are measured in weeks instead of days. If Alan can get what his retail customers want when they want it (that is NOW!), why would he go to a manufacturer who is going to put him in backlog queue? It's not going to happen!
Zero Backlog Strategy = More Business
Your customers are willing to put up with longer lead times from China - eight to 12 weeks or so -as long as they are paying China-bargain prices. But they are not willing to wait that long for your higher-priced products. If you can guarantee 10-day lead times, you will likely find a renewed demand for your products without compromising price. Four-day delivery would be awesome.
Not every company overseas will lose a large chunk of its business if a similar U.S.-made product is offered with the promise of considerably shorter delivery. The point is that many small and larger domestic manufacturers can and will be able to maintain or grow their customer base if they adopt a 'Zero Backlog' philosophy - a philosophy that demands a paradigm shift away from the acceptance of huge backlogs and long lead times as a way of convenience or as a way to achieve alleged manufacturing efficiency.
No matter how long the backlog and customary lead-time you quote your customers is today, you need to strive to do better. If you don't get out of your manufacturing box with some creative thinking unique to your circumstance, you are going to miss the cut in the tremendous culling process that is going on in industry today.
Next month: Work Share - Is It for You?
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