Increased Profitability requires dealing with conflicting goals...

Have you ever wondered why your 'continuous improvement' program feels like you are moving in circles? This might be because you have to deal with conflicting goals. Only if one identifies a clear direction and strategy, an increase in profitability is possible. So lets see what helps to increase profitability.

On one hand costs need to be reduced and on the other we need to increase income, revenue or sales. To reduce cost, company's usually strive to reduce working capital (work in process, stocks, resources), save on the cost of procurement or production and optimize their planning processes so that they can execute more efficiently. In order to get the expected result one requires low inventories in raw, semi and finished goods, high utilization of resources and less variability in demand and supply.

The other side of the coin is the desired increase in sales which can be achieved by fast response to customers wishes, on time delivery, very high quality with less waste and scrap and the offering of a wide variety of options and customized features in the finished product. Logically this requires ample supply of all variants of the finished good, ample capacity on the production lines so rush orders can be attended to quickly and it results in a lot of variability.

 

These goals conflict and often companies become bipolar in their efforts of continuous improvement... should we reduce inventory or increase availability?, cut down on our offering of product options or offer more?, fully load our production lines or run them at a fraction of their ability?

The key is to find the perfect balance. Practical science like Factory Physics (based on the book by Mark Spearman and Wallace Hopp) provides a great framework to find that balance. In Factory Physics tools like the flow optimizer or efficiency curve in conjunction with the application of Little's Law, the VUT equation (which relates the three buffers Inventory, Capacity and Time) and the determination of the Variance in Lead Time Demand help a great deal to optimize Capacity, WIP, Inventory and Cash Flow and to determine the policies that support the strategy your company pursues.

It is those policies that we can use in the SAP supply chain. I have written quite a bit about policy setting in previous blogs, and if you read some of it, you know how important I consider them in the pursuit of the optimized SAP supply chain.

It would by far extend the scope of a blog article to describe the details on how to use Factory Physics to derive sensible policies which support strategy, but it is certainly worthwhile to look further into it... in case you were ever confused about what to do to get better results!