the rogo report - q1 2015

Alex Rogo Consulting April 2015

Tips For Weathering the Storm

No matter the economic environment, variability is inherent in any supply chain. Most manufacturing companies that are not 100% make-to-order (and some of those as well) operate, at least partially, upon a sales forecast. Times of economic turbulence injects even more chaos into already unreliable production forecasts.

So what can you do to weather the storm?

www.alexrogoconsulting.com �1

April 2015

THE ROGO REPORTRecession Proof Your Business Recession Proofing Your

Business: Tips for Weathering the Storm.

What can TOC do for you? A Case Study.

Is the Media to blame for recession? The Herd Mentality & Self-Fulfilling Prophesy.

Alex Rogo Consulting Announces Upcoming Events Schedule.

Welcome to The Rogo Report!

The Rogo Report is published quarterly by Alex Rogo Consulting, an applied research and management consulting firm.

Its purpose is to let clients, industry partners and other interested parties know our latest thinking, research, and findings relative to the world of business and continuous improvement.

If there is a particular topic that you would like to see discussed, please do not hesitate to let us know. We are always looking for fresh ideas and application areas, so your input is very much appreciated.

(Continued on page 2)

1

2

3

5

http://www.alexrogoconsulting.com



Downturns (or recessionary periods) are a natural part of the economy. That doesn't meant that there is nothing we can do to insulate ourselves from the impact.

“Those of you operating in the supply chain will not feel the full impact of this downturn if you keep an eye on your inventories and stay poised for the rebound,” said Alan Beaulieu, a senior analyst and principal with the Institute for Trend Research.

One of the problems manufacturing companies face is that they rely heavily on a demand forecast to drive their manufacturing plans. In the best of times the one thing that can be counted on relative to a forecast is that it will be wrong. In more uncertain times, demand forecast can be drastically misleading.

This typically leads to a manufacturing plan which produces far too much of what is not needed and far too little of what is needed.

As a consequence, a company has lost sales

because they do not have the right product to sell, and in addition to that they have money (the life blood of a company, particularly in uncertain times) tied up in inventory they can’t sell.

How can they avoid this and run a “tighter ship”? Simple - stop producing to a forecast.

In many companies, the actual manufacturing lead time quoted to a customer is significantly longer than the actual touch time required to produce the product.

What this means is that if a company can implement the steps to decouple their manufacturing plan from their sales forecast, they can transition from make to forecast or make to stock environment to a make to order company.

This graph is from an actual custom metal fabrication client in the mid-west US.

When Alex Rogo Consulting (ARC) began working with them, they were experiencing stagnant sales levels, eroding margins, and on-time delivery performance hovering around 50% - even while utilising significant overtime. Their most recent

fiscal year performance was a six figure loss.

ARC performed a quicke yet thorough assessment of the company, their market and supply chain, sales, marketing and operational scenarios, including those

triage actions that had to be taken immediately to stem the bleeding.

What can The Theory of Constraints Do For You?


(Recession Proof … Continued from page 1)




The thing I recall most vividly from the economics courses I took in college and graduate school is, of all things, a joke. A joke told by one of my professors. On the first day of class he indicated that if we recalled nothing else from his course, that we should remember the following:

If you were to lay every economist in the world head-to-toe in a straight line, they would all point in different directions.

I found it humorous at the time. The more I have thought of it over the years, however, the more I realised he wasn't merely making a joke.

Economists make predictions (forecasts) based on any number of trailing leading and other indicators - even the length of women’s skirts. The one thing that is reliable with any forecast is that it will be wrong.

That is not to say that there is no reason to be concerned about the economy. However, these “predictions” can have a way of becoming self-fulfilling if we are not careful.

What is meant by self-fulfilling? Let’s say that I am watching the news one morning and I hear that the economists are predicting a recession. This scares me so I decide that I had better start saving money (spending less) in case a recession does happen. So what happens?

Suddenly there is a significant fall off in the amount of money being spent on consumer goods. After all, why would I buy a new car or furniture or electronic equipment if I may need that money to buy food if a recession were to occur.

Of course, now that millions of people have significantly cut back on their spending, orders for all kinds of goods go down. As demand falls, companies decide they have excess capacity and

Is the Media to Blame for Economic Downturn?

Herd Mentality and the Self-Fulfilling Prophesy





(what with the media fervour over the impending recession) decide to downsize work forces. Additionally, as demand for their products fall, so does the need for their raw materials. So their level of buying from their suppliers drops sharply as well.

There is no impact on an economic system that compares with the multiplying effect of changes in demand in an industrial economy. No other type of economy (agrarian or service) has the same level of economic impact. For instance, if a new restaurant opens, they generate jobs, will buy office supplies, food, dishes, etc. They will certainly have an impact on the economy. That’s great.

But if a manufacturing company opens (or simply doesn’t close) not only will they add jobs, buy office supplies, etc., but they will buy raw material from other companies, manufacturing supplies, transportation services, etc. That generates demand and jobs throughout (an often very long) supply chain. The number of links in a supply chain (economy) that benefit from the creation of manufacturing jobs is significantly higher than in any other type of economy.

Therefore the negative impact of deterioration in that type of economy is significantly worse.

If one thinks back to the Great Depression, what was really lost? People had already bought the stock they owned - the cash was already out of their pockets. What was lost was liquidity – the ability to quickly convert paper back into cash.

The biggest issue contributing to the Great Depression was panic. Those with the liquidity to ride out the crisis and who kept their heads bought during the depression rather than sold through panic. Mostly, those people came out immensely wealthy when the economy rebounded during World War II.

The country (and the world) is certainly facing economic issues – but if people keep their heads and do not give into to a panicked, herd mentality, the depth (not to mention the length) of any economic downturn could be significantly mitigated.

The next step was to create, with the executive management, a strategic plan encompassing all functional areas of the company – from which a comprehensive implementation plan was developed detailing all of the actions required to make the strategic vision become reality.

The strategy focused around two key tactical objectives:

1. Implementing the TOC production solution drum-buffer-rope to get on-time delivery to 100% every day and eliminate over time.

2. Developing a mafia offer (an offer a customer can’t refuse) to exploit the new found capacity and production capability and translate into additional sales.

Once the drum-buffer-rope production system was in place and generating 100% on time delivery daily, the company went to market with the reliable rapid response offer. Your order will be shipped on time every time – backed up with substantial penalties for each day the order is late.

Additionally, for those who need it, rapid and express orders – orders with significantly shortened lead-times - also backed up with penalties for lateness. The rapid and express orders cost more, but is a very valuable option for a customer to have when needed.

(Herd Mentality … Continued from page 3) (What can TOC do… Continued from page 2)




This typically leads to a manufacturing plan which produces far too much of what is not needed and far too little of what is needed.

As a consequence, a company has lost sales because they do not have the right product to sell, and in addition to that they have money (the life blood of a company, particularly in uncertain times) tied up in inventory they can’t sell.

How can they avoid this and run a “tighter ship”? Simple – stop producing to a forecast.

In many companies, the actual manufacturing lead time quoted to a customer is significantly longer than the actual touch time required to produce the product.

What this means is if a company can implement the steps to decouple their manufacturing plan from their sales forecast, they can transition from a make to forecast or make to stock environment to a make to order company.

This means that a company can focus on buying only the raw material they need to produce firm orders in the short-term, only commit resources (labor, outsourcing, indirect, etc.) to producing product that will ship, invoice and convert to cash in the short-term, and, essentially, significantly lessen their vulnerability to market demand perturbations.

How can a company do this? Stop producing to a forecast!

By implementing the Theory of Constraints solution for operations, Drum-Buffer-Rope, you can immediately:

1. Decouple your manufacturing system from your sales forecast.

2. Transition to a make to order system while maintaining 100% on time delivery.

3. Free up cash otherwise consumed by unneeded inventory.

4. Develop an un-refusable offer based on reliability and rapid response capability to significantly increase sales, throughput, profit and cash flow.

5. Simplify your pricing and managerial account systems to something usable in real-time.

In an economic time where “cash is king” – decoupling your manufacturing system from a dart-board sales forecast will significantly improve manufacturing and sales and profit – as well as minimise risk and exposure.

(Recession Proof … Continued from page 2) Upcoming Events Calendar:

Project Management: From Art to Science WEBINAR.

Project Management: From Art to Science. 2 day Workshop

Executive Decision Making: DBR Production & Throughput Accounting.

01 May ’15 Online

19-20 May ’15 Los Angeles

26-27 May ’15 Chicago

How Cost Accounting is Driving the Fall of US Manufacturing WEBINAR.

08 May ’15 Online

For more information or to register, visit http://www.alexrogoconsulting.com/

http://www.alexrogoconsulting.com/open-events.html


http://www.alexrogoconsulting.com/open-events.html