DEMAND MANGEMENT IN A HIGH-MIX, LOW-VOLUME MANUFACTURING ENVIRONMENT

R. Michael Mahoney, CFPIM

President, Manufacturing Decision Analysis, LLC

The world of manufacturing is experiencing an inescapable evolution toward high-mix, low-volume manufacturing. Customers are demanding more choices and those that fail to respond to this competitive reality will cease to exist.

Demand management is the process of managing all independent demands for a company's product line and effectively communicating these demands to the master planner and top management production planning function. It is imperative to understand the ingredients and dynamics of incoming order demand to facilitate the efficient and effective setting of customer order acknowledge dates(i.e., delivery dates) at the master planning level. Fundamental to excellence in demand management is customer order service. Customer order service is directly related to the type of manufacturing environment employed. For a high-mix, low-volume manufacturing environment, build-to-order(or assemble-to-order) is the most cost-effective positioning choice and should be adopted.

The management systems for planning and controlling systems are different for each positioning decision.

Product- or process-focusing manufacturing operations will not produce equally significant results in a high-mix, low-volume manufacturing environment. For high-mix, low-volume manufacturing environments, it is critical to process-focus operations. Process-focused systems apply to a broad spectrum of product mix where changeover flexibility is required. Flexibility in operations is a cost-effective imperative for efficiently and effectively responding to intermittent demand. It is important to understand that the capacity needs for a high-mix, low-volume manufacturer do not justify focused facilities that are dedicated to either a single product or product family.

Daily planning visibility is of importance in order to achieve high customer satisfaction levels. High customer satisfaction levels are dependent upon the ability of the customer order service function of demand management to review and modify product availability on a daily basis. Excellence in customer order service is only attained after the customer's order requirements are clearly understood and current manufacturing capacity, inventory, and schedule positions are accurately known.

This paper will focus on exogenous(independent) customer demand and the cause of the effect for demand variability often exhibited by products in high-mix, low-volume manufacturing environments.

DEMAND VARIABILITY

It is essential to understand the underlying extrinsic cause of demand variability. Extrinsic demand variability is associated with marketing, sales, research and development, and manufacturing. A company has total control over extrinsic demand variability.

Figure 1.

Consider the demand pattern often experienced by a high-mix, low-volume manufacturer as shown in Fig. 1. Although the demand profile is relatively smooth when measured on a quarterly basis, the demand profile on a monthly basis will often exhibit a sharp peaking in demand toward the end of each monthly period. This is known as a hockey stick demand pattern. Short term demand patterns directly effect the ability of a manufacturer to provide exceptional low-cost quality products in a responsive and timely manner.

Hockey stick demand patterns are most often caused by the sales force. The time horizon over which the sales force quota performance is measured will often exhibit a peaking in orders reported to the factory toward the end of the quota reporting period. In the case of Fig. 1, sales quota performance is measured on a monthly basis. In order to alleviate the extrinsic hockey stick effect caused by quota performance measures, a company should stagger the measure of quota performance by dividing its sales force geographically such that each region has a different quota reporting time horizon. By dividing the sales force into four separate geographic areas and having quota performance measured at four different weeks over a one-month time horizon, the hockey stick demand pattern will become more linear(level). Clearly, the measuring of quota performance for a worldwide sales force at the same time on a monthly basis will damage the competitiveness of any manufacturer. Responsiveness and delivery responsiveness will decrease, and costs will increase relative to a more adept competitor that understands and mitigates the extrinsic dimension of demand variability caused by the timing of sales force quota performance.

Marketing and sales will also induce extrinsic demand variability through sales promotions and discounting structures. Although the focus of marketing and sales efforts are on increasing profit, marketshare, and customer satisfaction levels, discounting structures and sales promotions seldom, if ever, result in incremental profits and should rarely be employed. The method most often employed to measure the effect a price change will have on customer order demand involves the use of elasticity measures.

(Eq. 1) Elasticity = (% change in quantity demanded) / (% change in price)

Consider Eq. 1. If the result is greater than one, the demand is elastic and if the result is less than one, the demand is inelastic. If the result is one, the demand has unit elasticity. If the impact of a price change is known, it is essential that this information is communicated to the top management production planning and master planning functions in a timely manner. This is critical to achieving excellence in customer order service objectives(e.g., cost, quality, responsiveness, delivery). Information of this nature is most appropriately communicated by the customer order service function of demand management. An adverse communication delay may place demand on manufacturing resources in excess of what can be coped with. The ability of a manufacturer to respond to a significant sales change through structural or infrastructural change(s) will take time. From a strategic capacity management perspective, a combination of the lead and tracking capacity strategies should be employed to effectively respond to demand increases or decreases. A lag capacity management strategy is a do-nothing strategy that must be avoided.

Intrinsic demand variability represents the true underlying demand and can be stratified by product, geography, and competitive environment. A company has minimal ability to control intrinsic demand variability. The product life cycle is fundamental to understanding the intrinsic component of demand variability.

Figure 2.

Consider Fig. 2. At the introduction phase of a new product, high marketing costs will often result in net losses. High failure rates may also place increased demands on manufacturing test and repair resources. A period of time will be required for the product to gain acceptance in the marketplace. The growth period is characterized by increasing sales and profits begin to rise. If the time-to-market for a newly introduced product is not significantly faster than the competition, profits may diminish or flatten as a result of competitors entering the marketplace during this period of time. A failure on the part of research and development to realize the strategic importance of fast time-to-market performance for a new product will damage the competitiveness of any manufacturer due to the resultant loss of marketshare.

At the beginning of the maturity phase, competition is intense and marginal competitors will usually drop out of the market. During the maturity phase, intense competition coupled with increased price reductions and advertising costs will squeeze profits. The central focus of marketing and sales during the maturity phase is to maintain or increase marketshare. Cost reduction efforts focused on the reduction of material cost can be employed to increase profits. At the beginning of the decline phase, consideration is given to whether or not the product will be obsoleted or enhanced(i.e., add new features) in the near future. Enhancement of an existing product will extend the maturity phase at a much lower cost than a new product design requires. Based on revenue and profit results, the phasing out of a particular product may be the only decision and must be made in order to preserve a manufacturers competitive position in the marketplace. The pruning of losing products is a strategy employed by corporate turn-around artists to get losing companies back on track.

An understanding of the ingredients and dynamics of the product life cycles for the portfolio of products offered by a manufacturer will facilitate competitive advantage in all value propositions(i.e., cost, quality, responsiveness, delivery) relative to a less adept competitor. Business management must establish a strategy for research and development time-to-market, product redesign, obsolescence, and production and marketing investment in order to win in today's competitive global marketplace.

It is important to understand that manufacturing production cost determines product pricing which is a significant determinant of a manufacturers acceptance in the marketplace. While competitive cost and quality are marketplace qualifiers for a high-mix, low-volume manufacturer, responsiveness and delivery performance are order winners(i.e., differentiators).

Understanding the relationship between supplier response time(SRT) and demand lead time(DLT) is important to effectively respond to the intrinsic and extrinsic components of demand variability. In the course of setting customer delivery dates, the SRT will include the time to package and transport the customer order. The time interval between the customer order date and the customer due date is referred to as the DLT. A manufacturer has minimal ability to control the DLT. From an overall manufacturing system performance perspective, an increase in the DLT is equivalent to a corresponding decrease in the SRT. A DLT increase will increase certainty about the future while an increased SRT will have the opposite effect. The SRT is controlled by manufacturing, purchasing, and distribution while the DLT is controlled by marketing and sales. It is critical that SRT information is made centrally available at the point where decisions are made(i.e., sales offices) by the customer order function of demand management. Delivery dates must not exceed the capabilities of the manufacturer.

CONCLUSION

The ability to predict and respond to the dynamics of intrinsic and extrinsic demand variability will require cross-functional relationships among marketing, sales, manufacturing, and research and development. Such a linkage must be more than simply an interface and is critical to effectively control and respond to demand volatility.

Strategic cross-functional alignment, or the lack of it, is a major time sink in organizations, and paradoxically receives little attention. Customers either buy the skills, competencies, and values a manufacturer is able to offer(strategic buy), or they buy based on competitive cost considerations(efficiency buy). Strategic buyers are most often associated with high-mix, low-volume manufacturers. It is therefore essential to develop a well-educated work force that can provide customers with time and experienced-based services that can erect effective barriers against the competition. A thorough understanding of the ingredients and dynamics of the intrinsic and extrinsic components of demand variability is a competitive imperative.