Flexibility requires a breakthrough

Recently I was faced with an ancient conflict at one of our customers. Both convinced of the importance of flexibility, Sales showed strong support for make-to-stock (MTS), whereas Operations fought for retaining make-to-order (MTO). The question of course was: “who is right?”.

The advantage of MTS for Sales was obvious. Sufficient inventory of finished products of course makes  selling easier. What will it be sir? You name it! Should I pack it or will  you take it as it is? Sales obviously is much less concerned about potential residual stocks, as this topic is in the capable hands of Operations.

Precisely these inventories were a thorn in the side of Operations; they happened to have inventory levels and related risks in their targets. The combination of volatile and unpredictable markets and limited shelf lives made this risk very significant. Operations therefore considered MTO as a prerequisite for flexibility and accepted the additional change overs. Sales had to accept the longer and less reliable lead times that arose as a result.

So there they were, trapped in an ancient conflict. Either too much inventory or too long and unreliable delivery times. Lose – lose. A compromise seemed impossible

Subtle confusion

Some further probing demonstrated that there was a subtle confusion about the underlying objectives. Flexibility in the eyes of Sales meant the ability to deliver customer orders on time and in full. Operations however was looking to reduce the risk of overstocks and under-deliveries. The first objective requires the ability to quickly react to concrete customer orders, the second requires responsiveness to market demand.

Nothing easier than responding to specific customer orders with inventories, but nothing more difficult than responding to market demand with inventories. Especially if these inventories have to be relatively high due to long and unreliable lead times and high demand uncertainty.

Result of this observation was that Sales and Operations at least understood each other better now. But a solution was not yet in sight.

Breakthrough

The breakthrough was reached when Sales and Operations realised that lead times were the real killjoy.
After all, if they could structurally reduce lead times, they would be able to both timely produce to order more and simultaneously deliver more from stock and without risk.

A quick analysis of the elements of the current lead times boosted confidence that substantial reductions should be possible. Not by working harder, but by working differently. Very different.

Alex Tjalsma, partner/consultant Involvation