Tag: order fulfillment
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Follow the Money!
Buying patterns and the economy are constantly changing. Some products and categories that were popular are not anymore. You cannot control your customers’ tastes or the economy. But if you follow how the money is being spent, you can make a lot more! Unlike clicks and page views, buying patterns are very reliable as they are based on actual sales. Money changed hands. An economic transaction occurred!
Track sales transactions to understand your customer’s buying patterns, establish a more relevant product mix, satisfy more people and sell more.
Your customers speak to you when they buy. If you can listen to what your customer wants you can manage the buying process and you can influence and even control it. “Why would I want to do that?” you may ask. By better understanding your customer buying patterns you can establish a more relevant product mix that will satisfy more people. You can also guide them to more profitable choices at point of sale based on product availability or close substitution. You will satisfy more people and sell more. You will also make it easy for them to buy your products and services.
The Analytics of Buying Patterns
First, take the guessing out of the equation. You need to know what your customers are purchasing and what they want to buy from you in the future. This intelligence is available in your sales transaction data. Customers buy your products and services in distinct patterns.
Products and services have become more complex and companies offer a dizzying array of choices. However, with analytics the sales data will reveal popular combinations of choices. These popular combinations are guides on how you can make your products and services easier to buy. How you can make is easier for customers to do business with you.
There is also the issue of product profitability. Some of the choice combinations are more profitable than other. Again the analytics will reveal which combinations are moneymakers, and which ones not! Once again – if you have access to this intelligence, you can stock the right product mix and guide customer to better choices. If you stock inventory in your store you can leverage this intelligence to plan an optimal inventory mix. That means making the most money from the least amount of inventory investment while satisfying your customers’ needs.
Whether you are running an online store or a brick ‘n mortar store – this is a key principle to selling more and maximizing your capital utilization.
The Myth of Build-to-Order
Are You Looking At Top Selling Choice Combinations Before Stocking Inventory?
In working with manufacturers of configurable products, we have never met one that did not claim that they only build to order. “We don’t build until we have an order in hand” they all say. At first we believed them. A whole generation of companies has been transfixed by Michael Dell. No finished goods inventory; don’t assemble the parts until you know exactly what the customer wants; get the cash before you build the product.
Dell can assemble a computer in three minutes. A truck or a backhoe takes a little longer. But the same ideas should apply! Right?
Dell builds computers for final customers who come to its web site or its 1-800 phone line. Most manufacturers of expensive, complex products are once removed from their final customers. Their immediate customers are dealers. Final customers go to distributors and dealers to buy backhoes, tractors, work trucks, lighting fixtures, industrial fans, and so forth. The “customer orders” that the manufacturers so proudly wave are not final customer orders, they are actually channel/dealer orders. (Okay, this is an exaggeration, some are actual customer orders passed through by the dealers.) And how do the dealers place orders? They guess. They choose combinations of 30 or more options based on their experience. One manufacturer we worked with kept referring to these as “Christian orders”. After a while we asked them what they meant by “Christian orders”. With a big smile they said “Oh, we just take them on faith.”
So the dealers order certain product choice combinations to stock based on their intuition, and those units sit on their lots until they sell. Sure looks like finished goods inventory. There is some ambiguity about who actually owns the inventory. The manufacturer will say that the inventory belongs to the channel or dealer, so it’s not my problem any more. The dealer will say that the manufacturer finances his inventory; some cases has to take back the units and give his money back if a unit sits too long. In any case, the manufacturer knows that the dealer is not going to order any more units while his lot is full of “stale inventory” or “lot rocks”. (See Chrysler’s desperate attempt to force its dealers to accept more cars in 2008.)
So Dell computers are built to order. (And now also built-to-stock for their new retail model for stores such as Best Buy and Wal-Mart.) Jumbo jets are also built to order. But most configurable products are still a combination of build-to-order and build-to-stock, with manufacturers and dealers playing hot potato with the inventory. This means that somebody should be looking at the history of what combinations sold in the past, and trying to make sure that the stuff that they build is the stuff that sells! Looking at the sales patterns and trends is a very fast, efficient and intelligent way to determine what to carry. This is a more reliable than believing in Christian Orders or relying on dealers’ intuition. The manufacturers should be giving the dealers guidance on what to stock and order based on their global visibility into sales and customer buying trends. Customers buy combinations of features, and they do this in predictable ways. Detecting and using the patterns can make inventory turn faster, even if, technically it doesn’t exist.
Does Your Inventory Look Like Jurrasic Park?
Does Your Inventory Look Like Jurrasic Park?
I was working with a industrial manufacturer who made construction equipment, such as diggers and backhoes. They had a beautiful park-like setting around their factory. Artfully placed on manicured lawns around the ponds and fountains were quite a few backhoes . It reminded me of Jurassic Park. We discovered later that these backhoes were a lot like the dinosaurs – they had failed to adapt.
The backhoes in the park, though attractively displayed, were really just inventory. Those particular backhoes were there because they hadn’t sold. We soon understood why. The backhoe had about 40 features that the customer could choose. One of these features was a cup holder for the driver’s cab. There were two options: a stationary cup holder and a rotating cup holder that could be stowed under the dashboard. If a customer order matched a unit on the lot EXACTLY, except for the cup holder, then their inventory control system treated the two configurations as different. A whole new backhoe was scheduled and built, while the one with the wrong cup holder continued to sit on the lot, exposed to wind and rain and interest charges. Now, probably they should not have had two different cup holders in the first place. But if they did, the cost of giving away a rotating cup holder instead of a stationary one (about $20) was much smaller than all of the costs involved in building a whole new backhoe. And if the customer wanted a rotating one, he could probably have been persuaded to accept a stationary one today instead of waiting 3 weeks to get exactly what he wanted.
Two different configurations of a complex product might be “almost the same”, or “very similar”, or “quite different”, or “far apart”. Can we quantify these common sense terms? Surely two configurations that differ only on a cup holder, out of 40 features, are “almost the same”. If we can measure closeness, then we can see when a configuration in stock is “close enough” to what a customer wants.
For two configurations to be close to each other, there shouldn’t be too many features with different choices. Furthermore, some features are more important than others. In a backhoe, the engine, hydraulics, and buckets are very important. The cab is quite important. The cup holder is not so important. So two configurations are close to each other if they differ on a small number of features that are not very important.
The criteria for what is important can be based on knowledge about the product and what it is used for, and also on the cost in relation to other features. So “close enough” depends on how many features are different and how important those features are,. There might also be a probability of acceptance that depends on how many features are different. This can all be formalized, and we can compute a number that represents the closeness. If we can measure closeness, then we can automate the matching of orders and inventory in a much more nuanced way than “the same” or “not the same”. For complex products that are built to stock as well as built to order, this can substantially reduce inventory holding costs by keeping the inventory moving. This is the key to inventory optimization.
Each of those backhoes in the park had a story to tell. Stories like: “I could have been sold in October of 2007, but I didn’t have the rotating cup holder. Or in January of 2008, but I had flip-guard feet instead of street-guard feet.
Someday my perfect order will come, I know it will.”
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What does the stairway to complexity tell us?
If a product is too complex, where is the complexity coming from? Which features are causing the explosion in the number of build combinations? The stairway to complexity tells us where to look.
The stairway to complexity shows how the number of unique configurations drops as features are removed. Here is another stairway for a backhoe with 30 features.
The number of build combinations drops from 934 down to 1 as we remove the features. Behind the graph is the actual list of features in the order they were removed. In the table below, the features are ranked from 1 to 30, corresponding to the steps in the graph.
If we want to simplify our product, this ranking of the features tells us where to start. The greatest contributor to complexity is the Buckets, of which there are 34 different kinds. The number of build combinations would drop from 934 to 838 if we didn’t have to worry about Buckets.
Is the ordering of the features in the stairway the same as the ordering by number of options? The first feature in the stairway is certainly the one with the most options (34). But Tran_Control has the second largest number of options (9), and doesn’t appear in the stairway until step 15. So there is more going on than just the number of options.
The amount of complexity introduced by a feature depends not just on the number of options, but on the relative popularity of the different options. Having two options that are split 50% to 50% is much worse than if they are split 90% to 10%. (See earlier post: Entropy of a coin toss.)
Introducing a new feature only increases product complexity if it splits existing configurations that would otherwise be the same. One manufacturer insisted that his product was so complex because it was produced for many different countries. But the number of unique build combinations was exactly the same whether the Country feature was included or not.
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Arm your salespeople to make the sale
I was talking to an executive at Oracle, and he told me that CRM is entering a new phase. Salespeople are the revenue generators of a company. Current CRM tools have served the purpose of helping salespeople organize their customers’ contacts and manage the sales process and pipeline, but this isn’t enough.
Your salespeople are representing and selling your product. Customers who want to buy your product typically list a few things they want and look to the salesperson to guide them. The salesperson is their advisor on your product offering. The salesperson is expected to know the product and suggest good choices for the customer. Is your salesperson equipped to do that?
There was a time when life was simpler and products were simpler. The customer said, “I want a 17″ TV.” The salesperson could look at what he had stocked and reply, “I have a 19″ I can give you for the same price.” Wow! Done!
Today, even the best salespeople don’t stay at one job for long. They move, selling what sells. Training sales newbies on a product is a big challenge for companies, and the cost of the salesperson not knowing the product he’s selling is VERY HIGH. As many as four out of five quotes are lost because customers weren’t guided to a good product selection. You can fill this gap by arming your salespeople with tools and product knowledge that will help them advise customers effectively on your product. Your company needs salespeople to have that capability so you can make money on the stuff they sell!
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The quality connection
Recently I wrote about quality rankings for automotive manufacturers and the perception of these rankings in the market. While the marketing teams at these companies must shoulder the burden to convince consumers about their products’ quality, there is a very real connection between product quality and configuration management.
In many industries where products have grown over time with constant additions of new features and flexibility to allow customers to build to order, the level of complexity is staggering. Often the number of configurations sold on an annual basis is surprisingly close to the total units sold for that same period. This “snowflake” situation is one of the worst possible scenarios in product complexity as each unit has its own signature. Obviously, the production of these products also requires flexibility in manufacturing. This may result in reduced use of automation, and often it leads to units being reconfigured where components installed during one step are either removed or modified in a later step due to a unique situation.
These one-off manufacturing processes open the door for product quality issues due to fewer controls during production. Put simply, if I can reduce the number of different things that must be done during production I should be able to do those things better.
So product management teams have direct input on product quality via product complexity. Managing the product option mix to reduce the overall number of configurations can promote the increased quality that all manufacturers are looking for.
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Help the sales team help the customer
This morning I was talking to the VP of business process improvement for a company that sells industrial machinery. Their products are highly configurable. She told me that every year they have 50% new configurations they have never seen before. The number of choices on their products has grown over time. ”A salesperson can’t know everything about the product,” she said. “Customers want a few choices, and before you know it, the quote has crept into a configuration that’s bad for the customer and bad for us. “
As the VP explained, the biggest opportunity for complexity management is at the point of taking an order. A customer wants to be guided to complete their order. This concept is called Demand Shaping. There are myriad ways a configurable product can be ordered. However, each customer cares only about a few features that are of high importance to him or her.