Organizational Opportunities from the Frontline Story 1: Understanding the Needs of the Customer | Operational Excellence Quick Hits

Speaker 1: (00:06)
In today’s session, we’re starting a new series. The new series is going to be on organizational opportunities. That’s actually my personal experiences with working with companies and what lessons I’ve learned through those experiences. Today’s session we’re going to talk about a situation about understanding the needs of the customer. So the background was a manufacturing company that I worked with, that we were able to significantly reduce their lead time from 18 weeks down to eight weeks. Then we were able to offer shorter lead times of four weeks for customers that needed shorter lead time.

Speaker 1: (00:42)
The question became what should be the price for those shorter lead time opportunities? So the specific case was one where the customer called said, “Oh, we really need this product. How fast can you get it to us?” They said, “well, our standard lead time’s eight weeks. We can do it in four weeks, but we can give you a price for that.” They’re like, “Well, we need it quicker than that. So what can you do? Can you do that faster than the four week lead time?” So we said, “Okay, we’ll look at it and we’ll see what we can do.”

Speaker 1: (01:13)
So what we did is we looked at the information. We decided that we could move some things around without disrupting other customer orders and that we could offer them a two week lead time. So the question became what should be the price for that two week lead time? So in this case, it was a $8,500 order and we’re sitting in the conference room, we’re having a discussion. Okay. So what should we charge for a two week lead time? The sales guy says, “Well, we probably should charge an expedite fee.” I said, “Yes, I agree. So what should that fee be?” He says, “Well, how about $150?” I’m like “$150?” I go, “This is a service that nobody else can provide. I think we should charge more.” He goes, “Well, what were you thinking?” I said, “I think we should charge double the price.” He’s like, “What are you crazy? There’s no way they’ll pay double the price.”

Speaker 1: (02:06)
So I said, “Well, let’s do this. So how about we send the quote back? We say, ‘Okay, our standard lead time price is $8,500. If you want it in two weeks, we can offer that but it’s 17,000 and let’s see what happens.” So we send the quote. Within an hour we get a PO back that says we’ll take it for 17,000. So I said to the sales guy, “You don’t understand your customer needs.”

Speaker 1: (02:34)
So in this case, their significant need was lead time and in that case, because it was such a significant need, price was really off the table. He’s like, “Well, we’re going to take advantage of the customer.” No, not if we’re providing huge value to them. It’s not taking advantage of them. So what we did is we actually took the process and we developed a necessary condition internally to build the capability to offer short lead times for certain customers without disrupting other customer commitments. What we do is we have this planning tool where we can look at how much load we have for regular orders and what we have for reserve load orders.

Speaker 1: (03:17)
So you can see the dark blue here is regular orders for standard eight week lead time. The blue is reserved orders for shorter lead time, up to four weeks, if possible. Then this light yellow is regular capacity, the eight week lead time capacity and this gold color is reserve capacity. So you see out here in week 41 and 42, we have some available capacity for shorter lead time jobs. As jobs come in, if they’re shorter lead time, we fill these gaps here. If not, we push it out and they’re actually out promising after the first of the year. So their lead time has gone significantly higher since a year ago and demand has increased significantly, I think because they’ve been given great service. We’re trying to get back to that now. So this is a tool we’re using to do that. So the technique is reserving capacity for short lead time for those customers that have significant needs.

Speaker 1: (04:21)
When we look at an organization, we have three functions within the organization, finance sales, and marketing and operations. Of course, organizational excellence starts with the needs of the customer. So understanding those needs base our inputs into the organization and the output is providing more value than what your competitors can deliver. So the competitors can’t deliver in short lead time. You can take those opportunities from your competitors and leadership roles to make sure that these functions are working in concert with one another, that there’s no conflicts between these functions.

Speaker 1: (04:58)
Id we look at value, Dr. Goldratt defined value as removing a significant limitation for the customer. So in this case, the limitation was lead time. If we can remove that limitation and provide it in short lead time, they’re willing to pay for that because it provides value. So if we look at value and we look at price, value is only meaningful when it’s expressed in terms of a specific product or service which meets the customer needs at a specific time.

Speaker 1: (05:26)
Not every time they’re going to have a urgent need. Sometimes they’re just going to have their normal demand, but when they have those urgent needs, we need to be able to provide that value for them. So the degree at which we meet those needs provides the value that we’re giving to that customer.

Speaker 1: (05:43)
So we got to change our mindset. So price is determined by how much the customer’s willing to pay based on the level of value of that product or service and price has nothing to do with the cost. So you got to get that out of your mind that it’s price and cost, there’s a relationship between them. There’s really no relationship. Price has everything to do with value. The cost is what it costs you to produce that product and you know what? Your customers don’t care about your cost. So that’s today’s session and I hope you enjoy this series and we’re going to have a lot of stories from the front lines.