CI DILEMMA MARCH 2020
CI Dilemma
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Balancing the books
An electronics manufacturer is struggling to clear a backlog of orders while also
keeping new customers happy – leading to clashes with the fi nance department
I currently have a very healthy-looking
order book; however, it unfortunately
also contains a substantial backlog of
customer orders. We are all working hard,
but struggling to meet demand and keep
customers happy.
We are a make-to-stock electronics
company producing printed circuit boards.
As production manager, I must decide what
to produce and in what quantities. Often, I
feel I should only make enough to deliver
what’s been ordered because it’s vital to get
customer orders out the door – especially
when we have a backlog of orders! However,
when I do that, I know I will be producing
less than the company’s Economic Batch
Quantities (EBQs) and I fi nd myself
constantly upsetting our fi nance department
by failing on company measures.
We off er many common PCBs and our
fi nance department presses me to produce
more than the quantity that has been
ordered as we know we will sell the balance
soon. On PCB assembly, customer orders are
normally between quantities of 100 to 150,
but our EBQ target is to produce batches of
500s. When we run EBQs, we gain capacity
as there are fewer set ups and reduced setup
times, but ultimately this results in delays
to customer orders. Increased setups will
mean a drop in overall output but at least
we’ll be making the right things sooner!
When my team produces batches of fewer
CI Solution Andy Watt, MD & Theory of Constraints expert, Goldratt UK
There’s good and bad news here. The
good news is that there is a solution; the
bad news is that some people might not
like it – initially at least. To answer your
dilemma, I’m going to have to challenge
some paradigms. First, I’m going to ask
you to consider how these ‘costs’ are
aff ecting the performance of the business.
Let’s start with what you know. You
know that a delay in orders delivered is
a decrease in the number of satisfi ed
customers and therefore invoiced sales.
This will only impact negatively on your
business’ P&L.
When it comes to costs per part (CPP),
we would agree that in a month a higher
CPP would mean that you produced less
than excepted, and a lower CPP month
would mean you have produced more
than expected. What we may currently
disagree on is the impact this has on
business costs: there is no impact!
The costs of running a business monthon
month (wages, heating, lighting,
insurance, etc) are pretty stable and
don’t really change. All that you’re
changing is the amount being
produced in the period.
Regardless of whether you
produce in batches of 100 or
500 PCBs, the business costs
remain the same. With costs
relatively static, then the
division of output by the cost is
not a helpful measure – the focus
should remain on output but only in
reference to sales.
If you’re having to produce more
PCBs than customers have actually
ordered then yes, you’ll have a lower CPP,
but simultaneously your lead times will
extend and currently this is contributing
than 500, our fi nance director calls me
into a meeting to discuss the importance
of costs per part and gross margins. While
this is frustrating, I understand the benefi ts
of EBQs: increased output and a saving on
setups which lowers the costs per part, and
therefore the overall costs.
Our fi nance director is concerned that
our costs per part are currently higher
than expected. His solution is to tell me
stick to the rules and ‘only make EBQs!’,
but I’m not sure this is the best idea.
Adopting this policy will mean that often
we won’t be making the parts we need to
deliver customer orders, our lead times
will increase – and we’ll have even more
unhappy customers! The sales department
is on my back because we’re not delivering
on our promises and hitting due dates. On
the other hand, I understand that EBQs
are the best way to control business costs;
I just can’t see a solution which will satisfy
all departments. I feel the priority should
be keeping customers happy – do I need to
accept an unhappy fi nance director?
to you to failing to meet the promised
due dates. You will be upsetting your
sales department and, more importantly,
your customers! If this continues, you’ll
lose sales and ultimately risk losing
customers. If the choice is
between a better CPP but lower
invoiced sales and a worse CPP
but with more invoiced sales,
which should take precedent?
With a large outstanding order
book, your priority should be to
complete the orders and keep your
customers happy – a focus on CPP can
come second.
There’s clearly a misalignment in
priorities among your management team.
I’d suggest bringing everyone together to
decide the best course of action – if you
follow this logic, you should all agree to
only make what’s been ordered!
HAVE YOUR SAY: Do you agree with our expert? How would you clear the backlog of orders while keeping the fi nance director on-side?
Send us your views and you could appear here next month. Email: chris.beck@markallengroup.com
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