"What's wrong with you people? Since when does it take two hours to unload a truck?"
"We don't have all day," another truck driver complains. "How come there's only two of you working?"
"Call for help," roars another.
The forklift operator doesn't bother answering. There's no point arguing with truck drivers. Especially when they have a point. He just lowers the fork a little and moves forward. When the pallet is firmly resting on the big fork he reverses, takes a turn, and drives to the barcode stand. The content is registered and a location is assigned. Within moments the forklift starts the slow journey down one of the long aisles. The truck drivers watch as the big forklift becomes dwarfed in the distance.
It's a big warehouse. Almost six hundred yards long, and most of it already full of Pierco's fine products. The forklift operator doesn't have access to the computer system but he doesn't need the computer to know that for the last two months inventory has been piling up. Now that all the convenient slots are filled he has to drive the long distance all the way to the end. Considering also the time it takes to put the pallet ten yards high, the truck drivers aren't going to see him for some time. It's no wonder they're furious.
When he returns for the next pallet none of the drivers are there. They've probably gone to talk with Fred, the warehouse manager. A lot of good it will do them, he smiles to himself, and carefully aims the fork. No chance that Fred will divert one of the forklifts that loads the vans to help with the unloading. If there's something holy in this warehouse, it's to never allow an outgoing order to wait until the next day. They even stay overtime to guarantee it. Fred's bonus depends on it.
It's ten o'clock at night. The last of the empty trucks drove off a half hour ago. Fred is the only one left in the warehouse. He paces the back of his kingdom looking at the shelves. "Six more yards today," he mutters to himself. That's his way of measuring inventory. Six more yards of his warehouse are full of products.
But that's riot his only problem. That's just the most apparent one. The pressure of the truck drivers escalated to such heights that he had to add another forklift to help unload. That had its price. Today was the first time they missed fulfilling all the outgoing orders; almost ten percent of the orders were not shipped to the clients.
Fred can easily remember days when over twenty percent of the orders were not filled, but that was because he didn't have the inventory. Never before had he missed because he didn't have the capacity to load.
Should he use the loading dock at the back for unloading? It wouldn't help much. Almost half of the incoming inventory goes to replace stuff taken from the front of the warehouse. The average distance the forklifts have to travel will not go down by much.
But maybe it's better than nothing. Tomorrow he will look into putting another barcode station at the back of the warehouse.
Still, the time to unload a truck will remain unreasonably long. The queue of waiting trucks will grow and with it the drivers' impatience and fury. The only way to dramatically lower their waiting time is to unload all the pallets into a nearby area and later move each pallet to its proper place. But that means double handling. Which means a lot more people.
No way, Fred concludes. Two of his prime measurements are already shot to pieces. His inventory turns are at an all-time low and on-time delivery performance is quickly deteriorating. He will not let his cost go way above budget, too. No way.
There's only one way out. The plants must stop shipping so much stuff. All the problems are because they ship him too much. And he can't do a thing about it.
Fred's steps echo as he walks back to his office. He is furious. They have put him in an impossible situation. They're measuring him on things that are not under his control. The plants are going crazy and he's the one who is going to be blamed.
In the past he held about two months of inventory. Maybe a little bit more. Since the beginning of the year his inventory levels have climbed to almost three months. And he still has shortages. There are six products of which he has zero stock. And two dozen more are approaching dangerously low levels. But they keep sending him products he has plenty of. How many items does he have enough of for at least the next six months? He has to check, but there must be over fifty of those.
They don't know what they're doing back there in the plants. And he is helpless. He can't refuse the shipments. He can't tell a truck to take back stuff he doesn't need.
There's only one thing to do. If they want him to be responsible for his inventory turns he must be the one who decides what will be shipped to his warehouse. Not the plants.
It's about time to do something about it. At the rate things are going, in a month the warehouse will be jam-packed. What are they going to do then? Tell him to store the inventory in the parking lot?
Fred decides to do something he has never done before, he is going to send a strong e-mail directly to the divisional VP. On second thought, he decides to also CC all the plant managers. These people had better wake up.
Harrison is in his office staring through the glass wall down to his plant floor. As far as the eye can see there are rows of machines with a few people scattered here and there. The thick glass blocks mask most of the noise and to Harrison the view looks peaceful. Compared to what it was before, it is peaceful down there. No more frantic expediting, no more jumping from one emergency to another. Not since they implemented the Drum-Buffer-Rope system. Such a logical step. Why hadn't they done it a long time ago?
But, life is always complicated. If things are going well here, then someone has to stir up problems somewhere else. That Fred, or whatever his name is, had stirred up a whole hornets' nest. In the last two days since his ridiculous e-mail arrived, a few more warehouse managers had raised their heads. What do they think? That they can run his plant for him? Tell him what to produce? Tell him what to ship?
And all their complaints are based on nothing. When you strip away all the nitpicking that they wrote, it's clear that all their complaints are based on one single claim. The claim that the plants produce and ship things that the warehouses don't need. And that claim is outrageous.
He just spent hours verifying that the opposite is true. In the last three months, production has been triggered by an urgent demand from at least one of the warehouses. There was not a single case where his plant produced a product that was not frantically demanded by a warehouse. Not even one.
Of course when they produce a product, they don't produce it for just one warehouse. They produce the quantity needed for the entire network. Otherwise the plant will have to produce ridiculously small quantities and the setup will swallow too much capacity. True, since they had moved to Drum-Buffer-Rope they no longer had to try to save cost by running large batches. The batches processed are now less than half of what they used to run, many times, fewer than a quarter. But still, when the plant produces these smaller quantities, setup is an issue.
Harrison knows that his people are not dumb; that they are shipping the products to the warehouses that need them. Nevertheless, he spent quite a lot of time on the computer checking the last three months' history. As he fully expected, the products were being shipped to the right places. Obviously, when the amount sent to a warehouse was not enough to fill a truck the quantities were rounded up. If his people had not done that, he could imagine the reaction. Sending half-empty trucks is not acceptable at Pierco, or anywhere else.
An hour later Harrison examines the memo he wrote to Brian, the divisional vice president. He is not happy with it. The memo is not strong enough, and it's too defensive. Something is missing.
He rereads it. And then he rereads the memos of the warehouse managers. He tries to see what is likely to be the reaction of a person who doesn't know all the intricacies. A person like Brian.
As much as he hates to admit it, his memo is not enough to fully answer the warehouses' complaints. No wonder, his mistake is that he aims his attack against something that they never wrote explicitly. In all their memos they were careful not to directly blame the plants for producing the wrong products. They just alluded to it.
What is it that gives that impression? What puts the blame on the plants?
Once he asks himself these questions it's not difficult to find the answer. Their strongest argument is that for many products, the quantities held in the warehouse are much larger than the targeted level. As a rule they replenish inventory to a level of four months But Fred, for example, attached a list of fifty-four products of which, in his warehouse, there is more than six months of inventory.
How can it be? Now that the ERP is providing them with upto-date data about the actual inventories in the warehouses, they don't have to guess anymore. They are shipping the exact amounts. If all the plants are as careful as he is not to send above the four months' mark, how come there are so many products with so much inventory?
He turns to the computer to checks Fred's claims. Twelve of the products that appear in Fred's list are his products. And yes, their inventory levels are much too high. How come?
Harrison starts to dig. He concentrates on the product with the highest inventory level. What was its inventory in Fred's warehouse when this product was last shipped to him? He has never before asked the system such a question, so it takes some time, and a few frustrating dead ends, before he figures out a way to get the answer.
The last time that this product was shipped to Fred was on the seventh of January, about nine weeks ago. At that time the inventory at Fred's warehouse was sufficient for just two weeks of future sales. The quantity shipped from Harrison's plant raised it to exactly four months. Since then no additional product was sent. Still the system now claims that the inventory level is at eight months. Something must be terribly wrong with the system.
Before he calls the IT department and starts to raise hell, Harrison decides to check another possibility. Maybe Fred, in his fear of running out of inventory, asked for a cross shipment from another warehouse? That could explain what happened. These warehouse managers mess things up with their own hands and then blame the plants. How typical. But how can he prove it? The only way is to enter the distribution system.
Harrison isn't familiar with that part of the computer system, so everything takes much more time. Finally he figures out how to ask for all the movement of that product at Fred's warehouse. The list is endless. Most of it is totally irrelevant to what he is looking for. It's the shipment of small quantities from the warehouse to the clients.
He rolls down the list until he reaches the seventh of January. He identifies the line of the shipment from his plant, but what he is looking for are shipments to Fred's warehouse from other warehouses. He cannot find any, not even when he goes back as far as the beginning of December. But on the list there is also a different type of line, one that sheds a new light on the entire picture.
These are the lines that update, once a month, the forecast for the product. Harrison leans back in his chair. He should have predicted it. If there is a mess in operations, rest assured that it was caused by corporate.
On the first of February the forecast for the sales of this product in Fred's region was lowered to about one half. On the first of March it was lowered again. No wonder that the inventory, since it is measured by future months of sales, is now at the level of eight months. Production was right. Shipping was right. The problem is the forecast.
Harrison goes over the other eleven products just to verify that the exact same phenomena exist. Now he's ready to rewrite his memo to Brian. Now it is going to have the effect he wants. It will, no doubt, remove the possibility that the warehouses will get more control over the plants. His memo is going to be so powerful because it also provides a solution. It clearly indicates whom to blame.
Brian stares at the e-mail sent to him by the chief financial officer of Pierco. It is short and demanding.
You are draining the cash of Pierco. In January your division was over budget by forty-five million dollars. In February by an additional fifty-two million dollars. You must reverse this devastating trend.
This memo is not entirely a surprise to Brian, he is well aware of the rate cash is drained by the increase in inventory. The only thing that is slightly surprising is how quickly they came to him. Well, even that's not really a surprise. This new ERP system gives better visibility not just to him but also to corporate.
It's been quite some time since he noticed that inventories are climbing. At first he brushed it aside as an end-of-the-year effect. Now he knows that it's rapidly developing into a major catastrophe. He also knows where it's coming from. It's coming from the fact that the Drum-Buffer-Rope implementations have released so much hidden capacity in the plants. When the plants are producing over forty percent more than before and sales stay about the same, then the unavoidable result is a sharp and continuous increase in inventory. That is clear. What is not clear to Brian is what to do about it.
He doesn't need the memo from headquarters to tell him that he must do something. Do something drastic and do it fast.
At first he thought that he had a simple and elegant solution. Whenever the plants are shipping products to the warehouses the current measurement system rewards the plants with an internal sale. Whether or not the products are actually needed at the warehouses is not a factor the measurement system considers. The plants are rewarded in any case. So Brian thought that he could stop the accumulation of the unneeded inventories by simply modifying the measurement system.
Acknowledging an internal sale only if the shipment was done to a warehouse that needed the products would stop the plants from producing just to score high on their measurement, stop them from producing what is not needed by distribution.
The power of the ERP system, its processing speed, and the fact that all the relevant information is available, made such a modification possible. It was implemented in less than two weeks.
But it didn't have any effect, the inventories continued to rise.
As it turned out the plants were producing only products for which there was demand from distribution. Actually, each product that the plants produced was in response to an urgent demand from a warehouse; a real shortage or something that was about to become short
That was a big surprise to Brian. Not that the plants are doing what should be done, he knew that his plant managers looked at the good of the system as a whole, but he was not prepared for the fact that there were so many shortages.
Shortages did go down. Less than a year ago, before the ERP was implemented in distribution, shortages were encountered in about fifteen percent of incoming orders. With the implementation of ERP, shortages dropped to a little over ten percent. The increase in capacity in the plants did have an additional impact. It reduced shortages to less than four percent and considerably reduced the need for cross shipments between warehouses. What was a mystery to Brian was why there was so much more inventory and nevertheless still significant shortages. Enough to force the plants to constantly react.
He struggled with that puzzle. It took him quite a while to figure out the answer.
Even though the trigger to produce is a shortage in one warehouse, a plant cannot afford to produce just for one warehouse. So the plant produces and ships to other warehouses too. These shipments are done to increase inventory in warehouses from, let's say, a level of six weeks to the targeted level of four months. Which means that most of the inventories are shipped based on a forecast of what is expected to be sold many weeks from now. And that forecast is far from being reliable.
Actually, who's talking about reliability here, the sale's forecast for a product in a single region is outright lousy. No wonder that they end up with too much inventory in many places and not enough in others. Which translates, when one deals with over six hundred products and over two dozen regional warehouses into having shortages.
They must have a better forecast. That's the only way to eliminate the shortages. That's the only way to stop the buildup of excess inventories.
Their new ERP system has a fancy forecasting module, with many more features then they ever had before. Still, the validity of the resulting forecast is not improved. In this aspect their new ERP system has let them down.
Last week he spoke with George. At first George tried to claim that BGSoft's forecasting module is the best there is. Then he tried to duck responsibility, but Brian knew how to light a fire under him. No matter how difficult it is, BGSoft must come up with a much better forecasting module. It's essential.
Brian wonders about the chances that BGSoft experts will come up with an accurate forecast. Is it possible at all to have an accurate forecast? Besides, even if they would pull it off, there is no time left. He must do something now.
He looks again at the memo:
In January your division was over budget by forty-five million dollars. In February by an additional fifty-two million dollars.
As things are progressing he is destined to drain at least another sixty million dollars in March. Then what will be headquarters' reaction? He shivers just thinking about it.
He must do something to stop the cash drain now. Even if what he does is stupid for the long run. He must stop the plants from producing.
Actually, the whole situation is grotesque. The plants have exposed much more capacity. They are able to react much better to the distribution needs. But as a result the situation is rapidly deteriorating. That doesn't make any sense.
There must be something fundamentally wrong with what they're doing. Things are worse than before. But having more capacity without the need to pay for it is good. Nobody can tell him otherwise.
With that conviction in mind, Brian's thoughts drift back to basics. All the shipments of products to the warehouses are based on replenishing to targeted levels. The targeted inventory levels in distribution are fixed to four months. It's been this way for as long as he can remember. Also, for as long as he can remember, the average inventory in their distribution oscillated around half of the target; around the two-months mark. But that is changing now. Actual inventory levels are rapidly growing. At the end of this quarter the average inventory level will be three months or more.
He tries to summarize it. The plants' capabilities improved. As a result the inventories and the warehouses are moving closer to their targeted levels. And that's why he has problems? How can it be?
Then it dawns on him. It is so embarrassingly simple. The target is wrong! The targeted inventory levels are wrong!
Brian smiles bitterly to himself. The targeted inventory levels were established years ago, based on the capabilities of the system. Based on the average time it took to replenish the inventory that was sold from the warehouses. In the last year they significantly improved the speed at which the system can replenish the warehouses. And yet, no one thought about the obvious, the fact that faster replenishment to distribution means that there is no need to target such high inventories in the warehouses.
This "small" oversight has turned an opportunity to lower inventories into a reality in which inventories are rapidly climbing.
Well, now he knows what to do. The plants can now react in about half the time, so the target for the inventory levels should be cut in half.
He doesn't have to do anything more. He doesn't have to instruct the plants to stop producing. The change that he has done in the plant's measurement will guarantee it. The new measurement is no longer a reward for shipments of products that are not needed in a warehouse, therefore reducing the targeted levels will stop the plants from over-producing. That will stop the buildup of inventories in the warehouses. As a matter of fact, cutting the targets to only two months will force inventories to go down to a lower level than ever before. It will reverse the trend. Cash will be released. Corporate will be off his back. He will be a hero.
Pleased with himself, Brian starts to write e-mails to all the relevant people, instructing the targeted levels to be cut in half. This is not a trivial task. He knows that he is changing something that is part of the fabric. He must explain every aspect meticulously. Otherwise he will trigger a lot of confusion, misinterpretations, and even anger.
What will be the reaction of the plant managers? They will claim that reducing the targeted levels will force them into much too small production runs. In a way that's correct, but it can't be a real problem. Brian decides to devote some time to figuring out how he can put this claim to rest.
In the past, when in one warehouse there was a shortage, in the other warehouses the gap between the actual inventory and the targeted inventory was, on average, two months. That meant that the plant had a production run of about two months consumption of the whole market.
But now, when the target inventories are lowered to just two months, when there is a shortage in one warehouse, most other warehouses don't need any additional product. And those few warehouses where the inventory is less than two months, the amount missing is probably just a week or two. Too small a quantity to fill even half a truck.
That means, Brian starts to realize in panic, that the average production run will be just for two months for one warehouse. That is about four percent of the traditional production runs. Knowing that set-up is about ten percent of the total time, it is clear to Brian that such small production runs will cause setups to absorb almost all the capacity. The plant will be left with less than half the capacity they had before. They will not be able to produce at the rate of sales.
So cutting the targeted inventories is not a good answer, not when he considers the impact it will have on products' availability in the next quarter. Deeply disappointed, Brian realizes that he is back to square one. The answer must be to drastically improve the forecast. But right now he doesn't have a choice. He must act.
When he finishes writing the e-mails that cut the targeted levels he picks up the phone and calls George.
George puts down the phone and grabs his head with both hands. What is he going to do now?
Brian is putting the squeeze on him to install a forecasting module that accurately forecasts future sales. After a whole week of frantic memos and phone calls he at last succeeded in getting a hold of Lenny. Just to hear that Lenny is not going to collaborate. Lenny practically laughed in his face. He said that there was no way to forecast accurately, weeks in advance, the market demand of a single product in a single region. It is theoretically impossible.
George doesn't understand Lenny's exact explanations but he does understand that BGSoft is not going to make any attempt to provide a better forecasting module.
What made him choose to work in this lousy job? Whatever he does is not good enough. Over and over again he finds himself under the gun for something he doesn't have any control over.
He worked his butt off on Pierco's implementation. He had to constantly struggle with unreasonable requests from clients, with slow response of the software programmers, with bugs, with mismatches in the ERP system. After years of relentless efforts it looked like he had succeeded in making it all work. He managed to turn this huge, complicated project into the jewel in the crown of KPI, into the best reference site.
But that's all over.
Brian made it clear that unless the forecast accuracy is significantly improved, he will not entertain any more visits from KP1 prospects, that he cannot recommend a system that is directly responsible for an increase of over a hundred million dollars in inventory. He also hinted that he is going to raise the issue with all the other divisional vice presidents of Pierco. And Lenny, the only person who can do something about it, doesn't even want to listen.
George has had it. He decides to pass the buck and drop this in Maggie's lap. Maybe she can knock some sense into Lenny. He doesn't care. He wants to be transferred to another project.
The flight attendant takes away Maggie's food tray. Maggie can now go back to her e-mails. The next one up is from George. George always has good news. Not to mention the fact that he uses witty language when he reports on the visits of the prospects to Pierco. She smiles as she double clicks to open his e-mail.
Her smile doesn't last for long.
Gail was right all along. They should have stuck to selling technology. Here is the software, these are the specs. The software operates according to the specs. Good. I've done my job, everybody is happy. But no, they had to go into selling value. What a mistake!
Brian asked for software for production. BGSoft supplied the software. KPI installed it. Successfully. The software works, results have been achieved. Astonishing results. Can they relax now? Can they feel that they've done a good job and everybody is happy? Not at all.
Here they are, three months later, and it's blown up in their faces. And not because something went bad in production. In production everything is fine and dandy.
Results are deteriorating in distribution by 100 million dollars and they are being blamed. That's the meaning of selling value. There are no boundaries to what you are responsible for.
A hundred million dollars. If that story goes out, Maggie can easily envision what it will do. Now that the competition is so envious of BGSoft and KPI, they will not hesitate to use it, to broadcast it from every rooftop. It's one thing to have a bad reference. It's another thing when your best reference, the one you used the most, the one that you brought dozens of prospects to see, turns into your worst nightmare.
Can she persuade Brian to keep the lid on it? Only if she can promise that they are working hard on a solution. But that means forcing Lenny to give it a shot.
That definitely won't be easy. Not when Lenny is convinced that he cannot provide better software. Damn it, why can't he go through the motions? No one expects a new software module to be developed in less than six months. In six months, Brian is bound to find a solution. Some non-software solution.
Determined to put full pressure on Lenny, she returns to George's e-mail. What exactly does she have to ask of Lenny?
Reading George's message a second time, Maggie growls as she realizes the magnitude of the problem. It is by far bigger then she originally thought.
Keeping the lid on Pierco will not help at all. What's happening in Brian's division is not a fluke, it is not one unfortunate case. It is a warning of what is waiting for them from all sides.
George is quite explicit about the fact that Brian is not pointing the finger at them for no reason. It's their software that helped expose so much hidden capacity in the plants. And when production goes way up and sales lags behind, the unavoidable result is a continuous increase in the inventory in distribution. It's not a problem in plants that produce to orders, but it's an unavoidable problem in plants that produce to forecast. Finished goods inventories will go up.
In how many other plants that feed distribution have they installed the new production software? It's about half of the projects that they have launched this year
And in these dozens of projects, since their implementations in production are almost always successful in increasing capacity, the same thing will happen. Inventories will grow and they will be blamed for it.
She can hide one case. Maybe even two or three. But not dozens. What a name they'll get! No company will touch their software with a ten-foot pole. They are doomed.
A minute later, she reaches for her briefcase determined to catch the next flight back. Scott must hear about it, and this is not a subject to be discussed over the phone.