Goldratt decides early on if he wants to work with a company based on how he classifies the top management.
fmcg company in india supplying with 10% of the market: 2000 distributors 2.5 million shops.
bought 40% of intermediate product from outside instead of closing a bottleneck. solved the bottleneck and started supplying intermediate product to other companies.
shipped all their product to regional warehouses. didn’t know demand from each warehouse so had to ship products between warehouses depending on actual demand. made new plant warehouses and since plants had overlapping capabilities, managed them as one logical warehouse.
implemented replenishment to consumption in regional warehouses so their managers no longer place orders from the plant they just run the regional warehouse.
Inventories decreased shortages were almost eliminated. increase in sales of 10% over five months.
next step replenishment to consumption in shipping to external distributors. sales people thought external distributors would reject the idea of the company deciding what supplies they should get based on sales.
all the distributors agreed and sales went up 30% compared to previous year.
next step replenishment to retailers. variability is highest at retailers and so are shortages. so this will produce largest increase in sales. also retailers have limited shelf space and cashes they hold only a few skus. replenishment decreases shortages and reduces inventories to less than half.
that step should result in at least another 30% increase in sales. company can do this without additional expenses. variable cost = 60% of price and thoughput is 40% of sales so net profit is 0.6x0.4 = 0.24 unheard of in that industry.
distributors measure inventory turns. 10% improvement is very good, projected improvement is 1.6/0.6 = 250%.
what about retail? company’s products are 5% of their sales. 2% profit on sales is good for supermarkets in the West. markup is 15-35% but profit is smaller due to expenses and inefficiency. large sales volume and small investment makes supermarkets a good investment. indian supermarkets have the same problems but also smaller markup so they make 1% profit.
they are sensitive to what sells well and an increase of sales of 50% will makes the company’s products very popular with supermarkets.
but the company didn’t approach the retailers. why not?
What explains the FMCG company not trying to extend replenishment to retail?
already making a profit. might not work, so play it safe?
owners of small shops may not understand and accept the offer.
but the company enthusiastically changed their way of doing business until they reached the step of replenishing retail despite already making a profit when they started.
why not try with 1000 shops out of 2.5 million? and they already sell to 2.5 million shops so they know how to do it.
those ideas were a result of a tendency to blame people and come up with unsubstantiated derogatory explanations.
psychologists’ professional training often involves considering people who behave badly.
but goldratt’s ideas so it’s a good idea to learn to think clearly.
prior stages involved making changes in businesses they know well. Maybe the next step requires the company’s managers to step out of their comfort zone?