This season’s experience-based story includes a common problem rooted in the differences between the mentalities of those who give orders, and those who take them. This is once again set in a lead-acid battery manufacturing company, in the new millennium. The company was one of a relatively young international group of factories, obtained by acquisition for a large energy-based conglomerate.
The person appointed, Josef, was from the automotive industry, where he had been a marketing director for a major car manufacturer. His first few weeks on the job were spent visiting all the sites in order to gain insight into the range of markets and the products.
Marketing and production consolidation
In the meeting at head office, he outlined his understanding of the business based on his site visits. Ensuring that all agreed he had correctly grasped the fundamental commercial aspects of the group, he outlined the two key components of his strategy to get higher sales levels and more efficient production.
The first part was to streamline factory production by moving manufacture of certain battery designs around the sites. This would minimise the diversity of product types manufactured in each factory. This measure was designed to reduce change-over times on production lines and minimise material stock levels.
The second part of his strategy was more controversial and was the last measure announced by Josef: “The sales department is adamant they are losing orders due to long delivery times. I have seen the conversion rate from enquiries to orders, which is rather pathetic. For this reason, we will increase all our stock levels to support the selling initiatives.”
There was an audible groan, from all but the heads of sales. Josef was expecting this initial resistance; he was not too concerned as it was a well-worn path that he had been down in previous appointments. One of the tools that he would be using was to introduce fresh innovation from the automotive industry.
The innovation he had in mind was bespoke software that could accurately predict the types and quantities of stock required to satisfy sales enquiries, and at the same time would also ensure that working capital was kept to a minimum. He was confident of a successful outcome to this innovation, based on his impression of the “primitive technology” used in lead-acid battery manufacturing plants. After all, this was cutting edge software from the most advanced industry on the planet.
Faster deliveries at minimum cost
He explained how this would enable faster deliveries at minimum cost. If enquiry to order conversions increased by just 10% it would increase sales turnover by 20%. The best part was that this would be marginal business, i.e. fixed costs were already taken care of by the existing sales. Profitability would be up by around 30%.
He did ask for questions, but quite frankly was not interested in any of the negative responses from mainly production-based department heads. Their main concerns were the product exchanges between factories. The machinery and manufacturing standards were dedicated to specific designs that had been developed by individual factories over a couple of decades.
Modifications to both were needed and the cost and time of this had not been calculated. There was a brief discussion in which Josef reassured the meeting that this was work in progress and that there would be a final review in two weeks when all the points brought up would be answered.
There were however, two dissenting voices: Paul, an accountant from head office, and Petr, head of engineering in one of the factories. They were concerned about the additional outlay on materials to meet the extra stock levels (Paul) and the additional staff that would need to be trained to meet the higher production levels (Petr).
Both were reassured that the additional costs and the time for training had been taken into account. Josef then asked Paul to produce a new cashflow spreadsheet for each factory accounting for the staffing and materials increases.
As expected, it showed higher profitability as well as increased turnover, mainly due to manufacturing efficiencies that had been assumed as a consequence of product streamlining at each plant. Sales heads were delighted, production staff were wary, and accountants nervous. However, once the spreadsheets were issued and the plan given the official go ahead, Josef was satisfied.
But he did retain the memory of a comment made by Petr, that the additional staff to be recruited in June would be laid off by December. Petr’s only rationale for the comment must have been that the plan depended upon a sales forecast, and these were notoriously inaccurate. Josef however, had taken the precaution of putting in a variation of ±5% as a standard variation used in marketing projections. Even at a lower sales level, the figures still looked pretty damn good.
Recruitment done
That was May; it was now mid-September and the production programme was well underway. All factories had recruited and trained new production staff and they were already starting to improve output. This was despite the intervening summer holiday.
Early indications showed a slight uplift in sales, but less than predicted. Still, Josef remained optimistic as it was early days and the logic of his plan, in his eyes, was flawless.
However, another month went by and sales had still not picked up. The shortfall in the predicted sales levels also created stock overflows in the despatch warehouses. There were other issues too.
For some reason raw material stocks were roughly double what had been predicted in the cashflows. Warehouse walls were bulging due to being stuffed to the roof with incoming stock. Worse still, cashflows were now showing a predicted loss, not a profit.
Very soon Josef was under siege. Head office was pushing him to get to the bottom of the problems and fix them. He had two weeks to submit a full report and fix the root causes of this looming disaster. From the other end, desperate messages were streaming in from the factories, asking why their incoming materials stocks were double. To his credit, Josef was nothing if not decisive in his actions. Within three days he had called together the same team from the factories to a crisis meeting, again at head office. The purpose was to understand precisely what had gone wrong.
The meeting identified key determining factors in the software. There was an automatic re-ordering of items to replace stock used on every single order. This was running in conjunction with the planned stock level module of the software. Further, it turned out that the processing times were roughly double the materials’ delivery time. All of this combined meant that incoming goods and financing were rapidly overwhelmed. The real killer however, articulated by Paul, was the major revelation that Josef had not appreciated.
No 80/20 sales rule
“In the lead-acid traction battery business, there is no 80/20 sales rule for product types. The highest product seller in this market is around 4% of the total sales, and most of the factories had over 200 different types in their product range,” he said.
That explained the stock. But what about the sales targets? Well, the sales departments now shifted their position from improving stock and delivery times to improving price and payment terms. They presented evidence of lower prices and longer payment terms from a couple of competitors as their reasons for failing to shift the stock.
The comment from the production head Petr was both stark and simple: “Why is it that sales can always sell what we do not manufacture?” He argued that price and payment terms were essentially part of the product. Josef absorbed all of this but believed that the situation was still recoverable. However, drastic action was needed. Production staff were put on short time and they had a choice:
- Work fewer hours per week and if on less than 50% of their contracted salary, they would receive state aid to top up wages
- Be fully laid off and get 100% state aid.
Option 1 gave 20% more income. However, almost all chose Option 2. The reason was that, although in total they took home less pay, they actually received better value for their time due to not working at all. This was particularly true if you took out the travelling requirement.
This came as a complete surprise to Josef, who thought that the workers would go for Option 1 as they would have a reasonable amount more than if they did no work at all. The upshot of this was that there was insufficient factory staff to manufacture the batteries needed to satisfy existing orders.
As a result, delivery times almost doubled rather than being reduced. Sales fell even further. Josef, in desperation, organised an emergency meeting with shop floor production representatives to persuade some of those who had opted for a complete layoff, to return part time. He was, unfortunately, restricted in his financial incentives. Besides, roughly half of the new recruits had left, and his recovery plan was deemed unworkable by head office.
Summoned to head office
This state of affairs continued for another two weeks, after which Josef was summoned to head office. He was dismissed with immediate effect and asked to leave the company within the hour. Not able to say his goodbyes or thank any staff for their support (there were so few it made no difference), there was only enough time to clear his belongings and leave by taxi.
By chance, on his way out, he had an awkward encounter with Petr who was entering the building. Petr stopped and politely wished him well in his future career. He also remarked that the lead-acid battery industry is very different from consumer-based markets and that many of the standard economic models do not apply.
Josef acknowledged the good wishes but then confided that Petr had been right all along. His prediction that they would lay people off by December had proven accurate. Petr however, stared at his feet for a moment then disclosed that he had in fact been mistaken. This puzzled Josef, who pressed for his reasons in saying this. Petr smiled and pushed the door open to access the building. In doing so he turned his head to address Josef one last time.
“I said we would be making lay-offs by December, but that didn’t happen. It was actually a month earlier in November. So I was, in fact, wrong.”
Josef watched as the glass doors opened and then closed behind Petr as he slipped inside. After climbing into the back seat of the waiting taxi, he smiled wryly as he took his last view of head office before sweeping out of the car park and into the dense highway traffic.
