“A fill rate greater than 94%? Impossible! ... It is not possible to sustain it at an acceptable cost.”
It is not the first time, and I think it will not be the last, that I hear these types of statements when I talk to managers. And they are intelligent and experienced people, which has led them to have certain convictions that allow them to make decisions quickly, without entertaining their limited time in fantasies.
But what happened in the past that led you to have this conviction that it is not possible to have a fill rate close to 100% and be profitable?
The degree of order fulfillment in logistics is often referred to as Fill Rate. In its most basic and basic form, it represents the percentage of fulfilled order lines.
Of course, if the order has only two items of, let's say 900 units of the first and 100 units of the second, and we deliver 800 units and 100 respectively, with this definition we could have a fill rate of 50%. We can then refine our definition by considering quantities as well. One way is to calculate the fill rate as the units delivered are divided by the total. In this case we would have 90%.
But if the 900 units represent 50% in money, now we could do another calculation that gives us 94.4%. You see that the fill rate is a KPI that can mean different things, but that manager considered it impossible to sustain it above 94%.
How are decisions made?
The case I am telling is that of a manufacturer of consumer goods that sells its production to a supply chain, where there are wholesalers, distributors and retailers.
In that company, as in many others, the managers have higher education, and certainly learned the best-known cost optimization techniques for managing companies that sell consumer goods. Among others, balancing production lines, using MIN/MAX and EOQ, and calculating unit costs with the latest ABC (activity-based costing) techniques.
When one uses these techniques, the inevitable result is that capacity barely meets demand, and a lot of inventory builds up. The accumulated inventory uses two fundamental resources: warehouse space and working capital. When there is a lot of inventory, both resources are at their limit, so suggesting increasing inventory immediately increases the cost of the operation.
And what does that have to do with the fill rate? you say.
Let's see, if there is a lot of accumulated inventory, that represents more days of sales. Thus, production scheduling must consider a sales horizon further into the future, so it increasingly depends on the accuracy of the forecast. The only thing we know for sure about the forecast is that it is wrong, so those production plans will end up with some items out of stock, which results in a lower fill rate.
The only thing we know for sure about the forecast is that it is wrong. But it's even worse: every time an order is missing an item, there is production rescheduled, which wastes capacity and now we must pay a higher cost to achieve the entire production plan.
And managers don't realize this whole vicious circle?
It's easier to ask than to answer. How can they know that this is a vicious circle? Or better yet, how would they know that they are not optimizing the operation? After all, they are following “best practices” and applying basic principles that are taught to this day in very prestigious universities.
And they are also concepts practiced by many others in the industry.
After several years of optimizing, in that company they have achieved 94% as a realistic and sustainable maximum. Every time they tried to improve it, maintaining productive optimizations, inventories rose so much and so many losses appeared, that the logical conclusion is that trying to improve the fill rate is not profitable, and it is not realistic for them to suggest it after so much experience that shows opposite.
Is there a way out?
This is a question asked by a nonconformist. Someone who does not accept the tradeoff between fill rate and cost. Dr. Goldratt taught me not to accept contradictions; that a scientist must think until he can eliminate them. Genrich Altshuller also thought like this, placing as the basis of TRIZ the conviction that an invention arises from eliminating a technical contradiction.
to find out why those concepts are wrong.
The big current problem in business management is ignoring the systemic nature of organizations. These examples presented here are just a sample.
The solution to the problem of suboptimal fill rate is to question the concepts that give rise to the daily decisions of the factory and the supply chain. By abandoning these “beliefs,” one must adopt another set of policies. Fortunately, we have already traveled that path, and we know what the new concepts and new policies are. And we have seen hundreds of companies (maybe thousands) that in the last 30 years have achieved a fill rate close to 100% along with reducing costs and inventories.
Why is the adoption of systems thinking slow?
Russell Ackoff answered this question several years ago in a brief article. And he gave two reasons, one general and one specific.
The general reason has to do with the prevailing education, where mistakes are punished, from school, through university, and even at work. And the surest way to minimize the number of mistakes is to minimize the number of opportunities to make them. At least that is one of the strategies. Therefore, the survival instinct and the lack of urgency to do something new leads most people to avoid profound changes. And adopting systemic thinking, also in the words of Dr. Ackoff, is a change of era: the paradigms that must change are so deep and numerous, that it is equivalent to changing the set of beliefs shared by a large group of people; It is a change in your worldview.
Why “take a risk” with something that contradicts the mainstream? This position is defensible to a certain extent.
The specific reason has to do with systems thinking itself, where experts gather at conferences to present their research and cases in a jargon that is almost hermetic from the rest. Most of us would agree more with the first than the second, although sometimes technical jargon scares, but it cannot be the main reason.
Fears that block.
Before his departure, Dr. Goldratt wrote a preface to the book he could not write about the science of management. In that preface, he talks about three fears that trigger behaviors in many managers. It is up to the manager the degree to which each one affects him.
• The first is the fear of complexity. The consequence is that the manager divides the system into parts, thinking that it is simpler to manage each one separately.
• The second is the fear of uncertainty, so the manager seeks to have control at a higher level of detail, thinking that this way he can better deal with variability.
• The third is the fear of conflicts, where the manager seeks an amicable solution to the several conflicts that arise in the company, which in practice translates into compromises.
With a very complex work experience, where he has never experienced what it means to eliminate conflicts and simply manage a complex system, where uncertainty only grows and increases the complexity of the system, the manager clings to the few certainties he has, those that he acquired in his studies, as if they were dogmas.
I invite you to review with your colleagues your own beliefs, at least in business administration, and trust more in their reasoning abilities. You will have pleasant surprises.
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