To those of us familiar with the concept of brand loyalty, we understand that when brand loyalty is damaged, there are consequences.  Yet, the concept and its ramifications seem to be intangible, emotional and difficult to express in mathematical terms.  When this is the case, it becomes challenging to create a business case for investing and improving processes that directly influence brand loyalty.

Interestingly, I recently came across a study on consumer behavior when presented with damaged packaging.  The information I found most fascinating include:

• Perception of a product as a “brand you trust” dropped from 73% to 41% when packages were even slightly damaged
• 25% of the most brand-loyal shoppers question the safety of the product when the package is damaged
• Up to 55% of shoppers discarded the brand, and 36% opted to purchase another brand

These numbers presented are eye opening, but what, then is the financial impact of these data? Taking the information in the study, we applied a hypothetical percentage of damaged packaging into the model and based on the following assumptions, we arrive at the model below.

Sales price = $5
Percent of users switching brands = 36%
Annual Revenue = one $100,000 project per month

Reviewing this model, I notice at the 1% defect rate, my damage is only costing $4,320 per year.  While the observation is correct from a GAAP accounting perspective, it does not take into account the costs to acquire new customers, the lifetime value of customers, and attrition rates.  Additionally, the perspective does not count the number of people with whom the 72 lost customers discuss their disappointment.

So, what is the total cost of disappointment?  It seems to me, the answer lies more in our approach to the question, than the articulated dollar amount.  When we engage in a process that allows us to explore different perspectives including, sales and marketing data, operational data and the experiences our customers are having, we might then obtain an accurate account of the cost of disappointment.

Trust, transparency and commitment may not be viewed as typical ingredients to successful B2B relationships and often characteristics such as revenue, profit and cash flow are the rule of measure. Revenue, profit and cash flow are essential. A Business’ survival depends on the presence of these elements earned through its relationships with client companies. Since business survival depends on the presence of the revenue, profit and cash flow, what difference, if any, does it make if trust, transparency and commitment are not a component of the relationship?

I believe the difference lies in two things, choice and the human element. Organizations and businesses are more than a series of automated systems and processes converting and conducting transactions – every business possesses a human element. Next, there is the issue of choice. Today, businesses have more choices than ever to have their needs met – and ultimately, it is people who make business decisions from a myriad of choices.

If people, working inside businesses, do not have a sense of trust, transparency or commitment from our relationship with them, how can revenue, profit and cash flow be sustained? What prevents businesses from making a different choice?

Perhaps the best answer is that both sets of three: revenue, profit and cash flow and trust, transparency, and commitment are equally important ingredients of a successful B2B relationship.

Fortunately, approaching target price challenges from both a design improvement and process improvement perspective allows us to open ourselves to a path toward meeting our objectives. A design and process improvement course can make taking risks less emotional and bring us into the realm of rational decision making. What if a design and process improvement method was consistently employed, and the data collected from these efforts demonstrated that a 10%, 15% or even 30% gain in profitability is likely.

One step in achieving a data driven decision-making model is to create processes that deliver reliable data needed to incorporate into an existing decision making and forecasting model. A process that generates and delivers this kind of information is presented below. It is an iterative process that synergizes with a well known Six Sigma concept, Define, Measure, Analyze, Improve, Control (DMAIC).

Step One: Define Base Process

• Define base process
• Create value stream map
• Delineate sub-processes and assign cycle times to each
• Identify and document opportunities for improvement
• Present per product price and improvement opportunities

Step Two: Perform Project, Provide performance Feedback and Improvement Opportunities

• Actual cycle times
• Yield reporting
• Constraint analysis
• Feasibility study
  • Incorporate actual data to engineer design for manufacturability model
  • Material & equipment suitability
  • Yield and process time optimization

Step Three: Adopt New Process

• Define new process
• Create new value stream map
• Delineate sub-processes and assign cycle times to each
• Identify and document opportunities for improvement
• Present per product price and improvement opportunities

Step Four: Perform New Process, Provide performance Feedback and Improvement Opportunities

• Actual cycle times
• Yield reporting
• Constraint analysis
• Feasibility study
  • Incorporate actual data to engineer design for manufacturability model
  • Material & equipment suitability
  • Yield and process time optimization

This iterative process continues to deepen, creating an improvement perspective and can continue until all potential waste is removed, or can be finished when a desired target price and profit is met.  The data gathered from the process can then be integrated into our decision-making models.

While the decision-making model currently in use may not be well structured and documented, we are making decisions and are therefore using some sort of model. Enhancing our awareness regarding how we go about making decisions and adding a rational perspective to our new business strategies can support our efforts to increase revenues and profits.

Click Here to download a case study supporting this model.

Click Here to begin a conversation on how ASAP can help meet your target price initiatives.

Uncertainty feels risky and is frustrating to deal with. Blaming the people performing the process seems like an appropriate behavior, however, I have found it is more productive to take a curious approach and understand what drives this unpredictability.

So the then the question becomes how. What course of action can be taken to understand what causes variation and unpredictable outcomes? Broadly speaking, we need to look at the system inputs, such as, process, people and tools. The first input to become curious about is the process. Some questions to consider include:

• Is the process defined?
• Are process tasks defined?
• Are tasks and sub-process measurable in terms of quality and quantity?

Once the process is defined and measurable, move to a review of the tools needed to perform the tasks and sub-processes. Some questions to consider about tools include:

• Are the tools widely available
• What training is available for tool use
• How are tools calibrated and maintained to ensure consistent performance.

Finally, we can review what specific skill sets are needed to use the tools and perform processes. Some questions to ask about skill sets include:

• What types of motor skills are needed, fine, gross or a combination of both?
• Are hand strength and dexterity needed?
• Are detailed math skills needed for measuring and counting?

After negotiating this adventure in curiosity, we can start inserting humans into a well designed, measurable process where variations can be analyzed and controlled.

While this 3-step guide may seem time consuming, the benefit of doing this work is an ability to create fantastic training programs to further our goal to offer great products to our customers.

Speaking of great training programs, check out this sample video, highlighting ASAP’s performance training video production capabilities.  We have also included the corresponding Shrink Wrap Quality Training Test.

One of the difficulties in measuring productivity is that often our manufacturing environments have high-speed, automated equipment to produce our core processes, and secondary process are semi-automated requiring a labor component. While it may be a fairly simple equation to determine cycle times of our equipment-based primary processes, methods to determine cycle times in secondary processes requires a different approach, especially if customization is a requirement.

Although it may be difficult to measure, monitor and improve productivity, it is an important component to capacity and ultimately sales. This model demonstrates how productivity affects our ability to generate sales revenues.

Looking at this model in terms of meeting sales goals shows how important it is to know what capacity issues may sprout up if productivity levels are less than expected. If I am planning to achieve a 15% increase in sales, do I have the capacity to meet the goals? Are the capacity issues due to productivity or a lack of available resources?

Theses are ideas and questions are integral components in planning for successful organizational growth and meeting customer expectations.

Generating sales opportunities, closing sales, increasing demand and developing long-lasting client relationships is only half of the equation. The other half is actualizing these efforts through our manufacturing environments. Productivity has a big impact on whether or not we fully leverage our sales efforts.

Except that often, when I ask for 8 folks, I get 5. I ask for people with specific skills and 3 of the 5 actually possess the skill.  The other 2 folks, not the 3 as asked for, are coming soon and those people don’t have the skill set either.  Not only is the skill set absent, but the temps don’t really want to be here anyway.  Several of the people selected are not interested in productivity or quality and we hear about it in a very loud fashion.

These are just some of the frustrations we experience when contracting with temporary agencies, and we can’t really blame the people because the painful truth is that the industry itself benefits when their staff is unproductive.

I know this sounds harsh, but consider this: if my customer is expecting a turn time/delivery in 5 days, I need to plan and staff my project for this expectation.  If I plan the project as if it will run at 100% of productivity, then I need 5 people and I staff my project with temporary labor.  After the project gets started, I notice that productivity is at 60%.  Now I need 2 more laborers, or do I?  Since the 5 people I have are producing at 60%, what output can I expect from the additional 2 laborers and how will this affect my commitment to my customer?

This is a complex mathematical question.  First, I have to calculate lost time/productivity from Monday and if the crew continues at 60%, I have another calculation to make.  I figure I actually need 9.167 people working for the next 4 days.  Consequently, a project that should have taken 5 people 5 days, or 200 production hours to complete, now becomes a 333.33-hour, stress-filled project.  Not to mention the extra management costs working to avert disaster.

Whew, I avoided disaster with my customer and that feels great, but now I have a responsibility to my company to be profitable.  Let’s look at how this project performed:

This model demonstrates the actual labor cost due to an unproductive crew.  My company just lost $2,000 of gross profit.  In fact, I gave it to the temporary agency because instead of researching other alternatives, improving my process and or asking folks to be productive, I continued to add unproductive labor costs to the project.

Additionally, the temporary labor industry does not help me  improve my processes; offer fixed per project costs, or guarantee quality and yet the agency gains $2,000 in revenue.  The logical conclusion, painful as it may be, is that the temporary labor industry benefits from providing unproductive labor hours.

I’m thinking there is a better way to manage my variable demand and that now is the time to check into alternatives, especially before my next project is due.

Damaged product packaging and products has negative consequences, both from a brand loyalty perspective and from an internal costing perspective. The cost associated with brand loyalty is decreased revenue opportunity. Often customers do not tell us their problems; they simply quit buying our products. The internal product costs are bit easier to determine through cost modeling. With consequences such as these, it leads us to wonder how product packaging and product damage occurs and how can these issues get resolved?

The following is a comprehensive process to resolve damaged product.

1.  Document the actual damage that is occurring through samples and photos.

2.  Evaluate the frequency, assign costs and create cost model to understand the financial impact and establish a budget for improvements.

3.  Map distribution channel, noting the various conditions the product experiences as it travels to the end-user.

4.  Examine manufacturing systems to insure products are safely transitioned from operation to operation.

5.  Examine the packaging system including:

• Primary packaging practices
• Secondary packaging practices
• Tertiary packaging practices
• Pallet patterns
• Pallet protection materials

6.  Document findings and create an action plan incorporating root cause and budgetary factors.

Naturally, executing and earning the ROI on this 6-step process takes deep commitment from corporate leadership and cross-functional staff members alike. However, embracing a curious approach to problem solving and establishing budgets can make all the difference in resolving issues surrounding damaged product.

However, rather than reducing our work force, productivity provides a platform to increase the output of our current work force and thereby increasing profitability.   A key starting point to uncovering the potential profits hidden within productivity is asking questions such as; “How productive is our work force?” and, “How do our current productivity levels affect our profitability?”

Often, there is difficulty in determining a method to answer these questions due to the complexity of our manufacturing operations, ERP systems and reporting systems.  Simplifying the process with productivity models helps to gain insights on the potential Return On Investment involved with the pursuit of increasing work force productivity.

The productivity model below illustrates the effect of productivity on profits.  The first table explains the basic assumptions behind the model.

Next, this model illustrates the effect of productivity on the profitability of one manufacturing process, produced five times within one reporting period.

Profitability

This model demonstrates how powerful productivity is, as a factor in profitability. While developing processes to track productivity outside financial reporting mechanisms, can be cumbersome and complicated, there is opportunity for a substantial ROI on these efforts.  We can begin to reap these additional profits by following this five-step process.

1. Define processes and sub processes
2. Perform time studies and line balance
3. Implement consistent training methods and train supervisors and line employees to the process
4. Set productivity goals
5. Monitor output and measure against goals

Practicing these steps is a great place to start unlocking the hidden profitability opportunities within our manufacturing processes!

When focusing on the ability to obtain OEM and product components better cheaper, and faster, a transactional relationship may be preferred.  On the other hand, when focusing on broader business goals such as creating new revenue streams, increasing market share, increasing productivity and improving customer service, a strategic relationship may be preferred.

There are points along our supply chain that require different types of relationships.  The key is to understand what type of relationship works best given the specific business need.  The table below may help to identify which relationship type might work given differing situations.

Once a relationship type is matched to a particular need within our organization, it may be useful to explore the attributes associated with the two different approaches to relationships.  The table below lists attributes of both relationship types.

Interestingly, when examining business needs, matching relationship types and reviewing relationship attributes; it may be possible that a combination of both is the best option.  Understanding what kind of relationship works best for our specific business need enables us to include characteristics and attributes from both relationship methods into our selection processes.

Combining desired business outcomes and relationship types into selection processes has the potential to help our businesses operate more effectively.

What have your experiences been with strategic and transactional business relationships?

Surprisingly, the quantity of product packed into this container/master carton has a big impact on the cost of fulfillment and kitting projects.  Consider that opening a master carton, removing product and breaking down the carton for recycling takes about 36 seconds.

While at first glance 36 seconds seems inconsequential, this is where the carton quantity has an impact.  Since it takes 36 seconds to open, remove and discard a master carton, these seconds become fixed.  Whether we are removing 3, 12 or 25 parts from a carton, it still takes at least 36 seconds to perform the product removal process.

Working with the assumption that 36 seconds is a fixed process time, the method to determine the product cost is to distribute process time evenly over the carton quantity. For example, if the carton quantity is 3, then divide 36 seconds by 3 parts equaling 12 seconds per product.

Next, multiply the seconds per product times a fully burdened labor rate.  For example, 12 seconds times a $30/hr equals $.099 per product.  Therefore, the cost for simply removing one part/product from its secondary packaging is about $.10 per part.

Now, if the a finished display requires 50 parts per display, then the cost per display for simply removing the product from its carton is $5.  This chart below illustrates the impact carton quantities have on display fulfillment costs.

To determine the cost per display project, multiply the order quantity 500 times the cost per display.  For example, 500 times $5 equals $2,500. The chart below illustrates the removal cost based on order quantity and the potential saving of bulk packing product for display projects.

Furthermore, bulk packing products that are going into display projects, reduces the amount of cartons needed, which reduces secondary packaging costs while reducing waste and garbage removal costs.  The chart below demonstrates the opportunity for material and waste reduction.

Obviously, there are additional steps to a fulfillment process than simply opening, removing and discarding the secondary packaging of a product.  However, a simple change in secondary packaging quantities has the potential for huge labor, and material cost savings.