Debunking Five Common Myths About 80/20
Dear 80/20 Mentor,
I’ve read a lot about the 80/20 approach. My concern is that my most profitable accounts have economic volatility. I worry that if I give them more capacity over my smaller accounts and they pull back orders we will be stuck. How do you mitigate that risk?
- Risk Adverse
Dear Risk Adverse,
The most important thing to remember when considering this question is that it's not a binary choice to serve larger or smaller accounts. Rather, it is a matter of treating them differently.
Remember: we want all the business, but we want it on our terms.
Boosting capacity, and, hence, nailing lead time and delivery performance for our biggest customers just makes sense. Most of a company's growth comes from its top customers and losing any of our biggest and best? Not a pretty sight. As such, our biggest and best must not merely be satisfied with us, they should not even be merely happy with us...they must consider us their very best suppliers of ANYTHING and be "raving fans" of ours. Top-notch quality and delivery are the entry tickets for this ride; without delivering upon these table stakes, one can't have a good conversation with a key customer. Conversely, it’s hard for an experience with a key customer to go sideways if the quality and delivery are terrific. Hence, never contemplate whether it makes sense to give top customers all the capacity they need to ensure great quality and delivery. It ALWAYS makes sense—that is just the baseline.
Without question, there will be times when top customers hit valleys. How do we navigate our way through those times? There are two primary moves we can make.
The first move is the ideal one: lead time ranging.
Fill the valley with demand from lower-tier customers. Remember that we discussed "wanting it on our terms”? Here’s the payoff. Our big customers get short lead times quotes, like two days. Our small customers, on the other hand, get a lead time range, maybe one to four weeks. These small customers may balk at this arrangement, of course, but experience says that few do. Most, by far, understand that they don't have the same gravitas as our largest customers, and can live with the potential longer lead times—if we are ON TIME, and we WILL be.
How does this help us? Simple! We have a couple of weeks’ worth of business in backlog from small customers, but since we have up to four weeks to deliver it, we don't have to interrupt production for our big customers when we have big customer orders to fill. Thus, when we have a big customer "lull," we can bring the small customer volume to the floor to fill the gap. In practice, this means that sometimes, our small customers get their product in one week, and sometimes they get it in four weeks, but they always get it on time—we keep our promise. And because of that lead time range, we're able to always keep capacity available for our big customers, ensuring that we keep our promise to them as well. All this, and we "level load" our production to boot! It's like a dance, keeping everyone happy and leveling our production at the same time.
The second move is a bit trickier.
It involves shaking up the cost structure, bringing in more outsourcing, temporary labor, and such. It can work, but trust me, it's not as sweet as lead time ranging. It will be less pleasant, harder to execute, and more challenging culturally to drive your cost structure to a more variable cost-heavy business and less fixed cost.
Note: don't fall into the trap of using downtime to stock up on inventory, thinking demand will magically appear.
This approach is a short-term pain reliever for the P&L and company culture, but you’ll be planting a long-term disease that lies in wait on the balance sheet. Invariably, it will turn out that we built too much of the wrong things when we guessed at demand. Some inventory, of course, is always necessary, but remember that the definition of inventory is an admission that we can't manufacture optimally. Keep inventory to a minimum.
Lead time ranging is one of the 80/20 tools that allows us to keep inventory at a minimum, while keeping all customer promises and minimizing the amount of capital and direct cost we need to invest in our business.