It's Not Luck - Eliyahu M. Goldratt [27]
“So now we know, so what?” My impatient Don.
“I told you, so what,” Pete takes pleasure in teasing Don. “I told you that our client’s forecast is rapidly becoming more unreliable, that their own push for more and more marketing campaigns causes them to change, much more frequently, some of the printing on the wrappers.”
“Yes, you told us, but I still don’t see the relevancy.”
“What is the chance that the client will actually use all of what he ordered?” Pete asks. “Remember his order is theoretically sufficient for the next six months. Do you know how many changes can happen by then?”
“No, I don’t,” Don answers. “But you don’t know either.”
“Maybe you don’t know, but everybody in the industry has a pretty damn good idea,” Pete continues to tease him. “Our industry journals are full of statistics; look at these.”
And he gives us another page. It’s a copy from some magazine. Pointing to a somewhat fuzzy graph he says, “On average, the chance that you’ll use up a six month quantity is only thirty percent.”
I examine the graph. I’ve seen such stuff before, but it’s still surprising. I glance at my watch. In a little less than an hour I have another meeting. Did Pete find a real solution to his marketing problem or not? His confidence indicates that he did. At the snail’s pace that we are moving there is a good chance that I’ll have to postpone my next meeting. Should I do it now?
“I’m coming to it,” Pete assures me. “Our solution is based on the fact that the chance of not using the entire ordered quantity is much less when the order is supposed to cover only the next two months. According to this graph it’s only ten percent. You see, what we have to do is to convince the client that if he considers obsolescence, as he should, then ordering in batches of two months, from us, is giving him a cheaper price-per-unit than ordering in batches of six months from the competitors.”
“In other words,” I’m trying to digest the concept that Pete has introduced to us, “what you are suggesting is that the buyer will not consider the price-per-unit that he purchases, but rather the price that he pays per unit that he is likely to use. Makes sense.”
I examine the first two pages again. Pete didn’t choose two months out of the blue. For this relatively small quantity (one third of what actually was ordered), we are cheaper than the competitor. That’s smart.
“I have a big problem with this.” Don is more than skeptical. “Not with the concept—that I agree is sensible—but with the impact. I’ll accept that in thirty percent of the cases the entire order is not used, but how much of it is not used? I guess that it all depends on the numbers.”
“What do you mean, it all depends on the numbers? Of course it all depends on the numbers,” Pete rises to defend his solution.
“My gut feel is,” now it’s Don’s turn to tease, “that in almost all cases, I’m afraid, you won’t be able to demonstrate clear savings.”
Usually I enjoy seeing Don and Pete’s friendly arm wrestling. But today I don’t have time, and besides, the issue is much too important. “Don, compare the two cases,” I somewhat impatiently say. “It’s obvious that when the order is for six months, in ten percent of the cases more than two thirds of it is obsolete.”
True to his nature, Pete doesn’t proceed, but rather explains it to Don. “The fact that in two months there is a ten percent chance that something unexpected will make the wrapper obsolete, shows that in ten percent of the cases the additional quantity ordered for the next four months would be scrapped.”
“I see,” Don says. “So, based on this logic you computed the price-per-unit for the usable portion of an order?”
“Yes.”
“By how much was your competitor’s offer more expensive than yours?” I ask.
“Mine was still slightly more expensive, by about half a percent,” Pete answers.
“So why the big celebration?” Don asks.
“Considering the pressure on the buyer to reduce raw-material inventories, and the