It's Not Luck - Eliyahu M. Goldratt [6]
“What are you planning to do with this space?” I ask Pete. “Throw parties? Build airplanes?”
“Sell it, I guess,” he laughs. I don’t reply.
“What’s your on-time delivery?” Don asks.
“In the high nineties,” he proudly answers.
“And what was it before you emptied this warehouse?”
“Don’t ask. You know, at that point, none of us really believed Alex—that reducing finished goods would allow us to fill more orders on-time. That was a little bit hard to swallow. But let me take you to where the real change took place, the prep room.”
As we go, Don continues to question Pete on some details. Don is good, and his relentless eagerness to learn guarantees that he’ll become even better. I needed someone to take care of the details. Someone who is good enough to understand not just what I’m doing, but why I’m doing it. It has already been one and a half years since I decided to pinch this bright young engineer who was twiddling his thumbs on Bill Peach’s staff. Good decision; one of my best.
We enter the prep room.
No, it’s not one room, it’s almost an entire floor. It’s quiet. Here is where the real work is done, converting client’s wishes into “art work.” From here, once the client is satisfied, the work goes to the printing presses to be mass produced. At first glance I don’t see anything different, but then I realize that none of the nervousness, the running around, the tense expressions on people’s faces is left.
“No sense of urgency,” I say to Pete.
“Yes,” he smiles. “No sense of urgency, and nevertheless we are now turning around new designs in less than one week. Compare it to the four-weeks plus that was the accepted standard before.”
“This must have an impact on quality, as well,” Don says.
“No doubt,” Pete agrees, “quality in conjunction with lead time is today our strongest suit.”
“Impressive,” I say. “Let’s go back to your office and talk some numbers.”
Pete’s printing company is the smallest company in my group, but it is rapidly turning into a beauty. The huge investment that I put into this company—not in money but in time—to teach Pete and his people has certainly paid off. In one year they have turned from a mediocre printing house into one of the best. And in some aspects, they are the best. But the numbers are not so good. The company is profitable, but just barely.
“Pete,” I ask, even though I know the answer, “how come you are unable to translate your superior abilities—your high performance in delivering on time, your very fast response, and your quality—into higher prices?”
“Yes, isn’t it funny?” he says in a flat tone. “Every client demands shorter lead time and better performance. But when you deliver, they are unwilling to pay higher prices for it. It is as if they take this improved performance as the entry fee for doing business. If you don’t have it, you have a hard time getting business; if you do have it, you still can’t command higher prices.”
“Do you feel pressure to reduce prices?” Don asks.
Pete looks at him. “Yes, definitely. The pressure is immense, and I am afraid that some of my competitors will start to yield to this pressure, which will force us to reduce prices as well. Actually, it has already started. To get the contract for the small cereal boxes, we had to reduce our price by three percent. I sent you a memo about it.
“Yes, you did,” I confirm. “So what will be the impact on this year’s forecast?”
“It’s already factored in,” Pete replies. “But let’s face it, this anticipated reduction in prices has wiped out almost all the impact of our increase in sales. This year we are going to increase our market share, but not our profit.”
“This is a problem,” I say to Pete. “A real problem. What can you do to substantially increase profits?”
“As I see it, there is only one way. Look at the breakdown of the numbers. Our box business is doing very well. The problem is with the candy wrappers. Last year wrapper department sales were twenty