It's Not Luck - Eliyahu M. Goldratt [81]
“Good choice,” I concur.
I read the UDEs of the shops. No surprises. Even I, who never worked in the cosmetics field, know all of them. Things like: “Shops have to give considerable discounts on relatively obsolete products”; “Many times shops are out of an item a customer wants”; or “Many shops have difficulty meeting payments to the vendors.”
“Then we built the Current Reality Tree of the shops,” Susan flips one more page.
“Was it difficult to construct this tree?”
They, look at each other and grin, “Embarrassingly easy,” Bob admits.
I let Susan continue.
“According to your guidelines we should rewrite the tree so that the core problem is expressed as a policy of the vendor. In our case we didn’t have to do any rewrite. It came out naturally like this,” and she starts to read the tree from bottom up. “ ‘Cosmetic companies give discounts in proportion to the size of the shop’s order,’ and ‘Discounts for large orders are substantial.’ Take this policy of ours and consider the fact that ‘Shops are usually in fierce competition with each other’ and you see the unavoidable result, ‘Shops are forced to order in large quantities.’ ”
“Yes, I see, but let me digress for a second. An equivalent conclusion is that shops cannot afford to order in small quantities. Bob, didn’t you tell us that shops are not taking advantage of your new distribution system, of your offer to replenish to them on a daily basis? This might be the answer.”
“Yes,” he laughs. “And I accused them of resisting change, of being locked into purchasing habits. Nothing of the sort. At the same time that my distribution managers were begging them to order on a daily basis, our sales policies were discouraging them from doing it. Smart, isn’t it!”
I prefer not to comment and signal Susan to continue.
“Let me first go into the financial branch. A direct result of buying in large quantities is that ‘Shops have to carry a lot of inventory.’ As you know, ‘Most shops don’t have much cash.’ Remember we are not selling to the big chains, most of our outlets are small shops, like drugstores. So the need to carry a lot of inventory means that ‘Most shops must borrow heavily.’
“And you see the result, ‘Shops’ financial expenses are heavy,’ which translates into ‘Shops’ profitability suffers.’ ”
“The situation is quite bad,” Bob elaborates. “I constantly hear complaints from small shop owners that they are really working for the bank. To that extent the burden of the loans is heavy.”
I nod my head. I’ve heard about it. And not just in cosmetics.
Susan continues. “If, ‘Most shops must borrow heavily,’ and ‘Shops’ credit is limited,’ then ‘Some shops have difficulty meeting payments.’ ‘We, the vendors, want to be paid . . .’ ”
“How nasty of us,” Bob must interject.
“And as a result ‘Some shops have trouble getting merchandise,’ which, of course, has a major impact on their profitability.”
“How bad is it?” Don asks.
“Quite bad,” she answers. “Every year many shops declare bankruptcy. We, and our competitors, are well aware of the cash pressure, so we all give quite good payment terms. The standard in the industry is ninety days.”
“And reality is,” Bob adds, “that our receivables are running at about one hundred and twenty days. It’s a real problem.”
“Shall I continue?” Susan asks.
“There is more,” Bob promises, “a lot more.” He smiles at Susan.
“Here is another entry: ‘Shop forecast of future sales is quite inaccurate.’ Couple it with ‘Shops are forced to order in large quantities,’ and you get the next nasty result: ‘There is considerable mismatch between the shop inventory and actual customers’ demand.’ This leads directly to ‘In spite of the large inventories, shops suffer from shortages.’ ”
“What do you mean by shortages?” I ask, just to make sure.
“Shortage means a customer entered the shop, asked for a particular item, this item is not in the shop and the customer refused to buy an alternative item.”
“So according to this definition, a shortage translates directly into a lost sale?”
“Yes. That is the derivative,” she points to the tree. “And you