The Stockholder is not the Customer

I seem to have survived another end of month. Month ending is alway a busy time because we try to ship as much as possible so that our monthly financial statement looks as good as possible. This practice is deeply engrained in Acme, deeply enough so that all our suppliers realize that we don’t really insist upon having product until the end of the month. Thus there is always a spike in production at the end of the month, as material from languid supplies finally makes it to the factory and into tools.

One of the unpleasant aspects of our inventory management system is that it routinely allocates finished product to orders that cannot ship. There are a number of reasons why an order may not be shippable, but if we generalize and describe all such orders as “on hold,” it will suffice for this discussion. An order may be on hold for reasons the customer is responsible to resolve or for issues with the order internal to Acme. In the latter case, it is evident that inventory should allocate to the order and wait there until Acme figures out its business. In cases where the customer is responsible, however, it would seem that at some point the order should lose its place in line and give all the inventory over to a shippable order. Such is not the case, though, and we have one or two orders allocating inventory that have been there in excess of 100 days.

One of the other unpleasant aspects of the inventory system is that it will allow us to allocate for orders more product than we actually have. This is almost exclusively a problem for spare parts, which are sold to the customer and also used in production of finished goods. The best justification for this loose planning is the parts that are “supplier owned” until we actually take them from stock to use. This allows us to show less inventory on our books and gives the suppliers a convenient way to warehouse their inventory and deliver it to us on time. However, it means that we never show having enough inventory to meet future work orders. So we allocate inventory that we “know” will be available even though it currently does not show as available.

Of course we sometimes do run out of this inventory, despite it being designed to allow uninterrupted supply. But the real problem is the system’s distinction between “hard” allocation and “soft” allocation. With “soft” allocation, the system will reason that I have 10 of part A in total and work order 1 may have seven of those parts and sales order 2 may have seven of those parts. That’s overallocated–that’s demand for 14 parts where only 10 are available–but the system is willing to entertain both commitments. May the best man win, and all that.

Hard allocation is different. Hard allocation says I have 5 pieces of part A in location X and 5 pieces in location Y. Work order 1 will get the 5 pieces in location X and 2 of the pieces in location Y. Hard allocation occurs when an order is actually released to be filled, rather than being booked on the system. Once this is done for work order 1, sales order 2 cannot be released because it can only hard allocate 3 pieces of part A from location Y.

Actually, to be more accurate, sales order 2 would still be releasable for the quantity of 3. The problem comes when we show 3,280 pieces in stock and there are orders vying for 15,743 pieces. Quite frequently the sales orders lose out altogether.

But we could actually ship them. There are 30,000 pieces in “supplier owned” stock on the site. The system simply isn’t aware that we could ship them. By manually intervening and pulling out some of the stock to location Z and manually hard allocating that to sales order 2, you can drop and ship the order. Of course you don’t know for sure if there are enough pieces or if this is one of those cases where we truly don’t have enough pieces to go around. But you can drop the order.

Since, as noted above, a sales order can be released for shipment even if the entire order is not available, it is very possible for half of an order to be released for shipment when the other half becomes available. Theoretically there is no reason why the second half could not be released also. In practice, though, it would be a nightmare in any situation where the veracity of the inventory is not guaranteed. If the first half of the order is out there for 10 parts but we don’t have the parts and I must adjust the order, the system may be releasing orders at that very same time and see that the 10 parts show available and go right ahead and release them on the second half of the order. As to whether that might ever happen–refer to the above on supplier owned inventory.

So there can be some part of an order with truly available stock allocated to it, waiting for the rest of the order to clear shipping so that it can drop. But the order could also simply appear to be allocated, and actually be allocated with non-existent stock so that it cannot actually drop when the first half of the order clears. But this depends on whether the inventory is all “hard allocated” or if there is some that is only “soft allocated” and still up for grabs.

Sometimes there are further glitches so that an order which appears to be shippable is not, or vice-versa.

Okay, got all that? Now come on over to the production manager’s office. His production team needs the spare parts to build tools and gets very upset if you take those parts to ship on sales orders. Also his team builds the finished tools that you need for sales orders. However, they may produce tools “to plan” (that is, for orders that are expected) even if there are no actual orders for the tools and even if there are actual orders for other tools. (In this case, it is likely that we do not have all the components to build the tools that are actually ordered; it is not usual for production to overlook an order that is shippable for one that it is not. But it is possible.)

This production manager told me that if “we” did not ship every single tool for which there was an order by the end of the month, “we” were idiots. The production manager does not understand that it is nearly impossible to make sure no tools are allocated to unshippable orders when the tools are actively coming in to stock; the production manager does not particularly care. The most important thing is that the customer is served, and I am assured that whatever resources I need will be made available to me to accomplish this.

I don’t know if you can guess from just reading this, but it is not altogether easy to explain the situation and the processes for managing it. I cannot take someone from the assembly line down at the computer and tell them to keep pushing this button until all the orders are shipped. Of the four people in the shipping department who manage orders, I am the only one fluent in this aspect of order management. One of the others concentrates on invoicing orders, especially international orders (which is just as complicated), one concentrates on managing the orders when they have been released (which also has a lot of snares and complexities, and requires some management of the workers), and one of them is the supervisor for shipping, receiving, and stock, and has all the bureaucratic hassle thtat cames with that. All of them are generally familiar with the difficulties of getting orders to drop, but none really know the techniques to make it happen besides the basic command to drop available orders. It just makes too little sense and requires analyzing too much data that is not coherently presented by the system.

None of this makes any difference to the production manager, who only understands the first principle of customer service: the customer must be served at all costs. This is indeed extremely crucial for successful business, and is thus very hard to argue against:

Production manager: “If we don’t ship every order we possibly can, we’re idiots.”

Me: “I can’t ship every order that is possible to ship, because there are too many difficulties for me to overcome them all.”

Production manager: “I will give you whatever resources you need to overcome these difficulties.”

Me: “You can’t give me adequate resources to overcome these difficulties.” (He is not my superisor or the manager of my deparment and cannot hire personnel who would be trained to do this work; he can only loan his assembly-line workforce, mostly comprised of temporary workers.)

Production manager: “You are only telling me problems and we need people who can find solutions.”

He kept throwing me “right” principles, and I dearly love right principles, but none of them could be applied in the manner suggested. His most brilliant suggestion was that I make myself more of a pain to my boss until the problems were fixed. I have not failed to make my boss aware of the issues, but to nag, whine, and carp about them does not to me seem like advice with my career in mind.

It would help out customer service a great deal if orders that could not be shipped (because of non-paying customers, which in point of fact are not customers) did not allocate inventory. It would help out customers if the inventory on hand were accurate (a lot of the inaccuracies are driven by loose practices in assembly and machining, responsible to the production manager). We cannot suddenly start worrying about what the customer wants at the end of the month.

And we don’t. The customer is not really in view here, not the customer who wants to use or resell our tools. The real effort is to “ship” as much dollar-value as possible, thus reporting as large as possible profit, which makes the company appear more desirable to stockholders.

The way transportation is set up–your friendly UPS or Fed Ex or DHL, and also your large-freight trucking companies–freight moves to a terminal where it is distributed to other modes of transportation and moved on. There is a deadline for this. Planes and trains and even trucks must leave on schedule. On any ordinary means of transportation (leaving from our location, as schedules vary depending on transportation routes), “shipping” something after 6pm today does not get it any closer to the customer by 3pm the next day than if we ship it at 2:30pm the next day. But on the last day of the month, it is the difference between profit in August and profit in September.

This is why other departments, especially production, always want shipping to stay open as late as possible (even, if they could hope to achieve it, until midnight)–to achieve “credit” for the maximum possible profit to the company. This is good for the shareholders.

A bystander remarked to me, during my discussion with the production manager, that “the stockholder is our customer too.” I understand the reasoning, but is a false equivalence, a confusion of terms. Fundamentally the stockholders rely on us to provide a product or service the actual customer wants. If we spend time and energy doing things that please the stockholder but provide nothing to the customer, we have lost a certain amount of customer support. It may not have an immediate effect; we may have only lost an opportunity to make the customer a certain degree more pleased. But sales is often all-or-nothing. You don’t buy 10% of a tool, or 30%, or 90%; you either buy the tool or you don’t. Often, you contract to buy all of your tools from one company–or another. So if you erode your customer support too far, suddenly it will snap, and you will lose the customer. That can also snowball.

Hence it is extremely dangerous to allow yourself to believe or behave as if the purpose of a publically traded company is to make money for the stockholders (as one of my professors emphasized). This is no doubt how all companies are conducted to a degree, and many companies to a large extent, but it is also what gives you Enron. Morality may be black and white, but cause and effect rarely are; customers will tolerate a certain amount of transgression on their priorities by a company courting stockholders. But the erosion is real, and the breaking point impossible to predict. You cannot provide long-term value to stockholders without spending all your extra effort on providing what the customer wants now and preparing to provide what the customer will want in the future.

In other words, rather than giving extra effort to polishing our monthly financial statement, we should put that effort into producing what the customer wants all month long.

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