Author Archives: Ed White

BBQ Supply Chain

BBQMany companies are very uncomfortable when it comes to discussing or implementing Capacity Planning or many other aspects of Supply Chain.  Either it’s too difficult or too expensive or unnecessary or…  What most people do not realize is that they do planning every day in their personal life and never even think about it.  Let’s look at a specific example:

It’s a sunny Saturday and you have invited friends over for a BBQ.  Sounds wonderful, doesn’t it?  Then you start thinking about what needs to be done during the party.  You want to visit with your friends but someone needs to do the cooking.  Oh well, shouldn’t be a problem as you can talk to people while cooking and how long does it take to cook anyway.  That is a capacity question which will also lead to a scheduling question – when do you need to start cooking?  The answer to when to start depends on when people want to eat and how long it will take to actually cook the hamburgers.  In this case the capacity is fixed by the size of your BBQ.  You can only cook a maximum of 16 burgers at a time.  Since you are expecting 15 people averaging 2 burgers each that is 30 burgers or two lots of 16 (actually 14 in the second lot).  Assuming 10 minutes to cook one lot, that is 20 minutes total.  Not too bad.

But wait, you forgot to factor in the buns which take up twice the area of the burgers so you can only cook 8 buns at a time.  This will equate to 4 lots of buns.  Fortunately they toast faster so each lot only takes 5 mins or a total of 20 minutes for all the buns.  That gives us a total of 40 minutes to cook the burgers and buns and a starting time based on backwards scheduling.

But – there is a problem with this plan.  The meat will be cold by the time the buns are ready and people will be looking for the second burger before you can have them all cooked.  We can solve the first problem by cooking some of the buns at the same time as the meat but this is not a one to one swap as it is two bun halves for every burger (check the BOM).  The most efficient combination is probably 5 burgers and 10 buns at a time but this will mean 6 batches at 10 minutes per batch.  At 60 minutes that is 20 more than the first alternative.  Not acceptable so we need to try something else.  Maybe we could do 8 burgers and 8 buns at a time.  Since the buns take 5 minutes you could do two batches of buns while doing the one batch of burgers.   With this plan we need to do 4 batches and actually end up with 32 if we decide that a little safety stock would be desirable.  4 batches at 10 minutes each is 40 minutes or the same as the first plan but neither the buns and burgers will have time to get cold.  Definitely a better plan but it does not address the second identified issue – people looking for their second burger before you are finished.  It is now obvious we do not have the capacity to resolve that issue so that means we need to get creative.  We can either increase our capacity or outsource some of the production.  By borrowing the neighbours BBQ we increase the capacity but we might need a second operator to run that BBQ.  You might be able to run both by yourself but now you have no time to visit your friends and might burn some of the buns.  Best plan is to outsource half the work out to the neighbour.  Now all the burgers will be ready in 20 minutes and all it will cost is 2 additional burgers which you can cover out of the safety stock built in to the batch size.  As a bonus you get more time to visit with your friends.  This obviously calls for a beer, or two.

So there you go – a story from real life that has examples of priority planning, capacity planning, outsourcing, forecasting, BOM, MRP and assuming your spouse is checking up on you, Production Activity Control & Quality Assurance.  Maybe all that Supply Chain stuff isn’t so hard afterall.

Pricing and The Law of Unintended Consequence

Many organizations set the price for their products or services using the standard Cost Plus process.  The question they are asking themselves is “What is the best product we can offer our customers?”  With the answer to this in mind they then determine the cost, add profit and this gives them the price that they wish to sell at.  It sounds reasonable, is simple to apply and loved by cost accountants throughout the world.  But have companies that embrace this methodology considered the law of unintended consequences and what its effect will be on an organization embracing this methodology?  One of the pillars that this methodology stands on is that the lowest price is the best price.  (That might come as a bit of a shock to companies like Ferrari, Tiffany, Apple and many others.)  There are many problems with this assumption.  First and foremost, competing based on price will get you into a cycle of continually reducing cost.  While reducing unnecessary costs is a good thing, if it is the basis of your pricing strategy you have set a lower limit to your possible costs – once you get to zero cost you cannot go any lower… and you probably went bankrupt before you got to that point.  In reality there is an absolute minimum cost that must be covered for raw materials, people, machines and other resources.  Any further price reductions must come from the profit margin.

The next biggest problem is that it actively discourages innovation both in products and in processes.  Like it or not, innovation is messy and often expensive at first but without innovation an organization will just continue down the same path while their competition blazes new trails for your industry.  After a while you end up as just another Me2 company (See my earlier posting – Are you a Me2 Company?)

Other potential issues would be decreased employee morale (affected by raises, bonuses, cost cutting…), Supplier issues (cost cutting, quality issues, more attention to more profitable customers…), customer issues (pricing, lead time, quality issues…) plus many other potentials.  While this sounds like a lot of doom and gloom they are all possible or even probable unintended consequences of a low price methodology.  Probably all or even most of these will not show up depending on corporate culture, management attention and many other factors but they are possible and require a great deal of work (which means cost) to control.

So are there any other options?  Believers in Value Proposition suggest that turning the process on its head will also turn many of the issues upside down.  They suggest that organizations should first determine what customers would value (notice I did not say want) then determine the price the customer would be willing to pay for that value.  This in turn gives you the cost you can incur to provide this value which can then be used in the development process to determine the product that will deliver the value desired.  Note that this is a looping process because value desired always changes with time and as existing desires are met.  In the end it’s not about what product we have to sell to the customer, it’s about what product we need to provide value to the customer!  Moving away from a low cost model to a value add model opens up all types of possibilities to grow the business by increasing sales and profit.  People will pay more for unique products that directly address specific values.

Will the Law of Unintended Consequence come into play in this scenario as well?  Absolutely, but in this case many of the consequences will be positive.  Among them could be higher employee morale, a more innovative organization, supplier and customer relations that resemble partnerships, higher profit and better long term organizational viability.

I look forward to seeing any comments people have on pricing – low cost model or value proposition model.  Which do you prefer and why?