1 DIVIDED BY PROFIT MARGIN


I disappeared on everyone here for a week because I was teaching a 3 day class and just got home. I think I startled the folks in the room. Certainly not by my brilliance but by a change of direction in the conversation. We were talking about forecasting and the conversation was pretty typical.


The forecast has to be improved. I asked what their forecast accuracy was and the response was 80%. My response was, "that's pretty darn good. You'd be better off doing more lean efforts". It was so unexpected a response that I got about 20 seconds of silence and thought for a moment I had said something inappropriate. When asked what I meant, I said, "well how much more money will it make you if you're 1 percent more accurate?" They're response was, "not any more in revenue, but I wouldn't have the expediting expense involved with scrambling". Yup, you're right I responded, but imagine this. Take the dollar you save by improving your processes and divide it by your profit margin of your business.


That result is how much you'd not have to sell to get the same dollar back in sales. Imagine the pressure you'd take off the need for forecast accuracy if you'd spend your time improving". Well we did the math. We calculated the time they spend expediting and assumed that if we could improve enough to cut expedites in half, how much that would save them. Their eyes got as big as saucers. They saw that in this case at least, they'd have to double their forecast to make this level of money for the bottom line. Their response was,


"who cares anymore about improving forecast accuracy!" An interesting response

BLOG AUTHOR:

CHUCK NEMER

CSCP, CPIM, CLTD, CHSCA, CSSC, CPIA

FOUNDER, THE GURU OF BIZ

EMAIL : chuck@theguruofbiz.com


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Chuck Nemer is a trainer/consultant with 40 years of experience in Supply Chain Management, Lean, Leadership, and APICS. He currently works with approximately 50 universities and 3000 students annually in supporting the use and play of the simulations in the classroom. Within those 40 years, he has taught, and continues to teach, professional certification classes for APICS, professional development seminars and programs on his own, and on behalf of colleges in their outreach programs to local and regional manufacturing firms.


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