To What Extent Can Improvements in Productive Flow and Product Quality Lead to an Increase in Sales and Profit?
To what extent can improvements in productive flow and product quality lead to an increase in sales and profit? Use examples to critically examine the links. Sales and Profit are both critical goals in a company. If managers don’t achieve these goals, the company is gradually going to consume its capital and inevitably fail. That’s why they put so many attention on them and why they are always searching for new methods to increase them. In fact, there are many ways that can help making sales and profit grow.
A company can cut labor costs, outside costs or production costs, but sometimes it will not be enough and therefore it has to find alternative ways of improvement. Sales depend from a great number of factors. The first important factor that we have to take in mind is pricing. The price of the product we are going to sell to our customers drives the gross margin as a function of product cost. So, the cheaper it will be to produce it, the cheaper it will be sold to customers still allowing to keep constant the gross margin.
Therefore, the product will then be more appealing for them and sales will increase. Someone could argue that to reduce production costs, we could firstly reduce labor costs by moving the production in countries with low wages and salaries. But that could dramatically undermine the product’s quality of the company. The only way to reduce production costs while maintaining high quality products is to improve the productive flow, so that nothing is going to be wasted and product quality is going to be enhanced, as well. To do it, different methods have been experienced in the past.
The first method I am going to talk about is the so called “Just-in-time” (JIT), an inventory strategy developed by Taiichi Ohno. The fundamental point of this strategy, also known as the Toyota Production System, is that inventory is waste and products must be delivered on time. Companies have to improve their processes to maximize the reduction of inventory in them. The three main principles of this strategy are the following: • The Pull System • Continuous flow processing • Takt time When we talk about Pull System, we mean the system where processes are based on customer demand.
The goal is to build a final part in the exact time that the customer expected to be delivered. The second principle, Continuous flow processing, states that every product of a batch must be assembled, before starting with another one, instead of dividing the flow in different steps. Statistical analysis and Toyota’s experience demonstrate how this process increases productivity, builds in quality (it is easier to spot defective parts sooner), is more efficient and reduces costs by reducing inventory. Finally, the last principle of the JIT strategy is “Takt time”. With “Takt time” we mean the time spent to produce a product.
Every employee of the productive process knows it and tries to complete the work in less than the Takt Time in order for the product to be completed within the assigned time. A. Harrison, author of “Just-in-time manufacturing in perspective” tells us the advantage of companies using such a strategy: “Because of the key role of delivery speed in fashion-conscious markets, manufacturers with JIT manufacture and delivery capability will continue to win orders from those who are weak in this area” In fact, these “weak” companies have two “extra sources of waste caused by mismatches between sale and production”: Excess production of goods which there is no demand • Loss of sales potential of needed goods for which there is no stock available. In conclusion, A. Harrison argues that “JIT is about doing the simple things well, and gradually doing them better. It is about developing competence and simplification in the way we do things”. Another method of improving the productive flow and productive quality is strictly related to the previous one and is called “Kaizen”. Kaizen means improvement. Companies should constantly test and improve the work flow.
It was firstly introduced by Toyota manufacturers in the early 1950s and made Japan one of the strongest industrialized countries in the world. This strategy (or process) looks for ways of making small and immediate improvements in work processes and puts its basis on a system called PDCA Cycle. This system has four letters indicating four different steps: – P is for Plan. A company needs a target, to achieve results we have to know where we are leading to. – D is for Do, because we have to put in effect this plan. – C is for Check. We have to make sure that our plan is improving the process. A is for Act. The improved process must be standardized to guarantee that it will be done in the future and that there will not be returning problems. In both strategies we have analyzed so far, one of the key points was Quality.
This term is fundamental in a business because quality products are more efficient and reliable. By the way, measuring the quality of a product is pretty difficult and it is not simple to control it. When we talk about quality control, we mean “the maintenance of quality standards specified to contain variability in all its specified attributes within defined limits” (J. D. Radford and D. B. Richardson). As argued by the previously quoted authors, to achieve high quality products, we have to put some quality standards that are dictated by the following requirements: – Functional efficiency of the completed product – Cost and estimated life of the product – Interchangeability and ease of assembly – Appearance and “feel” of the product in use. In many companies, inspectors were employed to control the various processes, but the problem found by Radford and Richardson is that the quantity of items rejected varied considerably between the different inspectors.
In this sense Kaizen process that I have described before solves this problem by training every employee to identify damaged products at each stage of their production, so that problems are rapidly found and therefore quickly solved. Up to this point I described the ways and methods of improving productive flow and product quality. Now I will show an example of how these (or other) improvements can lead to an increase of sales and profits. Insight Direct (ID), a hardware and software distribution organization, felt that it had to improve the performance of its sales and order processing system.
It needed a system that could support a broader product offering, while reducing this processing cycle time and making the process more profitable. The result was an on-line inventory status and electronic data interchange-based sales/order processing system that has met each of these requirements and has dramatically increased customer satisfaction. Lead times for software products orders at ID for out-of-stock products were extremely long. Problem was that salespeople would take orders for computer software packages without knowing if the products were actually in stock.
If the product was not available it would be back ordered. To solve this problem, ID decided that it needed an easy-to-use system that would allow it to access its vendors’ software product inventory info in an on-line manner. With this system they reduced cycle time from customer order to product delivery from an average of 5 days to an average of 1 and a half and reduced percentage of products sold that were held in ID’s inventory by 80%. They increased products offered from 6000 titles to 35000 titles and dramatically reduced costs to process an order. All this goals brought to an important improvement in sales and profit.
This example supports my thesis, but there is one case that I found out, where low quality products can compete with high quality products. This case may be explained through a famous company, Nike. This company moved a great slice of its production to Asian countries, where labor cost is extremely low. The raw materials that it uses and the way its products are assembled are of low quality but nevertheless Nike’s sales and profits of the last ten years have been constantly increasing, with a slightly decrease only in 2008, during the recent financial and economic crisis.
The reason of this success is simple: Nike has a strong brand history and has a great marketing department. Nobody cares about the quality of its products because “it’s Nike”. The same argumentation can be made with Burberry, another important manufacturer that recently moved all its production from Britain to China. Burberry’s managers know that most of their customers are going to buy their products even if they moved their production, because the brand is popular and has gained a high-target market.
However, long term drawbacks caused by this strategy should be evaluated as well by the management. In conclusion, every firm should always look forward to improve its productive flow and the quality of its products, without incurring in additional costs. But in a world where image plays a fundamental role in every day’s life, marketing and promotion become key points in a company’s strategy. After all, as John Scully, former president of Pepsi and CEO of Apple argues, “No great marketing decisions have ever been made on qualitative data”.
References
- Haslam, C., Neale, A., & Johal, S. (2000) Economics in a Business Context 3rd ed. London: Thompson Learning.Harrison, A.(1992) Just-in-time manufacturing in perspective, Prentice Hall Intenational Ltd.Radford, J.D., Richardson, D.B. (1968) The management of production. Second edition Macmillan, St.Martin’s press.
- http://www.netmba.com/operations/process/structure/
- http://toyotageorgetown.com/terms.asp
- Handfield, R.B., Nichols, E.L. jr. (1999) Introduction to Supply Chain Management. Prentice Hall, Inc.
- Monden Y. (1983), Toyota Production System, IIE Press, Atlanta, GA
- Stoddard, W., Rhea, N. (1985) Just-in-time manufacturing: The relentless pursuit of productivity. Mater. Handling Eng. 40 3, pp. 70–76
