Sales, Capacity and improved Bottom-line

Company G, a small manufacturer of textile, looks into its next quarter. Assuming no major decision is taken the company predicts its total T for the quarter to be $485,465. However, its total OE for the period is $485,000, leaving net profit before tax of only $465. Too close to breakeven, and that is just a forecast!

The sales force got instructions to come up with additional sales – offering lucrative deals to potential clients, as long as there were no concerns for cannibalization. If intuition says some negative impact on other sales might happen, it should be part of the proposed change and the T and load calculations should reflect it. It turned out that early negotiations seemed good. Several new options were brought before management.

The graph of the predicted load looked like that:

Each row presents the relative load versus capacity of one critical resource. The Blue/Violet part shows the regular sales. The new special sales contribution to the load is represented by the pink part. The Dye, the current ‘weakest-link’, is now loaded to about 91% of its available capacity.

The financial state is depicted by this table:

It seems the additional load uses only available capacity. Even the Dye resource does not penetrate the 95% line, which represents the limit for the protective capacity of the weakest link. There is no need for any delta(OE).

The meaning is that by pushing the sales force the company succeeded to increase its predicted bottom-line from $465 to $45,965.

This means that realizing the amount of truly excess capacity in Operations should lead to putting pressure on Sales to come up with more opportunities. Of course, we require that the new opportunities should generate higher overall T, taking into account that sometimes new sales cause reduced sales of other products.

Another requirement is to make sure that the capacity profile is valid for delivering all the sales according to the market requirements. That means having enough protective capacity on all resources.

Looking at the improved situation for Company G reveals that even with the additional sales the management of that company should continue to push their salespeople to bring more sales.

The weakest-link, the Dye Resource, has still 3-4% of load to reach its protective level. All the rest have much more. Sales of products that require more capacity of the other critical resources than from the Dye might be lucrative depending on their T.

The main concern is that the additional sales might create too much load.

When we reach this stage then two different actions should be contemplated:

1. Using the capacity buffer to increase available capacity. The financial calculations should consider the delta(OE) making sure it is smaller than delta(T).
2. Reducing some other sales that yield less T relative to the capacity of the overloaded resources.

Suppose that after checking the above additional sales and realizing there is still room for more, additional ideas were checked, but then the following problematic capacity profile emerged:

The management of G realized they cannot promise delivery to all their potential sales with this overload. So, something had to be done about it, giving up some sales and being ready to pay more for additional capacity, under the condition that eventually the profit would be significantly higher.

Going carefully through both types of actions. Reducing some sales, where the VP of Sales confirmed it did not disrupt any commitment, and also using some additional capacity, which caused delta(OE), the final capacity profile, using fast computerized calculations, looked valid:

And the financial table became:

In other words, pushing Sales to come up with new opportunities, coupled with careful analysis of the capacity.  Then reducing some opportunities that required too much capacity of the overloaded resources. Then also using additional capacity to provide valid capacity profile, the bottom line went up from mere $465 to $130,065!!!

When Sales, Operations and Finance key executives sit together in a mutual-decision meeting to plan their activities for next month, or quarter or even a year, supported by fast computerized calculations, superior decisions with huge impact on the business are made.