Free Give Away?: A Case StudyByRaymond D. Matkowsky
How much free material do you ship a year to each of your customers? You don’t! Think again! Maybe you do and don’t know it!
Being in charge of the quality control lab for a small chemical manufacturer, taught me that everything may not be as flawless as it seems. This lab’s job was to insure that all company products were shipped within specifications and issue “Certificates of Analysis” when requested or required.
In response to a client’s request, a review was conducted of all control data for shipments occurring within the previous six months. As assumed, all batches were within specifications. In this case ± 1% of the stated active ingredients. However, when viewed from the prospective of total shipments as opposed to single orders, a disturbing pattern emerged. We were giving away a vast amount of free merchandise.
Lost Profit!
As I said all batches were within specs and appeared acceptable. However the majority was at the high end. For example, if the active ingredient was quoted at 10% with a specified range of 9 to 11%, the majority of the batches came in at 11%. Within a six-month period, the company shipped over $18,000 worth of free goods with this one product alone. The company catalog listed over 150 products that were manufactured in various quantities. A partial analysis of these indicated that over the previous year the equivalent of close to $75,000 of finished goods was lost this way.
Stopping the Shrinkage
What can you do to stop this loss? First you have to find out if you actually do have a problem. The information should already be on hand. All you have to do is review it. Do it now whether you suspect a problem or not! You never know what you may find! It is better to learn of bad news before it turns into a crisis that you will find difficult to control.
If you don’t have a problem, congratulations! You can go on with the rest of your business. Assuming you do, you’ll want to stop it quickly because it’s your profits going out the door. Most inventory shrinkage problems are quite easy to correct and probably without any cash infusion. You may find that this is your case.
If your product is water-based, which most are, the solution is quiet effortless. Simply tighten up your specifications. Instead of ±1% reduce the specifications to ±0.5%. Usually this just requires a simple adjustment with water.
Alternatively, you may want to keep your specifications at ±1% but require plant personnel to get a supervisory sign off any time your variation exceeds ±0.5%. The effect will be to encourage your workers to stay within the lower range plus make the floor supervisor aware of any problem areas before they become excessive.
If your product is not water-based or its production is more complicated, you’ll need to do a little more digging to discover the causes of your problem. It may require a full-fledged Analysis of Variance to determine what factors and interactions influence your final results and it may take more of your time and money to do so but it maybe well worth the effort since it will most likely pay for itself.
Small Variations = Large Losses
Small errors can add up to major costs. You would be wise to plug small leaks before they begin to surge away your profits.
Have you had this type of problem in the past? If so, how did you handle it? Let us know. Email me at rdm@datastats.com.
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