SETTING PERFORMANCE GOALS
How likely is it that someone in your market will begin to deliver 100% on-time and zero PPM quality? What would happen if several suppliers began to do that? Would that affect your customer’s expectations for your performance? It’s already happening.
I used to go to the cleaners for my shirts and dry cleaning. I remember that I would either go in early before work and right after work. But everyone else had the same constraints so there we were waiting in line to check in our clothes and pickup with 10 other people and one person at the desk working very hard to make sure we didn’t have to wait more than 20 minutes.
But then I happened to move and change cleaners, and the new place had three people at the counter and no waiting even at peak hours. That seemed like heaven and I would never go back to a place that couldn’t do that for me.
But then one day someone came to my home and said they would give me the same service and pricing, and pick up my cleaning and laundry at my convenience.
After that, I would never go back to bundling up my cleaning, putting it in the car, and then taking my precious time to take it over to the cleaners. I was hooked on the time savings and convenience of home service. And there was more than one choice so the best quality and fastest turnaround became my primary criteria.
I know a lot of cleaning places went out of business because they could not foresee a time when home delivery would become the norm and at the same prices.
What happened to Blockbuster when Netflix began delivering movies to your home with no late fees and a lower price for more convenience? What happened to any major video rental place?
What were booksellers doing when Amazon started selling books online?
And what were computer retailers doing when Dell computer started taking orders and custom-building your computer and shipping it the same day?
Every industry has to look ahead and realize what changes are inevitable. And even though our first reaction is, “That’s impossible,” as leaders we have to refuse to accept that things are impossible because history tells us that it is highly likely that someone else will prove us wrong. Leadership then is accepting the “impossible” and setting a goal to achieve it.
Let’s consider what changes are inevitable in our aerospace and defense industry.
- 100% on-time delivery – in the past we have only been able to think about this through adding inventory – more raw materials if our suppliers had long lead times, and more finished goods if our customers needed near 100% performance. But many of us have almost lost our business going down that path. Carrying costs are the “silent killer” – add $2,000,000 in inventory raw or finished goods and you’ll add 20% per year in carrying costs – $400,000 per year. (the gift that keeps on giving) And what do we typically collect from our customer to offset that cost? Perhaps a thank you but we are rarely in a position to charge for this service because we realize that we’re only doing it because the customer has asked us to deliver on-time and we can’t without inventory. But we begin to notice that our margin, what’s left of it, is dwindling away because carrying cost doesn’t show up on a line in your P&L, it just hides itself everywhere on your financial statement – hiding in plain sight. The customer has very good reasons to ask and expect us to adapt – they are implementing moving production lines and can’t tolerate late parts and assemblies. They’re looking for suppliers who can help them.
- Zero PPM – how did that ever become a reality? Or it is? When we realize that production lines for our customers are going to be very fast and lean, we begin to realize that they’re setting up a condition where a single part could stop workflow – and each of those delays could cost the customer millions of dollars! It’s been reported that the new Honda Jet will employ automotive suppliers for most of its supply chains. Automotive suppliers have operated at 100% on-time and zero PPM for many years. Charge Backs have been appearing more and more often. Someone has to pay that additional cost for a part or assembly that isn’t right when it gets to the customer. In 1985, Bill Smith at Motorola published a paper that would later be used by Mikel Harry to found the Six Sigma Institute. The birth of Six Sigma came as a result of the realization that Motorola’s customers could not tolerate the levels of quality previously considered adequate or even good. At 3.4 part per million, cost and customer satisfaction continuously improved. Most aerospace suppliers are accustomed to operating at 2,000 PPM or more. Drawing a line between where we are and what it will cost our customers for suppliers to remain where they are, you arrive at a point where you cannot connect the dots. Suppliers must achieve six sigma levels of quality and charge-backs will continue to exist to re-enforce that reality – the customer is saying, “Somebody has to pay for this and it’s not going to be us.” Now faced with the cost or even part of the cost of a flight test gone wrong, many suppliers will have no choice but to go out of business.
Because these changes represent a clear and present danger to suppliers, I recommend that we adopt 100% on-time and zero PPM as either a short or long range goal. Depending on your current state, you might have to make this a long range goal but the most important thing is that you have a culture and capability to continuously improve metrics toward that goal. If you don’t allocate the resources to make improvement to the goal a reality, how will you convince your customer that you’re on board with what they will need and demand in the future?