Book Order Form | Table of Contents | Preface | Chapter 1 | Chapter 2 | Chapter 3 | Chapter 4 | | Chapter 5 | Chapter 6 | Chapter 7 | Chapter 8 | Appendix A | Appendix B | Glossary

    Planning and controlling an inventory is an extremely difficult task during a highly accelerated period of growth. The time and actions necessary to keep inventory under control can be outstripped by the need to move forward fast. Pressures on the Manufacturing department increase to insane levels. Whenever you catch up, you are behind. Efficiency starts to decline. There just is not time enough to do things with the same detail and thoroughness, and compromise, becomes a key word. Decision times are reduced and everyone looks for ways to shrink procedure times as well.

    A real danger comes when the growth slows down or the company takes a different direction with a new product. Having built up an inventory to meet greater demands results in an inertia, keeping a high risk situation in place which must be monitored constantly to prevent economic disaster from a surprise down-turn.

    And if that were not bad enough, in many growing markets, prices can drop quickly, forcing through-put production rates that are even higher than the elevated sales rates (through-put=the rate of output). If the price drops 20%, unit output must increase 20% just to maintain the revenue stream at planned levels. Also lower prices often increase sales to a frenzy, and the manufacturing department must respond and meet the demand.

    Suddenly, as well as overcoming the new requirements for growing sales, you have to recover the lost revenue reflected in lower unit prices. This kind of growth requires even more planned over-kill. Planning based on what you have done in the past will not work, because before the new output and efficiency targets are reached, the requirements have increased again, creating new needs and forcing inefficiency.

    The Hump Theory states: Higher growth rates require companies to commit more resources than had been called for in the normal course of planning in order to overcome production inefficiency and to achieve the expected future output levels. In other words, if you do not plan overkill, if extra resources aren’t added, you will just be chasing your tail.

    In a slow growth situation these types of resources are placed on a set schedule, just early enough so that they will meet the demands as defined by the target date. But high growth planning requires that all resources be put in place immediately to cover the additional output. For instance, even before doing the obvious -- increasing direct labor to produce more product—upper management must recognize that sales activity will greatly strain accounting transactions as well as all the support efforts in manufacturing planning, purchasing and shipping.

    The time it takes to get resources up to speed depends on several other factors, including: the length of the manufacturing cycle, the length of any required personnel training, the complexity of the product, the skills needed for the operations, and the support and tools available. Additional resources will have to cover temporary inefficiencies created by inexperienced personnel. The demand pressure on human resources is related to the rate of growth.

    Obviously, in any manufacturing enterprise all resources -- a trained work force, raw material, machinery, and even product design -- have to be in place before production can begin. This is represented in Graph 3, where the resource line leads the output line for the duration of production.

Graph 3: The relationship between resources and
output for a slow-growth company.

    Graph 3: The horizontal difference between Resources and Output -- A to A¹ -- represents the lead time required to accumulate enough resources to meet the required output level (in this case 2 months). For slower growth rates, additional needs are modest and can be integrated and absorbed with little effect on the overall efficiency average. Even though inexperienced new hires have to start at the bottom of the learning curve, the time they need to become efficient on the job is absorbed by the longer available lead time.

    With a rapid growth situation comes the need to continually add resources, but continuing inefficiencies make it difficult to ever really catch up. In Graph 4, Point A, located at the current point in time (T), indicates the total resources which would meet the output at point A1 in a slow growth situation.

Graph 4: The Hump

   Point B represents the resources required to meet the output requirements at A² in a rapid growth situation. The B resources are nearly twice what would be expected because rapid growth introduces higher than normal rates of inefficiency.

    Furthermore, the hump moves in time as the output requirements raise. By the time output A¹ is reached, the resources have to be at B¹, since they are needed to meet the higher output requirements at output A².

    The hump continues to "roll" up the resource curve so long as rapid growth is maintained. Management always desires and plans to get ahead of it, but this will be difficult at rapid growth rates. The size of the hump depends on the rate of growth (the slope of the output curve) and the normal lead time it takes new hires to raise their efficiency and quality to the specified project norms.

    Human resources are much more difficult to bring on-line than equipment. A machine producing 400 parts with an efficiency rate of 92% in one eight-hour shift can double output simply by being running an additional shift. If the machine’s out-put rate holds, it will produce consistently and reliably, providing the company with a steady predicable rate of output. By contrast, doubling personnel related output is far more difficult and time consuming, because before you can double the shifts, you first have to find and hire the qualified people and then get them up to the necessary efficiency rate. But in a rapid growth period there isn’t time to get every new-hire up to the increased efficiency before the overall requirements change dramatically, calling for even more resources. While experienced workers operate at an efficiency of 85%, an inexperienced worker, by definition, starts at the bottom of the learning curve with an efficiency rate near zero. Their low efficiency, although temporary, still pulls down the overall average significantly. How much that average drops will depend on the time required for improvement and the number of new, inexperienced additions to the base.

    To make matters more difficult, rapid growth tends to flood the process with new employees, who usually show a turnover rate much higher than the norm. Those transients who leave early offer a negligible contribution to the time expended and hurt overall performance by slowing the process of integration of new workers and the subsequent improvement in efficiency that experienced workers bring to the job.

    Cash flow can also be heavily impacted by inefficiencies during the hump period. In rapid growth planning, cash flow projections generally focus on inventory and accounts payable needs, which simply match production figures to the orders needed to pay for them. Such cash projections normally carry estimates for a payroll related to efficient personnel on-line and ignores important inefficiency factors, such as the cost of hours lost by inexperienced personnel building useless inventory. Those are payroll hours which will probably never be covered by pricing and collection activity. I suggest to anyone interested in covering their back-sides, that the cost of inefficiency be carried as a separate line item in cash forecasting schedules.

    During these Hump Periods the profits expected from increased sales can also take a big hit from inefficiency. This unexpected, heavy hit on profitability happens because the extra resources needed to overcome inefficiencies eat up a great deal of the potentially profitable contribution of increased sales. Costs due to inefficiency end up being written off as operating expenses on an ongoing basis. Even when pricing models attempt to cover inefficiency to reach realistic profit goals it is extremely difficult to predict inefficiencies in a fluid situation brought on by continuing rapid growth rates.

    In rapid growth the battle cry is, "Get more people in!" When the situation is severe enough a company will hire anyone who is breathing. All areas of a company need the additional help that growth demands. Increasing sales produce a proportional increase in the number of customer inquiries, support calls and demands. But seldom will management attempt to keep up with demand by adding overhead costs of this class personnel.

    Measured simply in terms of output the inefficiency of indirect employees may or may not be as visible as that of direct employees, but inefficiencies in any area always costs money and adversely impacts the product and customer service quality. Sales needs more sales staff and engineering needs more design help, and each new hire will bring with him the same period of low efficiency as the direct manufacturing labor. Even though demand for the product or service may be high, pricing is often critical and cannot easily be raised to cover all the indirect inefficiencies associated with rapid growth. In fact, as noted earlier, acquiring a higher sales volume often involves lowering prices. So to cover the additional costs and initial shortfall, some companies hold down indirect staff costs.

    It is sometimes possible to delay hiring additional personnel (except direct manufacturing labor because without added labor there will be no added product output) by working everyone harder and for longer hours until the staff members either quit or nearly suffer breakdowns. But when the indirect work force is stretched too thin, the results are seen and felt in lax procedures, discipline, and controls, i.e. inefficiency. It is also not easy to rapidly add skilled personnel to upper level positions, so people within an organization are often over promoted. They hardly have the time to learn their newest job before they are promoted again.

    Rapid growth forces an atmosphere of compromise which lowers the overall quality and performance of a company. This let down may come back to haunt the company, if inefficiency outperforms the sales, the reputation suffers. At the very least, rapid growth could prevent the company from optimizing performance while chasing higher outputs and profits.

    As you can see, large increases in manufacturing play havoc with the entire operation. It creates chaos on a daily basis by putting tremendous strain on supervision, human resources, material and production control, and top management.

    Two experiences I had are good examples of how improving the process improves yield rates and gets more output from the resources that are in place.

    In the first case, the product was a system that we were not testing thoroughly enough in the final stage. The manufacturing manager and I sat down to discuss how to process returns faster, and were confronted with an amazing statistic. At the rate we were building up product returns, and factoring in our growth rate, in three years the returned inventory would fill up the entire five buildings we occupied.

    Obviously something was wrong with our product, and we needed expert advice. We got engineering in to help, and as a result, we tightened specifications for the major components, added thermal testing, and put our best assemblers on the reworked product before shipping to the customer the first time.

    As a result of these changes, yield and output went up considerably with little additional expense. We were able to solve the inefficiency by rethinking and re-engineering rather than by adding acres of new personnel to out build the inefficiency.

    In the second case, the product was a component. We were producing over ten billion units per year, striving for a goal of twenty billion at a manufacturing yield of 50%. Every time we needed to increase production there was a flood of purchase orders for additional manufacturing equipment, totaling several hundred thousand dollars. One day I finally said, "No more."

    Enough was enough. We formed a tiger team with a couple of our best process engineering people and charged them with increasing the yield one percent at a time.

    These incremental gains of 200 million units turned out to yield good revenue gains at a modest cost. We made those gains by adding process controls and monitoring devices in the production phase. It was painful making those changes -- we had to shut down the entire production line a few times -- however, our sales people did a great job of keeping the customers hanging in there by convincing them that ultimately they would get a better product. The best thing is that when we were done they actually were better served.

    There are times when too much backlog can hamper new sales. When the orders on hand exceed the resources to ship, new orders get turned down, creating disappointed and at times bitter customers. Worse yet, customers usually seek other suppliers and never return again.

    During such over-committed sales periods it becomes clear fairly early that all customer requirements cannot be satisfied, and managers generally know which customer needs will be met and which will not. This creates a dilemma and a Catch 22 situation.

    Customers get upset when they are told at the last minute that they will not receive their order, but when told early on they won’t get their order on time, while there still appears to be enough time to work on it, they get even angrier because it sends the message that their needs are a low priority compared to the needs of other customers.

    There are other problems with an over committed shop. If delivery times are longer than competitive market norms, you risk losing the customer permanently, unless you want to take orders knowing you cannot meet the delivery commitment, which is always extremely risky.

    Even though there are high hopes all around the company that the rapid growth rate will continue, the manufacturing manager invariably loses many hours of sleep worrying when it will end. His biggest fear is that after putting a good team in place and finally meeting the growth needs, his great resource might have to be disassembled and people let go.

    Graph 5 plots sales backlog against the output. The backlog covers the production output until point C, at which point, the firm, committed sales falls abruptly. Since the manufacturing manager is closest to the situation, his discussions in meetings will be seasoned liberally with the word "cliff." However, with rapid growth rates there is no turning back, and each day becomes a gamble. If management takes time to figure out how to control this juggernaut, when they look up again, the opportunity might be gone.

    The following example shows the impact of rapid growth rates on efficiency. It only examines the period before new resources reach normal levels of efficiency. I’ve traced the near-term impact of rapid growth on the efficiency of a manufacturing operation. In rapid growth, the near-term pressure never goes away, it is always right on top of you. Since the dynamics of the bigger picture always force constant changes, the example covers only a portion of the operation related to labor hours.

    The company begins with 100 hours of human resources in place at 85% efficiency (Table 10). It then adds additional work hours in the form of overtime and new hires. Since overworked personnel rarely increase their efficiency with longer hours, overtime hours are assumed to be 10% less efficient, in other words to yield 75% of productive hours.

    The figures for new hire efficiency are dismal: the addition of 24 hours yields only a 28% in output. When new-hires are added, their hours are significantly less efficient than experienced personnel, until they gain experience and are brought up to speed. Their efficiency rates are 30% for regular hours and 20% for overtime.

    What inefficiency means is that during rapid growth periods you cannot expect to run at the normal 85% efficiency rate. Additional growth has to come from new hires and overtime. As shown in Table 10, to achieve 25% more output, to increase the effective hours from 85 to 106.8, the input to the direct labor must increase far more than 25%. Obtaining the needed 21.8 effective hours requires 44 additional hours in the form of experienced overtime and new hires. It would take an increase of 44% to gain 25% more output. This is rather disappointing.

Table 10: Labor Efficiency

    Inefficiency affects the cost factors even worse: getting 25% more output costs 56% more. The 24 hours of overtime, paid at 1.5 times the regular rate, adds 12 additional hours to the payroll or a total of 36 regular payroll hours.

    Continuing with the present example a 100% increase would require a 354% increase in work hours. In other words, to double the output it takes 3.5 times the original work force. It seems incredible, but then again, 100% growth does not come easily.

    In one company I worked for we grew the manufacturing work force from zero to five hundred people over eighteen months on three different occasions in three different countries. The average efficiency for the eighteen month period ranged from 30-35% of our standard. Fortunately, after being hurt in planning by optimism during the first experience, we planned for the loss of efficiency in the second and third.

    Other rapid growth situations may vary in time frames and efficiencies, which would change the size and shape of the hump curve, but one thing is consistent: growth above 25% in a short period of time demands that the work force explode.

    In a rapid growth planning based on historical labor efficiency rates are not adequate. It is far more accurate to plan this week based on the efficiency and yield factors of last week. One way to lessen operating problems is to set aside a key person whose job it is to look toward the future. Make it their job to examine today’s way of doing business and target changes needed over the next six months. Otherwise, six months from now your company will still be wrestling with the same problems it has today.

    Where no growth means not having to risk committing additional resources, growth requires counting on the growth rate being higher even before firm sales commitments. As a result, the more resources are committed and the more output is increased, the higher the cliff looms. But once the commitment is made, there is no turning back.

    This is a scary, nerve wracking way to do business and this unpredictability and volatility is why everybody talks about wanting and needing growth, but many managers work subtly to avoid it.

    Unfortunately, those on the outside looking in do not understand the phenomenon of rapid growth rates. Because commitments continually exceed resources, the manufacturing manager is in a no win situation: there will be constant reminders of missed commitments by Sales, Marketing, and General management. The inefficient labor costs may be covered as they occur, however, with constant changes in requirements being the norm, there is greater risk of excess material getting into the system. In such a dynamic market you feel like you are operating in a match box on a conveyor belt slowly moving toward a furnace.

    When rapid growth is new to a company, it might not be easy to make the needed culture change. Imagine creating all that turmoil and dramatic change in a stable company with a well-established, controlled mode of operation. Can a company, whose policy dictates only putting resources in place after a firm sales order is received, make the change to a method of operating where uncontrollable growth and gambling on the future is the norm?

Not likely.

    Rapid growth must be approached with the right attitudes: an understanding of the need for change, the need for energetic, sometimes chaotic operations and compromise from all departments. It is for those who are willing to gamble but are not afraid of planning week to week. Rapid growth is not for those with faint hearts or weak stomachs.