I don't have any particular reason to pick on FormFactor, they just happened to hit the news with a typically insane quarterly earnings report at the time when I was looking for a good example. "The DRAM business was down 29.0% sequentially and 17.4% year over year … The Flash business has strengthened considerably, posting triple digit year-over-year growth in each of the last 3 quarters. The business was up 6.7% sequentially and 329.4% from last year … The Logic business (SoCs) was up 20.3% sequentially and 56.3% year over year." Not too surprisingly … "The pro forma net loss was $31.9 million, or 67.3% of sales, compared to loss of $31.4 million, or 54.4% in the previous quarter and loss of $23.9 million, or 54.6% of sales in the year-ago quarter."
It is pretty obvious the sales strategy is: You guys sell as much as you can of whatever you can to anyone you can. The manufacturing strategy: You guys chase sales up the peaks and down into the valleys to make sure the cost stays as low as possible. No big surprise it doesn't work too well. It is also pretty obvious that sales and marketing have been given a free pass to sit out the lean transformations in most companies.
The supremacy of the 'top line' is at the root of the problem, compounded by cost-based pricing that has the sales folks driven by the silly idea that the cost (and therefore the price) of every item they sell is unaffected by the volumes being driven through the factories. So manufacturing lurches from volumes that grossly exceed capacity to volume that grossly underutilize capacity. They go from rampant hiring and overtime, to laying off and cutting back. They go from expediting the supply chain to shutting it down. At both the high end and the low end, the waste is staggering.
At thelast Lean Accounting Summit Brian Maskell and I both presented on strategic pricing and the need for integrating sales and marketing with the rest of the business. In fact I am doing a webinar on the topic in a couple of weeks with the Lean Summits folks. This is all simplty areflection of the more and more obvious fact that sales and marketing has to join the team. Isolating sales from the rest of the business, and cutting them loose with a 'more is better no matter what' philosophy doesn't work.
Setting sales growth as a goal simply for the sake of growing is nuts. As Tom Johnson points out, anst should not aspire to grow to the size of people, and people should not aspire to grow to the size of elephants. Such growth will not make you stronger – it will kill you. The business should grow to the size that makes sense for the business – no bigger, and no smaller.
Sales growth has to be sustainable and at a rate that enables the factory to be leveraged at its optimum. Profits are at their highest when demand flows through the supply chain and through production at a steady – or steadily increasing rate. All of this wild up and down nonsense is a formula for assuring profits are never as they should be.
Pricing should support the achievement of a sales volume plan that maximizes the business. That is what strategic pricing is all about – not pricing to sell more no matter what.
For decades Toyota succeeded with this sort of thinking – growingtheir business at a slow, steady sustainable rate – outperforming their rivals who were driven by more is always better thinking, and it is Toyota's loss of focus on this rinciple that caused their problems – making the mistake of thinking market share and profits were somehow synonymous.
Time to get the sales and marketing people on the bus – getting accounting on the team was a cake walk compared to what it will take to get sales and marketing involved - but it is clearly the next big challenge. Getting them to understand that, if we sold 100 last year we want to sell 105 this year – not 90 and not 110. That means not only changing their thinking, but changing metrics and compensation schemes; and it means a whole new approach to pricing. Should be interesting.