Backlog Reduction Gut Check

By Kevin Meyer

A healthy backlog can be a comforting feeling.  Boeing and Airbus rejoice in having backlogs over a decade long.  I used to work for a telecom equipment company that had a backlog of about fourteen months – also comforting until the industry went off a cliff in 2001 and the backlog was canceled within three months.

Those of us in the lean world know that a backlog often means that the customer is waiting, and with the exception of intentionally pre-planned future deliveries that is not a good thing.  So we work and toil to reduce cycle times, improve efficiencies, reduce changeover time – all to increase the velocity of product through the value stream.  And a funny thing happens.

We often start of with a backlog a few months long, perhaps something like this:

 

Pretty comforting since we know (unless the industry falls off a cliff…) that we'll be working for a few months.  The lean lightbulb goes off and we begin to work to improve product velocity, which begins to reduce lead time.  And the backlog begins to go down…

 

The current and next months still look good.  No worries.  And we continue to work.  Cycles times continue to go down.  Waste comes out, product begins to fly through the stream.

Uh oh… we start to get a bit of a queasy feeling.  We're busy this month, but next month looks pretty light.  Antsy finance types begin to make phone calls to the sales folks wondering what's up.  What are they doing wrong?  Orders are "drying up"!!  But the production guys keep working on lean because they know they are creating value for the customer.  They can respond faster to orders, customers become more comfortable that they can place an order and have it quickly.  Why should customers place an order three months out when lead times are now around six weeks?

Then the real gut wrencher hits:

Now we're really toast.  It's the first week of the month and we don't even have enough work on the books for the current month.  Next month is zero.  The CFO is now telling us to cut all possible costs because the company is swirling down the toilet.

Really?  Of course not.  Effective cycle time, driving published lead times, just kicked under that magic yet arbitrary four week number.  

I've seen this happen at several companies now, and it's always a test of faith.  Even in companies where order volume is scary consistent, that transition to under four week lead time creates fear and panic.  It usually takes about six months to a year for confidence to be restored.  Confidence that the month will be filled, month after month, because they are creating customer value in the form of being able to immediately accommodate variations in customer demand.  That's one way that lean drives a competitive advantage.

And that's why looking back you often realize that total orders in a month go up as backlog goes down. Customers actually place more orders because they see the value. As the backlog goes down the costs to manage the backlog also go down.  The backlog went down because product velocity went up, requiring efficiency improvements that in themselves also drove up the bottom line.

Top line up, bottom line up even more.  That's part of the power and magic of lean.