Wednesday, March 15, 2017

Principle 1: "Follow the Money"

Follow the Money… All funds originate from the consumer

All funds ultimately originate from the consumer making consumer demand the fundamental element of success…

Purchase Activated Profits
The fundamental structural difference between a demand economy and a supply economy is that a demand economy is based on income from sales profits and a supply economy is based on savings from manufacturing costs. In order to understand a demand economy the first rule is to follow the money. And the source of all money in any manufacturing economy is the consumer, even though many transactions occur in supply chain or in the finance chain the source of the funds is always a consumer. Funds acquired directly from the consumer build profits, however; funds acquired from a finance base can only erode potential profits because additional costs have been added to the total amount. Financed funds always have to be paid back in total with interest. In a Purchase Activated Manufacturing (PAM) economy there is no physical inventory held awaiting sale, products are produced at a rate equal to the flow of money from the consumer through each stage of the supply chain. Although a demand manufacturing economy may require financing at its origin the direct relationship between the manufacturing and selling of the product creates cash on hand without the use of term financing or factoring. Sometimes it is hard to understand that ultimately in a consumer-based economy all money must flow through the transactions that initiate with the consumer. No matter how many hands funds pass through they will always lead back to the individual consumer and their pocket book.  Even on a wholesale B2B relationship making only what is selling creates a money flow based on Days-of- Supply (DOS) with very little float that is never out of stock and never over stock, no matter what size or SKU is selling.
To understand this fundamental principle we need to understand how our current supply based manufacturing economy came to be. Before the industrial revolution most products were made by hand and made to order. These products crafted by individuals were produced specifically for value received by the purchaser. As the steam engine and the industrial revolution took hold we found that the assembly line and the machinery for creating duplication of product produced greater efficiency. This was a time of expanding markets and products. New products appeared and created new markets and the ability to produce great numbers of items efficiently fostered a marketing myth that anyone who could create product efficiently and could create enough product would always make money. For over 150 years expanding markets, markets that were often created by new technologies, supported this myth. These new technologies, which in the last 50 years centered around the computer often, were used to drive even more efficient assembly lines and greater "productivity". This productivity often created huge amounts of waste, because a hidden danger of efficient manufacturing is the output of huge volumes of product in a market that was often stagnant. In a market that is no longer expanding overproduction creates a situation where the product has to be force-fed to the consumers in order to sell enough of the inventory to have a profit. This supply based manufacturing economy creates a marketing requirement to create product differentiation in order to capture a sufficient market share to move enough pre-manufactured inventory to cover cost of manufacturing and the cost of selling. Since the key to efficient manufacturing has been to produce the same product in volume, then to profit comes from the efficiencies and lower cost of manufacturing. In mass manufacturing product differentiation can only be attained by creating value in price. This requirement to overproduce and then discount directly reduces the financial impact of the consumer (the ultimate source of income) because they pay less for product. This self-defeating strategy of making more and charging less without creating intrinsic value in the product promotes an unsustainable manufacturing economy. When you couple this overproduction strategy with the impact that most manufacturing technologies have on the environment this self-defeating strategy becomes even more unsustainable.
Unsold sizes, colors and prints are bales of lost profits caused by pursuit of cost only efficiency...

Today's Merchandising Strategy: Stock, Discount and Dump
This “make more and charge less” approach to manufacturing has choked the retail sales base with a huge constipation of product. The only solution is a continuous pattern of promotions and clearance sales dumping inventory they don't need. When retailers can't dump it, they delay shipments or charge back expenses, punishing the suppliers for overproduction caused by the cost efficiencies they required when they negotiated the product cost per unit. This basic conflict between the suppliers and sellers has crippled the US manufacturing base. The seller's constant need to discount price has blinded them to intrinsic product quality as a basis for domestic manufacturing. This fixation on cost of goods has ignored many of the other financial factors including the cost of selling and clearance, which changed our entire retail structure into a strategy of turns and dumping. Until we solve the financial stress between sellers and suppliers we can't return sustainable profit making manufacturing. As long as sellers only want to pay for the inventory what they sell while suppliers are forced to produce huge quantities at the lowest possible cost per unit we will continue to flood our market with profitless bargains designed to dump the product of the antiquated strategies of the industrial revolution.

The Information Age Marketing Relationship

In a purchase driven relationship all players have access to the consumer.  They can work together or sell direct to the consumer through branded "factory" outlets or direct from manufacturer online.  The playing field is leveling and a new relationship will claim the players that fail to participate.

The situation that has allowed the financial imbalance between sellers, suppliers and manufacturers to continue over the years is one of real estate. Since the sellers own the real estate where the actual transaction occurs they control the funds from the consumer, this leverage has allowed them to demand cost concessions from the suppliers and to leverage ever-increasing pressure on the cost of labor. Many retailers have taken advantage of this absolute leverage making more and more demands on suppliers to reduce costs and ultimately many have enacted unilateral charge-backs. These actions have driven the profit level for suppliers to an absolutely unsustainable level causing unsafe and unfair labor conditions and environmental impact in developing countries all over the world. In addition, these demands have driven most of the manufacturing of retail products like apparel overseas. Once this manufacturing was offshore the political leverage of the apparel manufacturing industry and its unions was blunted at both the federal and the state level. This created an opportunity for well-meaning politicians to drive up labor and environmental regulation requirements and minimum wage levels to create an environment where it was impossible to bring back US mass manufacturing of apparel. Examples of this situation are the Clean Water Act and the Resource Conservation and Recovery Act both of which were designed to impact the country’s water resources, which were at risk of serious pollution from a number of manufacturing technologies. Because of these regulatory laws, there needed to be change in the basic technology of coloring fabric because it was impossible to bring back the full supply chain to the U.S. The problem is coloring the simple polo shirt can use over 100 gallons of water per shirt while discharging up to 70 different toxic chemicals. This massive use of water and the resulting toxic discharge had to be sent overseas where there was less regulation in order for the industry to continue its supply-based manufacturing paradigm.

New Technologies Support PAM 
New digital technologies like 3D Printing, DTG coloration, point cloud imaging, optical recognition cutting, inkjet sublimation and Active Tunnel Infusion have created new waterless, discharge free manufacturing environments. These new manufacturing developments paved the way to move more of the supply chain back onshore. This development has empowered the suppliers with the ability to sell directly to consumers through rapidly developing online channels and multi platform marketing that is expanding at a rate much faster than traditional retail growth. The ability to capture this virtual selling real estate has created the possibility of a new equilibrium between sellers, suppliers and ultimately manufacturers. Suppliers and manufacturers need to take advantage of this new real estate and sell directly to consumers recapturing some of the massive profits that have been lost by retailers through clearance markdowns and out of stock sales losses. This opportunity is available because of the new, clean, change on the fly technology, which allows suppliers to produce either one-off or small batches to support direct sales.
If properly exploited this new technology can balance the access to consumer funds and allow a more equitable distribution of income between the sales, supply and manufacturing components of the production and sales process. This technology also increases profit available by reducing the cost incurred by inventory that remains unsold or unshipped. The ability for both, sales and supply, to take advantage of this new profit available because of the new sustainable production and sales strategy can create onshore manufacturing fuel by profit directly derived from sales income.

Purchase Activated Manufacturing Consumer Successes
The first and most dramatic case of direct consumer Purchase Activated Manufacturing (PAM) is the paint counter at your local home center. In the days following World War II hundreds of thousands of GIs were buying houses; construction was at an all-time high. All through the 50s and 60s we had an expanding market for paint. This market was so dynamic a sellers market that stores could afford to stock hundreds of premixed colors to satisfy this massive expanding market. In the 80s and 90s more houses were being redecorated with hundreds of new primary and secondary colors. The basic colors stocked by hardware and paint stores all over the country were using up tremendous amounts of selling space and inventory share with colors that had specific shelf life. This problem was additionally impacted by the chemical nature of making colors and some of the pollutants like lead and iron oxide which made the waste from the plants and the surplus inventory difficult and dangerous to dispose. The solution turned out to be very simple; harness the color technology that was used to make the exotic colors in the plant, simplify it for in-store use and make the product after the consumer selected it. This provided a solution to both the inventory problem and the pollution problem while rapidly becoming the highest profit per square foot real estate in the home center.
Consumer Purchase Activated Manufacturing (PAM) from a Virtual Inventory
The second and often overlooked agility solution is in our hand everyday. Our smartphones represent massive agility wrapped in a relatively common silhouette. By offering thousands of apps delivered through a single device the smartphone has created tremendous value by allowing the user to build a menu of functions constructed around their individual needs. By connecting this virtual product to real consumer selected activities, smartphone manufacturers have increase the value of their product without requiring dramatic changes in their basic production technology.

Taking the same concept that the smartphone is used we can extend it to another highly successful and now domestic market of the simple T-shirt.  Using new change on the fly technology created for Direct-to-Garment (DTG) inkjet printers, digital decorators are now successfully printing full-color images on  T-shirt blanks directly from consumer art chosen from online clipart through Internet configuration software.
PAM Consumer purchased then produced DTG
 This industry has exploded in size over the last five years by partially completing the connection from virtual design information directly to a physical product. The remarkable expansion of the digital decoration industry is an example of the profit driven evolution of a consumer driven Purchase Activated Manufacturing (PAM) industry. Although the multibillion-dollar T-shirt industry is clearly being affected by this new technology the overall apparel market will soon be impacted by further advances in technology, which will allow dying in printing directly on white or solid colored fabric. This ability for the massive apparel market to change product on the fly will allow direct replenishment to retailers that matches their retail sales and creates a “no out of stock, no overstock” sales environment. In addition, this technology will allow suppliers to sell direct to the consumer, which will begin to balance the leverage of funds in the industry.
Over a decade of digital and demand manufacturing development has lead to these Lessons Learned about “following the money”
Step one: Track the path of funds from the consumer’s wallet to your bank account.
Step two: Track the product from final assembly to the consumer’s possession.
Step three: Calculate the difference between the product production unit count and the customer/consumer unit possession count.  This is the actual sell-through.  A wholesale sell-through is the difference between the contracted order and the shipped and paid total.
Step four:  Calculate the difference between actual sales income and the sale of the entire ordered inventory at full retail or wholesale price… this is the lost income from mass manufacturing.

Real Life Purchase Activated Apparel Example

Next Installment: Principle Two


Manufacturing agility must match variable demand in speed and scale