Last month I wrote about the need to learn how successful manufacturers in the past have dealt with rising labor costs and changing global business conditions.  This month I want to think about one of those successful strategies:  supply chain partnerships.

I will describe a supply strategy that I see again and again.  I almost always recommend against this strategy, because really it is just a bad habit that is hard to break.  Then I will describe how to make a better supply strategy.

In your factory, do you use some kind of commodity as a raw material?  Maybe it is steel, copper, cotton, lumber, or something else.  Do you try to “beat the market” by buying large quantities of this raw material when prices are low, so that you will be well-stocked when prices are high?  Please stop that. In the long run, it is a losing strategy.  The most successful companies in advanced manufacturing do not use this strategy.

This may be a surprise, but you quite likely would be much better off if you purchase your commodity only as you need it, from a highly-qualified supplier.

Commodity trading is an industry all to itself.  In London, Hong Kong, New York, Dubai and 100 other financial centers around the globe, highly-trained traders work constantly to win the commodities game.  They buy low and sell high.  They understand how to use complicated options to hedge their bets.  They are supported by entire teams of analysts in buildings full of super-computers.  Are you really that good?  You need to be brutally honest with yourself about this.  Can you really beat those guys at their own game?  If you can, then congratulations, and maybe you should be closing your factory so that you spend all your time in commodities.  But maybe you are not that good?  Maybe the professional commodity traders see you just the same way a professional card player sees the tourist in the casino.  If maybe you are not quite that good in your commodity bets, and if maybe you should instead be trying to make money with the value-add you perform in your manufacturing, then you should stop trying to finance your cash-flow needs by winning at such a risky game.  It is gambling, there is no other name for it, and it would not be much different if you told yourself that a trip to Las Vegas or Macau was a business investment.

So what is the alternative?  Find a supplier who will absorb the commodity risk for you, and deliver these raw materials in small quantities ready-to-use.   Instead of buying enough material for an entire month, imagine that you might buy enough material only for one day.  Imagine the material being delivered ready to use, exactly as your worker needs it.  Imagine the delivery driver bringing raw materials all the way into the factory, right up to the machine where you will first do something with it.  We call this “point-of-use” delivery.  It has many advantages, here are just a few:

1)      You will free up all the cash you now have tied up in raw material inventory.

2)      You will gain flexibility with your customers, because you will not be trying to push them into buying the old stuff you have in your warehouse.  You can move with agility as demand moves from one product type to another.

3)      You can demand perfect quality from your supplier, because you will immediately see whether raw material meets requirements.

4)      Your supplier can perform the low margin and low skill value-add to the raw material that is not profitable for you.  (I call these the “commodity activities”.)

5)      You can focus your own management expertise on the core business where you really earn your money.

6)      You can simplify communication on your factory floor and back to your supplier.  When everyone sees exactly what should be done, the boss no longer has to tell them to do it.  Or to make another example, when the delivery driver sees what material needs to be delivered, you don’t need a purchasing manager to tell him to do it.

Obviously, you need a supplier you can trust to adopt this strategy.  Find one.  As China moves into higher-skill processes, the companies that try to play the supply game the old way will soon find themselves left out in the cold.

Know your skill, and focus on that skill.  It is your core competency.  Do not be envious when you hear about someone else who earned millions by placing all the right bets on aluminum, plastics, chromium, or whatever.  Of course there will be a lucky few, just as there are a lucky few who hit the jackpot at the casino.  But those beautiful casinos did not get built without suckers who lost at the game.  Have you ever seen how beautiful are the offices of a big-city commodities trader?  Don’t be the sucker at that game either.

I am often asked for advice on the strategic choices of small and medium manufacturers. As an advisor to business, I study to understand what we can learn from the past, and recognize the signs of change for the future. Learn from past mistakes to avoid future mistakes.

In this article, I want to describe three choices that an American company faced thirty years ago. We will learn from history, and get a lesson along the way. I hope this story will help you make your own strategic choices.

Imagine the owner of a textile mill in the US thirty years ago, in 1983. Let us say the factory is in the state of North Carolina (I will use textiles in North Carolina as my example. If your business is in something else, think of your own industry as you read on. You can picture this factory owner making electronics in New Jersey, or metal hardware in Ohio, or plastics in California. The same story has happened again and again.)

It is 1983 in America, and business is good. North America and Western Europe have just come out of a dangerous recession and the economy is improving nicely. The factory owner has heard that a new leader in China (Deng Xiaoping) is encouraging economic reforms that will open up China to the world economy. Perhaps the tide is changing. Should the owner make any change to his business strategy?

Looking back now, we can say that of course the answer is yes. Thirty years ago China brought the entire world into a new era of global productivity. Before the 1980s we could only guess what kind of manufacturing muscle was under the dragon’s skin. Now we know.

Many factories in China today face these same threats. The world continues to change, and China is no longer the sure place to start a low-cost business. Once again, factory owners are asking – is it time to make a change to the strategy?

Our American factory owner in 1983 soon discovered that his business was changing right beneath him. He had three choices for his response. These are the same three choices faced by many China factories today:

1. Win the competition because of your low hourly labor costs.

To keep costs down, the factory owner could move his factory out of America. He might move to China, and many did. This strategy can work, temporarily, but sooner or later this strategy will require another move. Eventually someone, somewhere will work for even less. The personal sacrifice of moving the factory out of the community might be substantial as well.

2. Win the competition because of friendly regulations.

The North Carolina factory owner could go to the government for protection. He can seek special rules or taxes that will make business difficult for foreign competitors. He can look for government-sponsored subsidies in bank loans. The owner will try to use pressure on everyone in the supply base to stay local, because as soon as one part of the supply base begins going to China, the entire industry might move there eventually.

3. Win the competition because of your lean efficiency and quality.

Some factories in America faced low-cost foreign competition head-on and still did very well. Some factories did not move, and some factories did not run to the government for safety. North Carolina still has a textile industry. New Jersey still has electronics. Metal hardware and plastics are still made in Ohio and California.

How did this last group of American companies survive and thrive in the new business world? Perhaps you think the answer is simply that they replaced high-cost workers with automated machinery. No, that is not correct. These companies learned new ways to think about efficiency and quality. Manufacturing processes that operate in flow, not batch. Instead of quality ensured by redundant inspections, they discovered how to build quality assurance into the flow of the process.

The effort required by these successful companies was enormous, and required great humility. The owners and managers found that they had to adopt cooperative and collaborative approaches for dealing with workers and with suppliers. They had to throw aside activities that were merely done “good enough” so that they could focus on the activities in which they excelled.

These companies can now produce at a lower cost than anyone. They are not afraid of any competitors. The owners and managers were able to stay in the towns where they wanted to live, and they have great honor in their communities.

If you have a manufacturing business in China, I see these same three choices you can make. You can focus on your labor costs, you can focus on getting government-sponsored help, or you can learn new concepts of efficiency and quality.

Here are three things for you to know about the methods you can learn from the last group of companies I described, if you want to consider the approach:

1. These methods will improve your cash flow and reduce your needs for capital. That is why they were invented.

2. These methods require humility from owners and managers.

3. These methods require a commitment to constant study and improvement.

When you go fishing by the ocean shore, you should pay attention to the changing of the tides. When the tide turns, you need to change the way you fish. I see that the tide is turning. Change now or get left behind. Make your choice, stick to it, and gather around your good advisers who can help you stay on your chosen way.

There’s an interesting theory when it comes to theaters and the absurdly high popcorn prices they charge.  Theaters make their biggest gross revenues through selling popcorn.  Although tickets are usually a little higher than popcorn, theaters do not have to split the revenue of their popcorn sales like they have to with the ticket sales.  Ticket sales revenue has to be split with the movie makers.

The profit margins for popcorn sales in theaters is in the high %80′s to %90′s.  Because of this, theaters use the old theory of charging more for the secondary product than the primary product.  They realize that by getting viewers to the theater through cheaper ticket prices, they will in turn be able to charge a higher price in comparison for popcorn.  So the person who really wins is the one who pays for a ticket but resists the temptation to buy popcorn.  However, theaters realize that it’s the whole experience that people want.  Sometimes it doesn’t feel right to go to the theater and not have popcorn.  This is similar to the person that overpays for the food at sports games because of the experience of having the two products go well together.

This all raises the question as to how efficient theaters are at producing popcorn.  How long does it take from the second you ask for a bag of popcorn at the cashier until the second you walk away with your purchase?  Theaters should be doing everything they can to maximize their efficiency at delivering popcorn to the customer.  Effort should be in speeding up the process (at least during peak hours when there are line-ups).  In my own personal experience (and I enjoy popcorn and a movie quite a bit) the process is not that fast.  Every line-up usually has only one employee receiving the order, getting the popcorn, getting the pop, than taking your change, and finally handing you the purchased items plus the change.

Without getting into complex details about how to streamline the process, how to speed up popcorn machines, how to maximize space, how to minimize employee line-ups for the pop machine, how to unfold bags quicker, how to eliminate waste etc, etc… why not simply have an extra employee standing beside the cashier?  I have seen this happen at a circus once, but surprisingly not at theaters.  You order popcorn and pop and make a payment, while the cashier immediately processes your order.  While the cashier is getting the correct amount of change the second employee assigned to that line gets the items purchased.  The line-up is significantly sped up through this simple process.  One of the reasons why movie theaters may not do this more often is because they are sometimes stuck in the old mentality that labor costs are extremely high.  They may tend to think that having to pay an extra employee is not worth the extra speed it brings.  They fail to realize that labor costs only account for roughly %10 of final costs at this point.

Of course, this is just a simple observation.  A study would have to be done to see if movie viewers are foregoing the popcorn line if the wait is too long.  If the wait is not too long for the average customer, than speeding up the line maybe does not save the theater any money.

What is interesting about all this is how Universal Studios delivers an experience more than a product.  They are delivering a story that people can walk into.  Walking into the Island of Harry Potter, fans feel like they’re in the movie experiencing the same things as the characters do.    In the past, the focus for companies was the final product—or the end product the customer gets.  In this scenario, it would be the “Forbidden Ride” inside the castle.  Everything else was just the necessary.  The bare minimum was provided.  Customers accepted it because it was the norm.  Now, however,  the focus is on delivering a more complete package.  20 years ago Universal Studios would have built some roller coaster they called the Harry Potter ride and would not add in all the extras such as the village itself, the stores, and the castle.  There would have been no focus on delivering a pleasurable experience while waiting in line.  The focus now is on delivering a complete package with quality pushed into every step of the process that the customer experiences.

What else is unique about the ride?  Well for one the seats are on a constantly moving conveyor belt.  Seats come in groups of 4.  Fans walk onto the conveyor belt and buckle themselves into the seats while moving.  This is what creates a constant flow of the line.  There is no long stoppage where a bunch of people climb into the rides and wait to be buckled in.  Rather, in small but constant groups, fans walk onto the belt and strap themselves in.  Because of this, Universal Studios is able to maintain a constant rhythm.  A constant rhythm allows for them to control the lines, keep fans happy (because of constant movement through the castle) and problems are little because it only can affect one cart at a time.  If one cart that holds 4 people has a problem it is no big deal because there is a new cart right behind.  The entire line waits a couple more seconds because only 4 people were delayed.  Finally, because of the constant movement, staff is better able to predict waiting time thus knowing how to inform fans.

The Harry Potter ride is one of the few in the world that has a conveyor belt that never stops moving.  Because of it, and also because of the entire experience the island delivers, the Harry Potter Island is one of the premium theme parks experiences in the world and also a great example of how a good product is delivered.

These tours will be starting in late January.

Understand:

- Efficient layouts (How Businesses have organized and shaped their work lay- outs to maximize efficiency, and successful culture)
- Innovative processes
- Lean practices
- Kaizen philosophy first employed by Toyota
- Successful management Structures
- Work Regulations according to Countries
- Successful employee cultures and more…

For more information contact us at: info@mjmckay.com

Businesses are slowly starting to realize that the labor wage competitive advantage is not as big as it used to be.  Outsourcing to Asia is not paying off in the same way it once used to.

There are a couple of reasons for this.  The first and main reason is that material cost accounts for much more of the total cost than what it once used to.  This is in big part due to the fact that with advanced machinery, quicker processes etc,, we are now able to make many more products at a faster pace.  Labour costs are only accounting for roughly 10-15% of the total cost of the process.  Previously, this percentage used to be around the 40-50% mark.  Another reason is that the labour costs in Asia are slowly rising closer to the wage paid in North America. Finally, Businesses are starting to realize that the negatives they suffer from not having control over quality, process flow, innovation and turnaround time to name but a few outweighs the little they gain from lower wages in outsourcing.  Here is a good article on outsourcing here written by HBR: http://hbr.org/product/producing-prosperity-why-america-needs-a-manufactu/an/10345-HBK-ENG?referral=00134

Businesses in North America who outsource are starting to realize that their lack of control in how their factory is run overseas is detrimental to quality.   This is why we keep on seeing news on how China’s manufacturing is getting weaker and weaker; http://money.cnn.com/2012/09/01/news/economy/china-pmi/index.html.

Because many low labour cost foreign countries have been so successful with this for so long, they are only starting to realize now that this advantage that kept them competitive for so long is slowly disappearing.  Because of this, typical factories in these countries tend to be run very inefficiently.  Their labour cost advantage was the main thing keeping them running.

On the other side of the argument, successful manufacturers in North America have been successful due to efficient processes.  The ones that did not outsource remained competitive by running very efficient factories.

Due to the changes in location strategy and a renewed focus on efficient processes,  we are now working with companies who are looking to improve their own strategies and efficiency.  Starting in January, we are bringing up owners and managers from different parts of the world who are interested in learning from companies who run highly efficient operations.  We are also inviting local companies from North America as well who are interested in learning new methods and want to improve their existing operations.

For more information email us at info@mjmckay.com

People often associate Lean with a new gimmick that upper management tries for a little while by telling their employees to implement it.  The problem with this is that employees will never buy into it.  Lean will never truly work unless a buy in process from the employees happens.  Sure, 6Sigma, as well as some facility changes can bring about some cost savings etc.  But the real advantage in lean lies in developing a culture amongst the workers that is focused on constant improvements coupled with a respect for people.  The typical definition of Lean—variations on how to eliminate waste, is tied in to the former sentence of what lean means.

So than, what is a great way to start?  Here are some of the essentials to developing a good Lean Culture:

1. Start simple.  Paul A. Akers has a great company in Bellingham that is focused on having an “extreme Lean” company.  How easy and simple does he do it?  At FastCap, each employee is responsible for coming up with a 2 second improvement to any process each day.  This strategy has proven a great strategy at FastCap for engaging employees and making constant improvements.  The beauty of 2 seconds is that anyone can do it.  The 2 second improvement does not require an MBA, bachelor degree, or anything else along those lines.

2. Upper management must be involved.  Remember, if upper management is not involved than Lean for you will prove to be just another passing fad that comes and goes.  Every employee will “know” that there is another business strategy that will simply come along later.  This will stop them from becoming truly invested.  You must become fully engaged and involved in the process constantly.  Furthermore, you must get your management to become invested as well.  It is for this reason exactly, that Lean companies will often literally knock down office walls in order to eliminate that barrier between management and production line workers.

3. Engage your employees.  Ask them for opinions, improvements, and ideas.  This of course has to be done strategically in order to control the process, but if done correctly can prove to be a very successful method.  Employees who are being asked to contribute to the cause with something other than just their hands will feel much more a part of the business/movement.  It’s similar to one saying: “You paid me for the work of my hands, but could have had the work from my mind for free.”

3 simple points to start…

One of the more important phrases that always needs to be remembered when employing kaizen is; “the next process is your customer.”  This is extremely important to remember in any organization, and Mr. Imai was quick to bring this concept to light again in his conference.   What typically happens is we have “walls” in between processes—Both physically and metaphorically.  The different employees involved in each step rarely talk to other employees involved in the next step, or previous one.  When the next process is truly considered the customer, than, and only then can we truly serve our final customer well by knowing the requirements, needs, and information needed to improve each process.  If process A, considers process B (who receives product from process A) the customer, than process A will start serving their “customer” well by meeting their needs and requirements, and getting feedback from them.

This view, of viewing the next process as your customer ties in with most of the other views presented.  Everything in Gemba (the place where all the action happens) deteriorates if left alone.  If the next process is not viewed as your customer, than the quality will definitely deteriorate.   This applies to most things in the Gemba.  Hence, everything needs to be standardized (so mistakes or waste is visible, and to be improved on) and sustained.   A standard should be: visible, simple, and clear.  It should be improved on whenever possible.  A standard is set in order to improve on and in turn make a new standard.

Mr. Imai finished talking about standards by using Disney as an example.  Here are the main points on how Disney uses standards to remain as consistently one of the best at having happy customers:

1.         The first contact of the customers is with those employees who sell tickets.  Those employees are told that they are not ticket    sellers, rather the first employees to have contact with the customers.  Therefore, their job is to smile, engage with the customer, and be caught up on current events so they can help the customer in any way.

2.         Greet and welcome each and every guest with a smile.  Make their day special.  The goal is to deliver consistently above their expectations.  Every employee is charged with this.

3.          Seek out guest contacts.

4.          Provide immediate service recovery.

5.          Display appropriate body language always.

6.          Preserve the magical guest experience.

7.          Thank each and every guest.

As one can see, Disney is intensely focused on delivering quality to the customer.  Everything they do is with the intention of delivering value to the customer.  Every job description has detailed SOP’s and are constantly improved on in order to give guests a better experience.

The same mentalities that Disney uses can be used at any other business, whether it be service or product oriented.

The other day we were at a conference listening to Masaki Imai speak about the Kaizen philosophy.  Masaki Imai is credited with bringing Lean thinking to the consciousness of the Western world.  He is the author of the books; “Kaizen; The Key to Japan’s Competitive Success,” and “Gemba Kaizen; A Commonsense Approach To A Continuous Improvement Strategy.”  He worked closed with Mr. Ohno, the Vice-President of manufacturing of Toyota and another founder of the Continuous Improvement Lean philosophy.  Mr. Imai now tours the world working closely with many different companies helping them develop a culture of continuous improvement.  Furthermore, Mr. Imai speaks roughly 100 times a year.  Being able to attend the conference and meet Mr. Imai personally was a pleasure.

Taking this Kaizen approach to business has helped countless businesses around the world, both in manufacturing and services.  The Kaizen approach is based around turning people into problem solvers, thus taking advantage of that which is free–the mind.  This approach focuses on developing a culture where workers are trained into being problem solvers.  Where they learn to constantly be looking at ways to improve the company.  The Kaizen philosophy focuses on a low cost form to implement a competitive advantage rather than a high cost, big time innovative change that might, or might not work.  It is based on constant, gradual improvement, rather than quick, big time improvements.

A quick definition of what Lean is by Mr. Imai when comparing traditional vs. non-traditional manufacturers, (think Toyota):

Traditional: Employ maximum resources for minimum output.                                                                          Lean: Employ minimum resources for maximum output.                              

 When one actually looks into the numbers, and compares certain car manufacturers, one sees that these statement are true.

As such, here is a quick summary of points that explain the spirit of how Kaizen works.  I will follow up with another blog detailing more of Mr. Imai’s points on how to be a successful business.  For now, these points will help you understand how to implement the Kaizen spirit within your company.

Kaizen definition: “Continuous improvement.” Everyday, everyone, everywhere, must involve top management to front-line workers, from small to dramatic strategic changes.

The 3 biggest factors for making this happen in any company are:1. Top management, 2. Top management, and 3. Top management.

-  Disregard conventional fixed ideas.

- Think of “how,” and not “why not.”

- Do not make excuses.

- Always question current practices.

- Do not seek perfection, do it right away even for only 50% of the target

- Correct mistakes at once.

- Do not spend money for Kaizen

- Wisdom brought out with hardship

- Ask why? Five times and seek the root causes.

- Seek wisdom of 10 rather than knowledge of 1 (knowledge is reading etc, while wisdom is having learned from doing.)

-  Kaizen ideas (continually improving) are infinite.

Spacing.

The first thing you may notice when walking into a Krispy Kreme restaurant is the set up they have right behind their counter.  You’ll notice that it’s open, spacious, and that you (the customer) can basically tell everything that’s going on.  There are not many closed spaces, or walls preventing you from seeing how they run their system.  This gives the customer the feeling of interaction with the process.  Customers can watch how the donuts are made.  This helps the customer feel involved, as well as feel like there’s not something secretive to the process.  Nowadays Businesses often feel like they have to be secretive about how they do everything.  Be careful with this.  Making an effort to be more open whenever you can could bring some good benefits.  Of course you will have to discern as to certain things that have to remain as a secret, but consider making other processes more open to customers whenever possible.

Team.

Using big spaces as opposed to many small spaces is being used by many successful businesses these days.  Zara is a classic example of this.  Their main factory in Spain uses one big space with a round table where everyone can be involved with each other.  Manufacturing receives help from engineers, who interact with marketing and sales.  Team work can be greatly improved through this process.  Communication can be vastly improved as well.  Finally, it can also help to eliminate many issues regarding to internal politics.

HorseShoe. 

You’ll notice in the pictures that the donuts travel in a horseshoe shape.  This is a classic staple of many well run Lean factories.  Having your product travel through a Horseshoe makes it much easier to easily access at different steps of the process as opposed to something such as a straight line.  With a Horseshoe shape, all you do is walk into the middle and you are easily within reach of almost the entire conveyor belt.  Finally, by shaping it like such, you are able to have different workers helping each other out when necessary due to the much closer proximity.