Bob Sproull
Operation Excellence
by Jim Covington
December 11, 2013
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Optimizing Silos... what a
waste! Christmas Catalogs... how does it
get here? Where do we buy? Where do we sell?... It makes a big difference!
In the past
few months, I’ve been asked to review a couple of companies and their
manufacturing processes... “Are we making stuff right?” (A better question might have been, “Are we
making the right stuff?”) After several
days touring multiple facilities, when I told them, “yes, you are in an
industry with mature technology, and you are probably doing about as well as
your peers... you all use identical raw materials and pay the same price for
those. Your equipment is not state of
the art, but substantial upgrades would not be cost effective... it takes a
heck of a long time to pay off a $500K machine with no appreciable improvement
in quality, labor utilization, etc.” In
short, it wasn’t the answer that they wanted to hear. I’m sure that my reports went into a drawer
and the internal summary was, “that was a waste”. Given the limited scope of the task... yes, I
agree it probably was a waste!
Reflecting
back on a couple of these situations ... it struck me... these firms still want
to optimize the silos. “Let’s fix
manufacturing!” As a silo, in these
firms, these manufacturing operations weren’t broke. Sure, you could “5S” the place... form a
functioning safety committee, improve employee communications, reduce
manufacturing lot sizes, form self-directed work teams, etc... and don’t get me
wrong, those things SHOULD BE DONE... but in doing those you might find a penny
here, or a penny there... however, it certainly won’t be a meaningful change to
the financial results of the operations.
[Let me take
a different tack here for a moment... I’ll tie this all together in a couple of
minutes].
Christmas
Catalogs. I’m sure that your home
mailboxes (and emails) are overflowing these past few weeks with promotional
materials for gift ideas for the upcoming holiday season. I picked one up yesterday and glanced at the
cover... the most prominent statement on
the cover was “SAME DAY SHIPPING!” Now,
that banner might have been a real selling point in the late 1980s... but
today, for that industry... that is a big yawn – everybody ships the same
day! Heck, Jeff Bezos made a splash on
60 minutes last weekend about how he sees the day when Amazon delivers goods
with drones! Imagine order on-line and
have 30 MINUTE DELIVERY --- not
“SAME DAY SHIPPING!”
[Let me take
still yet another different tack – hold on, these all come together.]
Logistics
and sales channels. This country
experienced its most rapid period of economic expansion in the post WWII
period. Transportation of goods was very
difficult... no single source point to point logistic networks existed. Neither UPS, nor FED-Ex, nor DHL were yet
created. You either shipped by regional
carriers that had alliances or the USPS.
The ability to monitor and thus extend credit was impossible... you had
to apply for an account, received and paid from statements, etc... direct withdrawal
of funds, direct deposits, Pay-Pal, Visa, Master Charge, American Express...
none of these channels/systems existed.
With the strong demand for goods, local distributors flourished in
almost every market place. These
distributors’ strategies were simple (and very similar)... they provided local
availability of goods --- they purchased in bulk to minimize transportation
costs (either Truck Load or through shipping companies that specialized in LTL
– that had many terminals – again, not point to point), and the distributors
provided local credit and collection of funds.
They existed primarily for these two reasons... local availability of
goods and local credit as the bigger firms had no idea who their customers were
nor had the systems to deal directly with them.
Lumber
yards, gas stations, drug stores, grocery stores, men’s and women’s clothing
stores (clothing -- if you knew any local purveyors of these items the big
event of the year was going to the Merchandise Mart on a buying trip), agricultural
feeds, aftermarket auto parts – All of
these goods took a similar route to the eventual consumers. Manufacturers ship to several smaller
entities, that in turn ship to several smaller entities that then ship to local
distributors and then are sold to the consumer.
The network
would look like this:
[Forgive my
elementary graphic skills (my graphics department is a very limited part time
operation) – but I think you get the point!]
Now consider
this typical supply network... if every level is feeling pretty good about
perhaps a 45 day turn... “after all, we used to only turn our inventory 4x
(90 days)...”, with 3 levels of intermediate stops in the supply chain... there
is 180 day supply... (actually, I’ve seen much, much worse in the past couple of years, but again,
their management was silo oriented and didn’t want to know that.)
“Do the
products have a shelf life?” “Yes”. “How long?”
“about 6 months!”, “... do you realize that you have 6 months in the
supply chain?” “No, we only have about 45 days!” That was an actual comment folks, you can’t
make this stuff up! (And remember the 6
months is an AVERAGE... some items are out of stock and some items are still
saleable (?) after two years?)
Another one
I indirectly heard lately... “If you can make this item in less than 15 seconds
(3 operations 5 seconds each), why do you have 30 days of this product family
on the shelf?” ... Reply from the company’s President, “because we have so many
SKUs (of that product family)!”
[Consider
that last paragraph again ... sorry I can’t help myself, quoting my friend Gene
Yarussi, who once bluntly stated, “Does that sound as stupid to you as it does
to me?”]
The number
of SKU’s has nothing at all to do with the level of FG inventory that should be
held for sale. It has everything to do
with the time to replenish. A 15 second
manufacturing cycle time protected with 2,592,000 seconds of finished goods is
NUTS!
So, let’s
tie this together ... we have manufacturing companies that know that they have
to improve.. financially, they are seeing less favorable results year after
year. They look at their income statement and see that the COGS is the biggest
item on that page. They then put on
their special “silo” glasses and mount the cry, “Let’s fix manufacturing!” Folks, there are some companies that have
troubled manufacturing operations – I won’t deny that, but look again at the
graphic above. Remember the quote of Dr.
Ohno, father of the Toyota Production System, “All we were trying to do was
shorten the time required from when the consumer ordered the car until we
collected the cash.”
How do you
shorten the lead time?... you get it there quicker! How do you get it there quicker, ... you
eliminate one of the levels of distribution, (one of the speed bumps!) Modern communication and transportation
systems are still not being fully and effectively utilized by all
manufacturers... those that don’t address this issue will most certainly fail!
There is far
more margin improvement possible by eliminating one (or more) of the steps in
the supply chain to your customers. Each
step adds a minimum of 20% to the previous level’s cost. If you can install systems that eliminate a
step and keep ½ of that amount as improved margin... you will have achieved far
more than you can ever see as a result of “fixing manufacturing”. Can’t do that because of inertia? (i.e. that
is the way that we have always done it) – Look out! You are headed for the ditch! You must segment your market for the growing
portions that will demand it. If you
don’t, your competitors will!
Modern
communication systems, transportation systems, computer direct order entry
systems... (forget orders... set your customers up on direct replenishment
systems), modern banking systems... (I now deposit checks into my bank account
with my Ipad/Iphone) have had a phenomenal effect on our economy. Yes, the mom and pop distributors and
retailers are being replaced and will continue to be eliminated... anyone seen
an ice delivery man or a home milk delivery service lately? ... There are no
guarantees of “forever”.
As a recent
example, I have an Acura with 45K miles... it needed tires. The local tire distributor that I have dealt
with for over 20 years gave me a quote of $1,280 for a set of 4. “Jim, I’ll need a week to get them
here!” I found them on-line for $854
(with free shipping) ordered on Tuesday and arrived on Thursday from South
Bend, IN. The firm that sold them to me
“gets it”... there is no value added for a growing segment of the market to
have the tires go through probably 2 more levels of distribution – therefore
put in systems to eliminate them. I got
them mounted for $75. Never spoke to a
single person until I went to have them mounted. Order entry was on line, a pay pal
transaction was accomplished, they were picked, shipped and delivered – I saw
the UPS truck leave pulling away. It
wasn’t worth it to me to pay almost $250 more for slower delivery based on a
1950’s distribution model/process.
Back to
companies, contrast a couple of actual scenarios – granted one company is
directly servicing the customer and the others are manufacturers.
So... Do YOU
think that companies B & C are on the right strategic path? They are run by smart people. While they are
successful today, do you think that they will be as successful tomorrow?
Amazon isn’t
the best at what they do... how many transactions do you think that Walmart
does per minute? ... in most instances, goods purchased in their stores today
are replenished from a distribution center tonight, without order entry,
without credit and collection, and the
replenishment/distribution centers are run with no forecasts...
If you are
intrigued... Walmart’s stats.
Founded:
1962. Revenue: $469,000,000,000. Employees: 2,000,000. Locations: 11,047 (US).
BTW the Walton’s still own more than 50% of the company.
Fixing the
manufacturing “silo” isn’t the only path that needs to be explored. We “manufacturing” folks have to look at the
much broader supply chain. The key is
faster “flow”.
[I haven’t
even opened the door on the supply chain coming to the manufacturers]
It is a New
Year... do you need a fresh set of eyes to look at your entire operations
and supply chain? We can
help! It won’t be a waste!
“Profound knowledge must come from
outside the system – and it must be invited in.”
--W.
Edwards Deming
All the best!
Jim Covington
815-988-5404
Other:
I have a
good friend John Covington (not related by blood, but certainly by
spirit). John runs Chesapeake Consulting
Inc. Chesapeake is a boutique firm that
focuses on enterprise fitness. http://chesapeakeconsultinginc.com/ He too has a mail list, and monthly he
publishes a list of mental pearls that I find to be worthy of
consideration. Last week, his column was
timely and stresses that Advent season is a time of year to consider personal
planning for the year ahead. I couldn’t
find it on Chesapeake’s website... but there was a link that I’ll share
here: http://hosted.vresp.com/1042041/fde3f169f3/TEST/TEST/
The column
talks about making a list of the “as-is” and another column of the “to-be” – if
you find it worthy, I’m sure that he would gladly add you to the list, as his
is a process with weekly assignments for the next three weeks that I’m certain
will be worthwhile. Thanks John!
One other
note. 2013 has been a difficult year our
family. Some, but not all of you know
that Jody had a major health issue early in the year that we were told was all
clear, but reoccurred while we were in France in September. After 23 days in the hospital there and a
hospital to hospital transfer from France to UWHealth in Madison for an
additional 9 days stay she was able to return home. She is recovering... the prognosis is for a
full recovery – but it will be a few more weeks before life becomes close to
the “old normal”.
The support
of friends, family, and folks we didn’t even know has been overwhelming. As John’s above article states, these events have certainly brought a
focus to our lives and an appreciation that “people are good”.
Thank you
and may god bless!
Jody and Jim
Covington
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