Evolving Excellence

How Many Legs Does A Lean Dog Have?

Abraham Lincoln told a lot of stories, usually to make a point.  One of his favorites was to ask someone, "If you call a dog's tail a leg, how many legs would the dog have?"  More often than not, the person he was asking would ponder the question for a moment, then answer, "Well, if you're going to call the tail another leg, I guess the dog would have five legs."  Lincoln would then make his point by pointing out that, "No, dogs have four legs, and merely calling the tail another leg does not make it so."

In similar fashion, calling Modular Function Deployment a lean practice, in fact crowing about it as an "economical and customer-oriented way to build cars" in SME's Lean Directions does not make it a lean practice, economical or customer oriented.  No matter how you cut it, Modular Function Deployment is something that is more aptly described as the tail end of a dog.

The nature of MFD is apparent when one reads the entire 'economic and customer-oriented' quote:

"Volvo introduced platform thinking as an economical and customer oriented way of building cars.  The purpose was to achieve advantages such as shortened lead times, higher efficiency in production and frequent model changes.  This, in turn, enabled increased sales and lower costs."

I can't find anything in that of particular value to a customer - just a whole lot of cost reduction gibberish.  The cream of Swedish academic thinking behind MFD seem to have forgotten the basic premise of the law of averages - namely, If you put your head in the freezer and your feet in the oven, then, on average, you should be feeling pretty good.  Their example is the application of modularity in a vacuum cleaner.  With glorious charts and academic gobbledygook, they explain that you can put the same motor in just about every vacuum cleaner, slap different plastic on it to hide the motor, and voila! The customers all think they are getting exactly what they want.

In fact, the customer who cleans his 800 square foot apartment once a month pays for more motor then he needs, and the customer who meticulously cleans her 3,000 square foot home weekly gets far less motor than she needs.  On average, however, since one got screwed on price but gets plenty of performance, while the other got screwed on performance but got a pretty good price, they combined customer base should be happy.  That's the MFD theory, anyway.

The greater fallacy in calling MFD lean is that it does not really provide the economies it promises.  "Shortened lead times, higher efficiency in production and frequent model changes" are possible from MFD solely because of less frequent changeovers in production.  Instead of reducing setup times, MFD is nothing more than a practice designed to spread setup times over bigger batches - the very thing that got traditional manufacturers in trouble in the first place.  It keeps the waste of setup time in the manufacturing process, and in the product cost.  It just seeks to hide it.

Pursuit of modularity is the cornerstone of the Ford 'Way Forward' strategy, and Bob Lutz' scheme at GM.  For them, it is a 'Back To The Future' deal.  Detroit has been putting different sheet metal on common chassis and drive train platforms, then using marketing smoke and mirrors to try to dupe people into thinking that the cars were different for decades.  MFD is just a 21st century buzzword for business as usual - at least thinking as usual.

GM Execs Need More Hummers

That really was the headline of a recent CNN article... I'm not talented enough to make that stuff up.  (Update: CNN apparently didn't find it appropriate, and has since made a minor adjustment to the wording)

But that's not the point.  Apparently Bob Lutz wants to take the usual GM approach and milk a successful brand, thereby diluting its value.  Hummer sales are up 50 percent just in the first eight months of this year while GM's overall sales were down 12 percent.  So why not create a Hummer truck, Hummer sedan, maybe even a Hummer convertible?  That strategy has worked in the past hasn't it?

Reminder: GM's year-to-date overall sales are down 12 percent.  By comparison Toyota's are up about 10%.  GM and Toyota sell roughly the same number of cars... 156,000 in August for GM versus 145,000 for Toyota.  GM sells considerably more trucks at 206,000, but Toyota is closing the gap fast with a 12% increase to 96,000.

Let's take a moment to examine brand dilution, keeping in mind that the number of cars is roughly the same and the only real differentiator is truck sales. 

First let's look at GM's brands and models:

Buick	Cadillac	Saab
LaCrosse	CTS	9-2
Lucerne	DTS	9-3
Rendezvous	STS	9-5
Rainier	Escalade	9-7
Terraza	SRX
	XLR	Chevrolet
GMC		Cobalt
Canyon	Hummer	Monte Carlo
Sierra	H2	Corvette
Envoy	H2 SUT	Aveo
Yukon	H3	Malibu
Savana		Impala
	Saturn	Colorado
Pontiac	Ion	Silverado
G5	Aura	Avalanche
G6	Vue	SSR
GTO	Relay	Equinox
Vibe	Sky	Trailblazer
Grand Prix		Tahoe
Torrent		Suburban
		Uplander
		Express

Now let's look at Toyota:

Cars	Truck/SUV	Lexus
Avalon	Tacoma	IS
Camry	Tundra	ES
Corolla	4Runner	GS
Matrix	FJ Cruiser	LS
Prius	Highlander	SC
Yaris	Land Cruiser	RX
	Rav4	GX
	Sequoia
	Sienna

And that's not counting the large number of GM's model variations, which far exceeds Toyota's.  Now helping out GM by including its much larger truck sales, dividing the total number of vehicles sold by the number of models:

• GM with 52 models: 6,961 vehicles per model in August
• Toyota with 22 models: 10,917 vehicles per model in August

57% more cars per model with Toyota.  Is it any wonder that GM has a problem differentiating between major brands and models?  What, really, is the difference between Chevy and GMC trucks?  Both companies have a wide range of vehicles... from low end to very niche high end models. 

Now think about it from a waste perspective, as Toyota obviously does.  With so many different models, what is the incremental cost of different subassemblies and components, production lines, changeovers, design effort, marketing and sales efforts, brand management organizations, management infrastructure including accounting and reporting, and general complexity?  Especially when you're a company used to beating up on suppliers, beating up on workers, and shedding knowledge workers because their true value doesn't exist on the balance sheet?

And of course there's the customer experience.  With Toyota you figure out if you want the basic high quality car or truck, or if you're willing spend a few extra bucks for more luxury, and then you're off to either a Toyota or Lexus dealership.  Once there you have a simple choice in clear categories of cost, size, and capability.  The experience is low pressure as the reputation for quality sells the cars.

If you're a GM-buyer  you first have to figure out what brand you identify with.  Buick?  Pontiac?  Chevy?  What's really the differentiator?  Off you go to one of the several local Chevy dealers, only to be met with sixteen more choices before you even get a chance to think about model variations.  And I won't go into high pressure sales guys in polyester leisure suits trying to explain why body panels don't match, hoping you'll buy from him instead of the guy at one of the other Chevy dealers in town.

Before making high value Hummer yet another bland GM brand, how about figuring out how Pontiac, Buick, GMC, and Chevy are different.

Myopic Mis-focus

I try hard to avoid picking on NAM.  Really I do.  But sometimes banging my head against the wall just doesn't relieve the frustration with an organization that could do so much, but refuses to focus on the real opportunity. 

Today NAM released yet another joint study on the horrors of how the U.S. business environment affects domestic manufacturers.  It's the usual story... the costs of litigation, natural gas, environmental regulations, employee benefits, and corporate taxation are rising.  "Dramatically rising" in their words.  Adding the equivalent of about $5 per hour in production costs.  With one exception U.S. corporate tax rates are higher than its nine largest trading partners.  Table 1 and Chart 1 in the full report show that employee benefits and regulatory compliance costs are also higher.

Yes that is a difference, and it does impact competitiveness.  But is it significant?  Not at this time. 

A $5 per hour "competitiveness burden" is vastly overshadowed by the opportunity of improved efficiency.  Not efficiency by chasing lower cost labor or investing heavily in robotics that need to be "absorbed", but by simply analyzing processes and methods to drive out waste.  Those of us who have mapped value streams know that even a first pass analysis of steps and activities can identify more than 20% in waste that can be quickly removed.

NAM and others focus on how hard it is to be a domestic manufacturer, while apparently ignoring the foreign manufacturers who are extremely competitive with U.S.-based plants.  Toyota obviously comes to mind.  By removing internal wasteful processes and activities, Toyota can build a car at its U.S. plants with an average of 27.9 hours of labor.  GM, the most efficient of the domestic manufacturers, still requires 34.3 hours.  Six years ago Toyota's U.S. plants took 30.3 hours, so they are more than six years ahead of GM.  Yes some of that is a result of structural impediments created by union job classification structures, but that is due to an adversarial union-management relationship... a function of leadership.

U.S. companies that focus on internal waste reduction are extremely competitive.  Bill's correct that it is often private companies that don't have to genuflect to Wall Street's nearsightedness, but there are examples of U.S. public industrial manufacturing companies as well.  The stock charts of Danaher and Parker-Hannifin make it pretty obvious.

Another day, another excuse.  It's time to focus on the major impediment to competitiveness... internal process waste.  Only then will single digit percentage differences in tax rates and energy costs make a real difference.  There's a long ways to go before we hit that point.

The Summary of the Summit

It has taken me a couple of days to come to a conclusion concerning the Lean Accounting Summit and to distill all of my thoughts into a central point.  After such contemplation, I think the best way to summarize it is that the divide between public and private manufacturers is becoming quite clear.

Of course, the Summit was a great event.  Attendance was at a record level.  The quality of the speakers, the depth of the material, the number of success stories and the probing of the attendees was outstanding.  There is no doubt that Lean Accounting is no mere fad, nor is it something only a few companies need.  The companies that are serious about lean are serious about lean accounting.  The heavy lean hitters - Womack, Bodek, Schonberger - all put on a great show.  The real Lean Accounting wizards - Maskell, Bagley, Fiume, etc... - were also ready for prime time.

What I noted, however, is that the case studies, the successes, the companies that were knee deep into effective deployment of lean in general and lean accounting in particular, were all from the privately held crowd.  The Fortune 500 attendees were in the minority and they generally lagged behind and talked of lean more from a theoretical knowledge than a practical one.

Every such event has its share of naysayers - people who are there because their boss made them, or they just wanted a company paid trip to Disney World - and the few of them I encountered all  came from the big public company side of things.  Just as many of us in manufacturing tried to avoid the turmoil of change twenty year ago by pointing out that Toyota is different, lean requires Japanese culture, lean doesn't work in our environment, blah, blah, blah, there were accountants in attendance trotting out the same inane arguments.  Just like all of us in manufacturing who took that silly position, the accountants will soon face the inevitability of lean accounting.

The energy at the Summit - and there was plenty of it - came from the smaller and medium sized companies that are well on their way to becoming extraordinarily lean, and who are pushing the boundaries of lean accounting, forcing all of us 'experts' to keep on our toes.

The bottom line?  Lean Accounting versus old time standard costing has pretty well become the indicator of whether a company really gets lean or not.  The big guys don't get it, but a growing swell of small and mid-sized manufacturers do, and that is more than enough to convince me that the future of manufacturing is very good, indeed - just not for stock brokers.

Lean Sandwich, Hold the Bread

One of the presentations at the Lean Accounting Summit was titled "Lean by the Numbers", and had the following description:

"Learn about the role of the Finance organization in removing transformational barriers.  Understand what Enterprise Lean means to these pillars of their respective industries and how they are using technology to accelerate business processes and keep their managements focused on the business issues.  What have been their barriers and enablers to the flow of information?"

Sounded interesting; I'm always interested in hearing how real companies have overcome lean implementation roadblocks.  The barriers associated with the accounting/financial side can be especially formidable.

I knew I was in trouble when I walked into the room to find a large Oracle logo being projected on the screen.  I know there are some situations where complex business software is important, but regular readers also know that I feel that software is commonly misused and often creates unnecessary complexity.  I was still getting used to wearing my conference badge holder with an Oracle logo on it.

The first presenter was from... Oracle.  He described the wonders of business enterprise software... how it could cost products down to the micropenny, provide glitzy configurable dashboards, and manage every aspect of the shop floor.  He then introduced presenters from a couple companies that had been implementing lean and specifically lean accounting.

A financial manager from Parker Hannifin, which has been working hard to implement lean at many facilities, was up next.  He described how they had turned off the shop floor control modules of their ERP systems by implementing visual pull methods, and how in true lean accounting fashion they use value stream costing instead of product costing.

Viking Range was up next, where one of their financial managers described how they had also turned off the shop floor control modules of their ERP system by implementing visual pull methods, and also now focus on value stream costing instead of product costing.

The Oracle presenter then came back for a wrap-up, reiterating how their software could very efficiently calculate product costs and control every aspect of the shop floor.  I guess he somehow missed all the other presentations on what lean and lean accounting is all about.  No wonder about half the room got up and left.

It's like a sandwich with overly-processed white bread surrounding some nice veggies and turkey.  We know where the real nutritional value is.

Course Correction Complements of Norman Bodek

I’m on my way back from a very successful Lean Accounting Summit, and I’m sure Bill and I will have more on this in the near future.

One major highlight for me was dinner with the father of lean in America, Norman Bodek, and then listening to his lunchtime keynote on Friday. I’ve heard him speak a couple times, and have enjoyed several conversations with him in the past. You are initially enthralled by the first-person stories of working with the titans of lean… Shingo, Ohno, and others. But when Norman begins to talk about how he simply wants to help people learn, and how he believes that lean practitioners have forgotten that only half of the Toyota Production System is about waste elimination and that the other half is respect for people, you realize he is someone truly special. There is genuine goodness in this man, powerful enough to make many of us look inside ourselves to see how we measure up.

His keynote was great, to the extent that some attendees apparently asked if next year’s Summit could include an entire “Bodek Track”. All Bodek, all the time, to paraphrase a cable channel ad. He focused on the other half of TPS… respect for people, and his comments made you think. Why has Toyota not laid anyone off since 1950, even in tough years, but GM and Ford this year alone will lay off tens of thousands? Why is inventory measured and reported down to the penny, but an organization’s most important asset, the knowledge and creativity of people, is nowhere on a balance sheet? The underutilization of people is one of lean’s forms of waste, but where is it measured? Human Resources, HR, used to be “HRD”… Human Resources Development. No longer. What happened to the “D”? “We must bring back the ‘D’!” Lean companies, such as Toyota, have extremely high levels of employee involvement… such as suggestion programs that average several implemented ideas per month per employee resulting in over $8,000 in savings per employee per year. He ended by having the 500 attendees stand up and swear that they will go back and make a difference.

At least some of us will.

At a time when companies like HP are dealing with spying on employees and GM and Ford are shedding tens of thousands of years of knowledge, Norman Bodek helps recalibrate us to what is really important. Many of us have focused on the tools, the planning, and the obsession with waste reduction… and have forgotten that the respect for people is just as important. I know I have, especially as I deal with some difficult people issues at a couple organizations I’m working with. Talking to, or more accurately listening to, Norman has reminded me about what is truly important. It came at an opportune time.

Thanks for the course correction, Norman.

Engineering Stigmas

Today's Wall Street Journal reported the results from the latest WSJ/Harris survey of recruiter opinions of MBA programs.  The University of Michigan's Ross School of Business regained the top spot.  Being among the elite comes with some perks... such as $100k starting salaries for grads with no real experience, donations to build $150 million buildings, and the ability to charge $40k+ for tuition.

We've discussed at length the problems with inexperienced MBA's, so I won't belabor those points again.  However there are some bizarre contradictions in the article.  When asked what Michigan's major shortcomings were, the top was "too much engineering focus."  But at the same time the top strength was "analytical and problem-solving skills."  I thought that was the primary benefit of engineering school was the resulting analytical mindset... which is why engineers are in such high demand in pretty much every industry. 

And another major shortcoming was "attached to a declining business center - Detroit."  But at the same time the recruiters liked that the MBA's had prior experience with the auto business "because they bring more credibility as consultants" and "can speak intelligently on all sorts of issues facing the auto industry."  That experience is apparently valuable "as automotive clients move away from the generalist consulting model and seek specialists to assist them during this transformational period for the industry."

Transformational indeed.  If Detroit is going to hire those Michigan MBA's because they value their experience acquired within their industry, then we might as well write off GM and Ford right now.  Bill wrote about this very problem over a year ago.  Nothing like a little inbreeding to create fresh ideas from a new perspective.  Maybe those auto execs are hoping that some magical knowledge infusion took place within the hallowed Ross halls. 

Nothing against Michigan MBA's.  I'm very confident that the "too much engineering focus" gives them a leg up on the "strategy/M&A/traditional finance focus" of the likes of Harvard MBA's... if you really want an inexperienced MBA in the first place.  But maybe that engineering focus will give some of them a desire to actually visit a factory floor every now and then.

But instead of hiring a bunch of inexperienced grads for $100k a pop to analyze their businesses, perhaps they should just peer into their backyard... at a very successful competitor's plant in Georgetown.  Some simple lessons: value employee knowledge, collaborate with suppliers instead of bashing them into submission, figure out what your true costs are, and focus on internal waste reduction instead of trying to innovate your way out of a pit.  It's really not that hard... it just takes leadership. 

You don't need an MBA, even a Michigan MBA with too much engineering focus, to tell you that.

Lowballing Geopolitical Risk

"Geopolitical risk: low".  That's what CIO Magazine told us in its Buyer's Guide to Offshore Outsourcing in Thailand.  Amazing how fast geopolitics can change. 

Who's affected?  Let's take a look at the company directory of the American Chamber of Commerce in Thailand.  Hundreds... too many to list.  Obviously some are properly locating their manufacturing facilities close to their customers in Asia, but others, particularly in the electronics industries, are exporting back to the United States.  Co-located are several fellow Chamber members in the consulting industries... no doubt singing the praises of low geopolitical risk.

We don't know what the end result of the Thai situation will be.  The coup leaders supposedly wanted to simply remove the current leadership, which some believe is corrupt, and rapidly return the country to democracy.  But absolute power, without the constraints of a now-annulled constitution, has a habit of becoming addictive.

The flow of outsourced manufacturing to low-risk Thailand has been supported by the US-Thailand Free Trade Business Coalition, which is promoting a free trade agreement between the countries.  And to no surprise, the co-chair of the Coalition is none other than the National Association of Manufacturers, NAM.  To their defense, free trade also makes it easier for U.S.-based companies to export to Thailand, but think about the relative size of the respective markets.

So if Thailand is low, where do other havens of outsourced manufacturing rank?

• China: moderate
• Malaysia: moderate
• Vietnam: low
• India: high
• Pakistan: moderate
• Philippines: moderate
• South Korea: moderate

China and India are higher risk than Thailand... and are the new outsourcing meccas.  Sort of makes you think.  Especially when Canada is ranked the same as Thailand...

What is the potential cost of that risk?  What would happen if you, as an executive of a company that outsourced overseas, woke up to find a new regime in place that has decided to simply take over foreign-owned operations?  Unlikely?  It happened just a couple months ago in Bolivia.  How does that cost compare with the effort required to reduce internal process waste instead of chasing cheap labor?

Unfortunately most companies won't get it.  Let the globetrotting begin.

The Hypocracy of Blame

I came across a manufacturing executive survey a few weeks back and have been pondering just what to make of it.  The good news is that it indicates that 78% of the American manufacturing execs are pursuing lean.  The bad news is that "resistance to change" and "lack of leadership" on the part of their employees is still seen by the top honchos as their biggest obstacle - that is to say, their biggest excuse for failure.

The typical lean scenario is to change nothing in management - the accounting system, the MRP system, the organizational structure, performance measurements, and the criteria for investing in machines and equipment.  At the same time, radical change is demanded from the shop floor.  The net result is that production is expected to ...

... get perfect quality from machines that were justified solely on the basis of their ability to keep labor costs low, and from employees who are paid on the basis of production volume or seniority.

... reduce cycle times, cut inventory and become much more responsive to customer demand, while complying with production schedules generated by the Big Push MRP system.

... devote their time to cross functional, value stream cost and flow improvements, while reporting to  a functional boss and having their performance measured by compliance to departmental objectives.

... engage employees in improvements, problem solving and total cost reduction, while reporting daily on even the slightest degradation in direct labor efficiency.

In short, the execs will not change much of anything in their dysfunctional, but comfortable, management world, but expect employees to change everything in theirs - even when that change defies the formal management process.  They demand that the employees toil away at pounding square pegs into round holes, then blame them when they don't fit.

Before braying to each other and pollsters about their employees' unwillingness to embrace change, the execs ought to give some thought to their own openness to change.  The old accounting system is the like an upper management security blanket - frayed, worn and useless for its original purpose, but the owner cannot sleep soundly without it.  Unless and until upper managers are willing to toss their security blankets on the trash heap, along with the rest of their destructive manufacturing management habits, I think it is more than a tad hypocritical for them to lambaste middle managers and shop floor folks for their lack of initiative and courage to embrace change.

The Crumbling Shield of Automation

Many companies pursue a cost reduction strategy based on chasing lower labor costs all over the globe.  As we've pointed out several times, this only leads to becoming a global tourist and no long-term or fundamental competitive advantage.

Other companies try to remain competitive by hiding behind the illusion of automation-based cost reductions.  Larger, faster, 24/7 equipment that doesn't have to stay home with a sick kid must be more efficient, right?  As long as the depreciation is fully absorbed by keeping it running full-time, whether the product is needed or not, right?  Anyone who has spent more than an hour learning about the fundamentals of lean knows the real answer.

Medical Product Outsourcing, a freebie trade magazine I subscribe to just to see how ignorant some people and companies can be, has an article that could strike fear into domestic companies that rely on automation for a cost advantage.  Low labor cost areas, such as China and India, are becoming lucrative customers to suppliers of automated equipment. 

Julie Logothetis, president of Kahle USA, notes that India has a particular hunger for sophisticated manufacturing equipment.  James of Kasprzyk of Machine Solutions says that 50% of his customers are now from outside the United States.  We joked about Africa becoming the new outsourcing mecca, but perhaps it's no longer that funny.  Kahle USA has received several inquiries from Africa, and expects to receive orders shortly from Nigeria.  Presumably this opportunity is better qualified than typical emailed financial requests from that country. 

So now we'll be seeing countries with low labor cost... and automated equipment.  A double whammy for companies that have such a lack of understanding of their true product costs that they believe labor is their primary controllable cost component.  What will they do?  Perhaps scurry to their representatives and NAM to complain about unfair trade practices... while many companies, domestic and foreign, compete very effectively from domestic soil.  Those companies understand that their primary cost driver is unnecessary waste, and reducing that waste can more than offset any difference in labor or regulatory cost.  You just have to take the time to look for it.

So much for the shield of automation.