Evolving Excellence

Barring Brilliant Minds

I'll try to remain politically neutral with this story.  One of the great incongruities of the current immigration debate in the U.S. is that we are arguing about millions of relatively uneducated illegal immigrants.  Some say they do jobs that others wouldn't take, some say that's hogwash.  Some say they should wait their place in line like everyone else, some say we need a guest worker program.  On rare occasions we even discuss how they impact average wage statistics, health care statistics, and the like.  Other countries, notably including Mexico, have far more restrictive policies, and countries like Australia attempt to match immigration with skill needs through a point system.

But the debate over knowledge worker immigrants, even temporary immigrants, gets far less press.  The CEI blog reprinted a letter to The Financial Times regarding this problem.

In its desire to reduce immigration, the US government has prevented the importation of brilliant minds. H-1B visas, three-year work visas which companies use to sponsor foreign workers, are limited to 65,000 per year. In April 2007, on the first day companies could apply for such visas the government was swamped by 133,000 applications. If the US government wants the quality of specialised immigrants to remain high, we must offer more H-1B visas to foreign skilled labour.

This is a real problem, as Microsoft is experiencing.

Chairman Bill Gates took one of his company's most nettlesome issues to Washington. Testifying before the Senate, Gates criticized U.S. immigration policy for limiting the H-1B visas issued to skilled workers from foreign countries, workers that Microsoft would desperately like to hire. "It makes no sense to tell well-trained, highly skilled individuals—many of whom are educated at our top universities—that the U.S. does not welcome or value them," Gates told the lawmakers. Senators ignored his pleas, leaving the visa policy unchanged.

But Microsoft is also doing something about it, a luxury most companies don't have.

So in September, Microsoft took matters into its own hands. It opened an office in Richmond, B.C., a polyglot Vancouver suburb, where it hopes to place hundreds of workers unable to obtain visas a few miles south in the U.S. The office won't be filled only with those who can't get visas. But for many, it's akin to a refugee camp, except these displaced persons aren't fleeing the U.S. They're trying to get in.

Microsoft's Richmond site is unique because it's located just 130 miles north of the company's Redmond (Wash.) headquarters, where 85% of its core software development is done. Placing workers in the same time zone helps them collaborate. And if they need face time in Redmond, it's just a 2 1/2-hour drive on Interstate 5 over the Peace Arch border. It doesn't hurt that Canada does not put limits on visas for skilled workers.  The 125 engineers there now hail from 26 countries, ranging from England and China to Trinidad and Tobago. Says Parminder Singh, managing director of the new facility: "I call it the U.N. of tech."

I guess you could call this a government-forced outsourcing of knowledge and R&D.  We are a nation of immigrants and should welcome an appropriate amount of influx of new talent and desire for a better life.  But is turning away high-earning knowledge workers really the best policy?   

China Begins to Outsource

Although the tidal wave of lemmings outsourcing manufacturing to China has begun to slow in the face of a weak dollar and Chinese quality problems, the popular perception is that China is still the place to find cheap labor coupled with a top notch infrastructure.  Perhaps those companies contemplating a move to China should look at what a high tech Chinese company is doing.

Lenovo has decided to change its manufacturing strategy and will outsource the whole of its own-brand notebook production to Taiwan makers, according to a Chinese-language Economic Daily News (EDN) report, citing the vice president of Lenovo's worldwide consumer notebook division.

Most of you will recall that Lenovo purchased IBM's laptop computer business a few years ago, and continues to be successful.  Labor cost in China is lower than in Taiwan.  Infrastructure capability is similar, but China has sufficient capacity.  The internal Chinese market, while representing still a tiny fraction of their customers, is growing rapidly.  So why outsource?  The article doesn't give an explanation, and follow-up research on this particular company doesn't dig up a reason.

Perhaps they have a sense of where Chinese wage inflation is heading, how resource constraints are already impacting manufacturing growth, and perhaps even some thoughts on the coming struggle between nouveau capitalists and the old regime. 

Respecting Kids Through Visual Management

Peter Abilla over at the Shmula blog recently described how he uses visual management techniques to help his five kids become productive members of the family.  While many families use similar techniques, even if they are scribbles on the fridge, Peter leverages the lean manufacturing aspects of the technique.

One area of life-skills that my wife and I are focused on in teaching our children, is teaching them the principle of work: how to work, the value of work, to take ownership over their responsibilities, and to be proud of their accomplishments, and to learn to work as a team and family.  One way we are reinforcing the principle of work is through the use of effective Visual Management.

He goes on to describe the components of an effective visual management system.

Visual Management has the following purposes:

• Visual Management provides instruction
• Visual Management conveys information
• Visual Management provides immediate feedback
• Visual Management quickly exposes abnormalities in a process or work area
• Visual Management quickly conveys progress or lack thereof

The result is on the right. Another unique aspect of Peter's implementation: it involved a Deming PDCA style method, beginning with a planned end-of-yeaar meeting, developing the plan, communicating the plan, checking how the implementation is working, and adjusting based on how it is working.

In true lean fashion, it includes the oft-forgotten second pillar: respect for people.  Or respect for kids in this case.

The Job Chart conveys information so that Mom and Dad don’t have to.  When Mom or Dad have to convey the information, it usually ends-up as nagging.  That approach is irritating, disrespectful, and polarizes people.  We want, instead, to teach self-reliance, demonstrate our trust in the kids, and help them grow in their own terms, but with our loving guidance.

And his family is looking at even more improvements centered around standard work.

What we haven’t done yet is to provide Standard Work Cards for each job, showing in text how to do the job and also a picture of what a "good job" looks like.  One example might be to show a side-by-side comparison of a dirty toilet next to a clean toilet, with a marker on the clean toilet, indicating to the reader what the ideal finished good should look like.

Sounds like a great idea, but I can't really comment much as I'm not a parent.  Does it work?  Any comments?  Peter is asking for them on his blog.

Excessive or Progressive CEO Pay?

We've read a lot over the past few years about supposedly excessive CEO pay.  Tens and even hundreds of millions of dollars paid to executives that sometimes preside over outright failure.  Severance packages that would provide a comfortable retirement for hundreds of us common folk.  Some of us have even pointed out how this situation is somewhat unique to the U.S., and can even violate a "respect for people" pillar of lean manufacturing. 

While some push for regulatory control, I'm more market-oriented... the shareholders get what they pay for and there truly is a market that creates value for good leadership.  But I'll admit the reality is that while shareholders could truly mass to create change, they are usually too disengaged or naive to do so, therefore executives get away with being paid for incompetence.

American Express is going to try something a bit different.  They are oft-regarded as an exceptionally well-managed company, but even in that context the proposed comp package for CEO Ken Chenault looks a little monstrous.

On Nov. 30 the board gave Chenault options on 1,375,000 shares and announced its intention to give him the same number again on Jan. 31. If it all happens as planned, that will be 2,750,000 shares - a mega-grant by any definition.

Just for context, Amex stock is currently at around 45, although as we know options are really worth a price differential.  But when we dive deeper into the details of the comp package, some interesting concepts come forth.

The first surprise is that it's an options grant at all. Since options are worth money only if the stock rises, a big grant is notable at a time when the market looks expensive by many measures and the economy is weak.

Even more striking are the extraordinarily high hurdles the board requires Chenault to clear if he's to get any of those options. To receive the full grant, he must beat several goals over the next six years, an unusually distant time horizon. AmEx's earnings per share must grow at least 15% a year on average, revenues must grow at least 10% a year, return on equity must average at least 36% per year, and total return to shareholders must beat the S&P 500 average by at least 2.5% a year. Chenault can receive a fraction of the grant for lesser performance, but below certain limits, which are still quite high, he gets nothing.

Wow.  High goals, rapidly reducing compensation for lesser performance, and a good chance of not getting anything... after having to wait almost a decade in the first place.  But even more interesting is how some scenarios play out, which require that Amex not just ride good times.

Now consider a couple of scenarios. Chenault misses all the targets but the market booms, returning 10% a year, and AmEx stock matches it. After their full term of ten years, his options would be in the money by $258 million - but he wouldn't get any of that. Why? Well, AmEx's stock presumably rode a rising tide, and his shareholders could have done just as well with an index fund while exposed to less risk. Alternatively, the market returns just 6% a year, in line with what many experts predict, but under Chenault's leadership AmEx hits all the targets and the stock returns 9% a year. Chenault collects a pretax gain of $222 million after a decade - an awful lot, but his shareholders are $35 billion richer than if they had chosen an index fund, and he's a hero.

So if we read in ten years that Chenault just collected nearly a quarter billion dollars, will we be outraged?  The goals are long term and are driven by increasing value to one of his customers, the shareholders.  Could any of us mortals pull it off?  Would any of us be willing to deal with the 24/7 stress, travel, and commitment required for such a job?  Not me.  I'm more than willing to give up 99% of that comp package in order to be able to come home most nights, sleep soundly, and spend the weekends with my family.

Why Did THAT Happen?

Regular readers know that I often liken regulation to a balloon... you constrain it in one place and it will pop out in some other, usually unexpected place.  Alex over at Marginal Revolution has good post this morning commenting on an article in The New York Times on unintended consequences.

Dubner and Levitt have an article in the NYTimes with three examples of the law of unintended consequences, the Americans with Disabilities Act made it more costly to hire people with disabilities and reduced their employment, ancient Jewish sabbatical law intended to help the poor has made them worse off, and the endangered species act has resulted in habitat destruction.

Those are three examples where the unintended consequence was actually very related to the regulatory action.  In most cases the consequence has nothing to do with the action, and can even appear unrelated.  Alex goes on to describe the mechanics involved.

The law of unintended consequences is what happens when a simple system tries to regulate a complex system.   The political system is simple, it operates with limited information (rational ignorance), short time horizons, low feedback, and poor and misaligned incentives.  Society in contrast is a complex, evolving, high-feedback, incentive-driven system.  When a simple system tries to regulate a complex system you often get unintended consequences.

Unintended consequences are not restricted to government regulation of society but can also happen when government tries to regulate other complex systems such as the ecosystem (e.g. fire prevention policy that reduces forest diversity and increases mass fires, dam building that destroys wet lands and makes floods more likely etc.)  Unintended consequences can even happen in the attempted regulation of complex physical systems (here is a classic example involving turbulence).

The fact that unintended consequences of government regulation are usually (but not always or necessarily) negative is not an accident.  A regulation requiring apartments to have air-conditioning, for example, pushes the rental contract against the landlord and in favor of the tenant but the landlord can easily push back by raising the rent and in so doing will create a situation where both the landlord and tenant are worse off.

More generally, when regulation pushes against incentives, incentives tend to push back creating unintended consequences.  Not all regulation pushes against incentives, some regulations try to change incentives but incentives are complex and constraints change so even incentive-driven regulations can have unintended consequences.

That was the lesson of government regulation, but a similar case could be made for any organizational bureaucracy.  I continue to be fascinated by the story of Sun Hydraulics that I told you about a couple days ago.  A $170M company with no job titles, performance criteria, company goals or objectives.  The whole company simply operates by a "do the right thing" mantra.  The political equivalent would be anarchy.  But it works in this case.  A very specific and unique case, which is probably why it would work in a political context only in very specific and unique circumstances. 

But it still begs the question... do the rules and regulations in your organization truly help?  Are they necessary or are they simply a band-aid?  And most importantly, what unintended effect are they having?

Is a requirement for perfectly defined and documented processes stifling innovative freedom?  Is a requirement for multiple redundant signatures slowing down your operation?  And perhaps most critically, is the bureaucracy driving your employees to new jobs at new organizations, perhaps even the competition? 

Asking Why in IT

Thanks to reader Alex for sending me a detailed article on how one IT system administrator used the five whys to solve a network connectivity problem. 

At 3:30 in the morning of January 10th, 2008, a shrill chirping woke up our system administrator, Michael Gorsuch, asleep at home in Brooklyn. It was a text message from Nagios, our network monitoring software, warning him that something was wrong. Michael logged onto his computer in the other room and discovered that one of the three data centers he runs, in downtown Manhattan, was unreachable from the Internet.

After a couple more occurences the culprit was identified.

The problem was something with the network switch. Michael temporarily took the switch out of the loop, connecting our router directly to Peer 1's router, and lo and behold, we were back on the Internet.  Michael spent some time doing a post-mortem, and discovered that the problem was a simple configuration problem on the switch. The switch that failed had been set to autonegotiate. This usually works, but not always, and on the morning of January 10th, it didn't.

After this experience he got to thinking about "uptime" in general, and the problems of outlier events.. 

Internet providers like Peer 1 like to guarantee the uptime of their services in terms of a Service Level Agreement, otherwise known as an SLA. A typical SLA might state something like "99.99% uptime." When you do the math, let's see, there are 525,949 minutes in a year, so that allows them 52.59 minutes of downtime per year. If they have any more downtime than that, the SLA usually provides for some kind of penalty.

Keeping internet services online suffers from the problem of black swans. Nassim Taleb, who invented the term, defines it thus: "A black swan is an outlier, an event that lies beyond the realm of normal expectations." Almost all internet outages are unexpected unexpecteds: extremely low-probability outlying surprises. They're the kind of things that happen so rarely it doesn't even make sense to use normal statistical methods like "mean time between failure."

There must be a better way to deal with such events... and he discovered the five whys.

Somewhere between the "extremely unreliable" level of service, where it feels like stupid outages occur again and again and again, and the "extremely reliable" level of service, where you spend millions and millions of dollars getting an extra minute of uptime a year, there's a sweet spot, where all the expected unexpecteds have been taken care of.

To reach this sweet spot, we borrowed an idea from Sakichi Toyoda, the founder of Toyota. He calls it Five Whys. When something goes wrong, you ask why, again and again, until you ferret out the root cause. Then you fix the root cause, not the symptoms.

Applying that methodology he identified a preventative approach.

• Our link to Peer1 NY went down
• Why? – Our switch appears to have put the port in a failed state
• Why? – After some discussion with the Peer1 NOC, we speculate that it was quite possibly caused by an Ethernet speed / duplex mismatch
• Why? – The switch interface was set to auto-negotiate instead of being manually configured
• Why? – We were fully aware of problems like this, and have been for many years.  But - we do not have a written standard and verification process for production switch configurations.
• Why? – Documentation is often thought of as an aid for when the sysadmin isn’t around or for other members of the operations team, whereas, it should really be thought of as a checklist.

"Had we produced a written standard prior to deploying the switch and subsequently reviewed our work to match the standard, this outage would not have occurred," Michael wrote. "Or, it would occur once, and the standard would get updated as appropriate."

Not only are they fixing the root cause, they are telling their customers about the problem and solutions.  That creates value through increased confidence.

Instead of setting up a SLA for our customers, we set up a blog where we would document every outage in real time, provide complete post-mortems, ask the five whys, get to the root cause, and tell our customers what we're doing to prevent that problem in the future.

Wouldn't you appreciate a supplier that did this instead of simply filling our corrective action forms, probably documenting the corrective action to a problem that has occured over and over again?

No Titles Except "Plant" Manager

I arrived in Sarasota a couple days early for the quarterly AME board meeting so I could attend an AME Champions Club meeting.  The Club is a unique group of senior executives from some of the most progressive lean companies who meet a few times a year to discuss the leadership of company-wide lean manufacturing transformations.  Although membership is a bit pricey, members get a variety of discounts on other events such as the AME Annual Conference, which can easily offset the cost.  I highly encourage you to check out the Club.  By the way, the trip to Sarasota brought to 24 my lucky string of consecutive flights that have been right on time.  Anyone want to go halfsies on a lottery ticket?

A typical Champions Club meeting is hosted by a company or organization that has a rather unique application of manufacturing excellence, and Sun Hydraulics was no exception.  Although they don't claim to embrace lean, their culture is really something to see.  A $170 million public company that manufactures high end hydraulic manifolds and values, profitable since it was started in 1970, six plants around the world employing roughly a thousand people.

What's unusual about that?  How about this:

• There is no organization chart
• There are no job titles or job descriptions
• No performance criteria
• No bonuses and no perks
• No regularly scheduled meetings
• No approval levels for capital or expense spending
• No goals
• No offices or high-walled cubicles
• If the peers accept the idea, then "management" is presumed to accept it - hence the need for very little management
• Every employee is simply expected to figure out where they fit

They are definitely not lean in the traditional sense...

• There are no kaizens - everyone is expected to create change, and must "sell" ideas to their peers
• There are no 5S lines on the floor, and nothing is bolted to the floor... that just "inhibits immediate change"
• They use an MRP and they have conveyors full of WIP, although they are transitioning to kanban "where it makes sense"

Their mantra is simply "do the right thing."  How does a company grow to that size with such an organization?  By spending a lot of time hiring the right kind of collaborative idea-generating individual who doesn't need to be told what to do. And they readily admit that the cultural aspects of growth, new factories, and "management" of hundreds of people is increasingly difficult.  One Club member asked if the culture helped them get to $170M, or did it keep them from being at more than $170M.  The answer is unknown.

There is one honorary job title: Plant Manager.  But it's not what you think.  This facility, what amounts to a very large machine shop filled with heavy 5-axis CNC's, has hundreds of live plants hanging from the ceiling.  The Plant Manager is the person in charge of maintaining the plants.

Want to see some other similar interesting organizations and interact with a group of very passionate senior executives?  Check out AME's Champions Club.

Boeing Should Learn from Vought

A hat tip to Mark over at the Lean Blog for sending me a couple articles on one of my favorite subjects, Boeing.  But instead of bashing Boeing again, let's discuss one if its key tier 1 suppliers: Vought.

Vought manufactures the two rearmost fuselage sections and then moves them to a nearby facility that it operates with Italian manufacturer Alenia as Global Aeronautica. There the Vought sections and a fuselage section built in Italy by Alenia are joined with the midwing box, produced in Japan.

I'm gritting my teeth to hold back from commenting on the convoluted supply chain Boeing created.  Back to Vought.  Earlier this week Boeing announced yet another delay in the 787 Dreamliner, and cited Vought as one of the culprits.  This was a little unfair.

The quality of the company's composite fuselage barrels is superb, Doty said, with sections for a dozen 787s completed. The problem has been obtaining and installing the interior structures, wiring and other components.

Yes, a tier 2 supplier apparently created the delays.  How much do you want to bet that if we poked at that supplier, we'd find a tier 3 supplier issue?  After all, only a few months ago the first full-scale prototype suffered from a lack of fasteners.  For that Purchasing Magazine named Steven Schaffer, Boeing's Vice President and General Manager of Global Partners, "Supply Chain Manager of the Year."  Go figure.  But I'll drag myself back to Vought...

The company has been working hard to improve their operations, which is also helping the division that makes assemblies for the 787.

Vought managers are implementing a "Vought Operating System" modeled on the legendary Toyota manufacturing system. Some Vought managers have visited Toyota plants to see the highly efficient automaker in action. Vought is implementing lean manufacturing practices on many programs as fast as workers can be trained and new tooling and machinery put into place.

The results indicate that this is real lean, not LAME.

Recordable injuries have declined 24 percent companywide from 2006 and 38 percent from 2005. Workplace injuries declined 21 percent at the Dallas plant last year and 30 percent at the Marshall Street plant in Grand Prairie.

Quality has improved sharply. The rate of defects has declined 25 percent companywide from 2006 and 35 percent from 2005. Defects have dropped about 10 percent at the Dallas plant and a dramatic 47 percent at the Marshall Street plant, which builds sections for Boeing airliners.

Inventories of parts and supplies are being used at a 28 percent faster rate, which means the company has less cash tied up in materials and lower costs.

Both the Dallas and Marshall Street plants have made major gains in meeting production and delivery schedules set by Boeing, Gulfstream and other customers.

Companywide, the cost savings from various process improvement programs could approach $12 million a year, with $4 million to $8 million from the Dallas and Grand Prairie plants.

The emphasis on people shows that they even understand the importance and value of people.

The credit, Doty says, goes to Vought employees who responded to the challenges facing the company.  "When you look back at these numbers, they restore your faith in one thing: We've got great people here. They really want to be world-class," he said. "If you've got good, motivated people, which we have, all you have to do is provide good leadership, support and resources." 

Perhaps instead of blaming Vought, Boeing should learn something from them.

4 Months To Fix 218,000 Factories

Quality and turnaround experts should be quivering in fear.  Apparently there's a new bunch of gurus who can create miracles of quality improvement in record time... and they hail from China.  A hat tip for UK reader Alex for sending me this article.

A four-month campaign to improve the quality of Chinese products has been successful and has helped boost the credibility of the ''Made in China'' label, an official said Wednesday.

Not too shabby.  Fixing the processes and systems at a couple hundred thousand factories in four months.  I should hire a few of those folks for my operations.  I wonder how they do it...

During the campaign, which began in August and ended in December, 98,000 food manufacturers were certified and 120,000 small food businesses — the heart of many of China's chronic safety woes — signed pledges to meet quality standards, Li [Changjiang, head of the General Administration for Quality Supervision, Inspection and Quarantine] said.

That's a lot of audits.  I wonder how in-depth they really were.  And we all know that signing a pledge leads to fundamental and lasting quality improvement, right?  Hmmm... there must be some deeper incentive...

Some 1,187 cases involving the production and sale of bogus food, pharmaceuticals and agriculture products were investigated, Li said without giving details.  In all, 1,480 people have been detained in those cases and another 64 have been arrested in schemes involving counterfeit blood protein and vaccines for the blue ear pig disease, Li said.

For those of you that may not remember, being "detained" in China is not a short vacation with some free meals.  The head of China's version of the FDA learned that the hard way a few months ago, and is now pleading his case in front of the pearly gates.  I guess that's one way to create rapid change!

''The international image of 'Made in China' has been strongly upheld,'' Li said.

Yes it has.  But probably not in the way Li envisions.

Boeing's Credibility is Being Tested

Highlighting Boeing's problems with the 787 outsourcing these days feels a bit like commenting on Britney Spears' parenting skills, but yesterday's Aviation Week article brings some of those difficulties into stark relief:

Boeing’s third announced delay in the 787 program puts first flight at least nine months behind schedule and means first delivery is as much as a year off the original mark. The company cannot predict when it will start work on the first delivery aircraft or when final assembly will begin on the five remaining airplanes needed to achieve FAA certification.

This blog has pilloried Boeing in the past for outsourcing so much of the critical manufacturing to secondary suppliers (who, unbeknownst to Boeing, outsourced much of their work to tertiary suppliers).  Outsourcing has led to brutally long supply chains that make much of the manufacturing process invisible:

While fastener and small parts shortages remain an issue, the larger hurdle seems to be a disconnect between a rosy, computer-screen view of how the airplane is supposed to flow together and the reality of what happens on factory floors around the world.

Not to put too fine a point on it, but it's pretty hard to make things visible when the factory is 8000 miles away.  And it's pretty clear that a "computer-screen view" of the process just isn't the same as genchi genbutsu.

This lack of visibility has also led to a spike in what Boeing calls "travel work" (translation: "waste").

That’s when Boeing’s own assemblers must complete jobs left undone by suppliers. The efficiency of Boeing’s global supply network is premised on major supplier-partners delivering fully prepared, or nearly fully prepared, large assemblies to the final assembly line. This lean-manufacturing approach is supposed to drive out wasted steps in the manufacturing process. So far it hasn’t worked and, in fact, is doing the opposite.

Boeing has been lauded as a leader in lean manufacturing, particularly with regards to the 787. But as Mark over at the LeanBlog has pointed out, flying components around the world isn't lean at all, even if everything went perfectly. I'm not sure if the growing 787 fiasco an example of LAME (lean as misguidedly executed), or whether this journalist (and others) don't really understand lean. Because if you just judge by the results, the 787 is beginning to look an awful lot like garden-variety outsourcing, complete with all of its attendant problems.

Either way, as production snafus continue to mount, Boeing Commercial Airplanes President and CEO Scott Carson acknowledges that they have to find solutions before events spin out of control: “Our credibility is being tested.”