Evolving Excellence

Lean Blog Will Return

Many of you also read Mark's Lean Blog and may have noticed that it isn't available today.  Apparently his blog host made some changes that messed things up.  Mark assures me he's working to get it back up as soon as possible. 

Falling Taxes... Except Here

Over the last couple years we've occasionally chronicled how government financial policies can create flights of knowledge.  Fundamentally people move to locales with lower taxes, they then create companies and labor pools and infrastructure, which creates wealth.  You can see this at the state level with the net outflow from New York, New Jersey, and California to places like Nevada.  You can see it at the national level with net ouflow of highly-educated professionals from France and Germany.  Those knowledge migrations can create incredible strain, and a corresponding reduction in the standard of living, on the places they leave behind.

As we pointed out in our most recent post on the subject, many countries are doing something about it. At a time when a couple of the leading presidential candidates and the less financially literate side of the population are asking for higher taxes (ok, "letting tax cuts expire"), France, Germany, the UK, Switzerland, Singapore, most of eastern Europe, and even Sweden are cutting taxes.  Especially corporate taxes, since they realize those business costs are simply passed along to consumers and also reduce the incentive to hire... a double whammy. 

Now tack on a couple more.   First Iceland.

Iceland is known as the Nordic Tiger because of rapid economic growth. Much of the nation’s prosperity is the result of free-market policies, including a 36 percent flat tax on labor income, a 10 percent flat tax on capital income, and a corporate tax rate of just 18 percent (down from 50 percent at the end of the 1980s). But Iceland is not resting on its laurels. The government has just announced a reduction in the corporate tax rate: The corporate income tax will be cut from 18 per cent to 15 per cent, effective for the 2008 income year and come into force in the 2009 assessment year.

And then there's Taiwan.

Meanwhile, even though the 25 percent corporate tax rate in Taiwan is already substantially lower than the 39 percent-plus rate in the United States, Taiwanese politicians apparently recognize that globalization and tax competition are powerful arguments for even lower rates. Tax-news.com is reporting that the government therefore plans to slash the corporate rate to 17.5 percent - and also make unspecified reductions to personal income tax rates.

But in complete ignorance of the Laffer Curve, I guess some illiterati in the U.S. will continue to focus in the other direction.  And then they'll wonder why the country continues to lose jobs... and knowledge.

Addendum: Coincidentally the Wall Street Journal had an editorial yesterday commenting on this very subject, particularly in regards to Mr. Obama's proposal to further increase the tax on corporations which he believes would somehow incentivize them to keep jobs in the U.S.. As the editorial notes:

If the U.S. didn't impose the second highest corporate income tax in the world, companies would have less incentive to move jobs overseas.  Rather than giving politically correct companies a 1% tax credit, it makes more sense to reduce the U.S. corporate tax rate for everyone - by at least 10 percentage points to the global average.

Economists have long understood that companies don't really pay taxes; they merely collect them.  A study by the American Enterprise Institute has show that U.S. workers bear the cost of the corporate income tax in lower wages and salaries.  To borrow Mr. Obama's language, what's really unpatriotic is the 35% U.S. corporate tax rate.

And we wonder why more and more U.S. corporations are moving overseas, taking jobs with them.

Success in the U.S. - Metal-Tech

It's always a pleasure to come across articles on companies that are successful manufacturing from U.S.-based factories.  Instead of wasting time complaining about exchange rates, trade barriers, and regulatory hurdles, these companies focus inward and improve their efficiency, quality, and service to a point that offsets those competitive burdens.

The Green Bay Press-Gazette had an article Sunday describing one such company, a metal fabricator appropriately named Metal-Tech.

State-of-the-art equipment, skilled employees and efficient, quality processes have propelled Fox Valley Metal-Tech Inc. to the front rank of metal fabricators. Metal-Tech is one of 63 Wisconsin businesses nominated for the 20th annual Wisconsin Manufacturer of the Year Awards to be presented Thursday at the Pfister Hotel in Milwaukee. The awards recognize Wisconsin companies that demonstrate a commitment to business excellence.

What do they do?

Metal-Tech services include laser and waterjet cutting of materials up to 6 inches thick, product design and assembly in the paper, printing, food-processing, custom-machine-building and ship-building industries, to name a few. Metal-Tech workers complete about 600 jobs a week, from the smallest parts to larger structures like cabs for Manitowoc Co. cranes, deckhouses for U.S. Navy patrol boats and electrical control boxes for new Navy aircraft carriers.

As with most truly successful companies, they realize their strength is derived from the knowledge, experience, and creativity of their people.  Their hiring processes are very defined to find and train the best.

Metal-Tech is providing on-the-job training for four Northeast Wisconsin Technical College students who they hope will decide to stay with the company after they graduate. They also have a representative on NWTC's welding advisory committee and have worked with the school to develop training programs for workers, such as blueprint reading. Potential Metal-Tech workers must pass blueprint reading and math tests, and take a Wonderlic test, such as National Football League teams give to their quarterbacks. "If someone has a high Wonderlic (score) but not a high skill set, if they are a hard worker, we know we can train them," West said.

The results speak for themselves.

Metal-Tech sales grew from $11 million in 2004 to $22 million in 2007, and it foresees continued growth.  The company standard is to schedule and program every job the same day it arrives. It has seen improvement in on-time delivery, reduction of time spent on rework and improvement in manufacturing efficiencies. West said the company's rework cost — having to remake a part — is less than one-half percent.

But I do need to find at least one point to nit-pick them on:

"We have 50 percent of our year already in backlog," said John West, company president.

Although a common metric for job shops, is that really something to be proud of?  Sure it helps provide a sense of security to stakeholders, but does it add value to customers?  Which customers are having to wait six months for an order?  What value would a much shorter lead time provide?  Will some other fabricator jump in and supply that value? 

Rockwood Gets What Whirlpool Forgets

A little over a year ago we told you how Whirlpool was laying off thousands of people at various U.S. factories just to rehire them back at factories in Mexico.  By traditional accounting methods that makes sense... the direct hourly labor cost goes down.  Reality is obviously different.

So let me get this straight... tens of thousands of years of manufacturing knowledge are being disposed of in Evansville and Fort Smith, huge hiring and training costs in Clyde, Mason, and Amana to bring workers up to a few weeks of manufacturing knowledge, it's "too expensive to retool" the Evansville plant but easy to swallow a hundred million bucks of severance charges (not to mention what the taxpayers shoulder).  A few bucks an hour savings in Mexico is worth a much longer multinational supply chain that requires more oversight, longer transportation of thousands of heavy objects a day, far more training expenditure to handle a foreign language in an area notorious for extremely high turnover, and the resulting quality problems from such a lack of long-term manufacturing knowledge.  That is some wacky accounting.

Wacky indeed.  But leave it to much smaller companies, companies not beholdened to high-priced MBA's fluent in traditional accounting spreadsheets, to understand reality.  Companies like Rockwood Manufacturing in Pennsylvania.

[Rockwood owner William] Gurzenda said there is “an incredible amount of human capital” invested in the company’s work force.  “They have the knowledge, skill and dedication to serve our customers and it would not be easily duplicated upon moving to a new location,” he said.

And he's talking about a handful of employees, not thousands.  Hats off to Mr. Gurzenda for realizing what most of the Fortune-50 doesn't: there is value in them there brains.

Continuous Improvement in the Classroom

We've occasionally touched on how lean manufacturing and continuous improvement methods can be applied to higher education, and our friend Bob Emiliani has a particular affection for the concept.  An article in the Philadelphia Enquirer over the weekend provided a good insight into how the principles could work in even grade school classrooms.

The sparkly smiley-face stickers and pink crayons in first-grade teacher Carly Laurent's classroom at Mt. Lebanon's Washington Elementary School don't look as if they came from the world of Total Quality Management.  They are being used that way, however, as part of the same "continuous improvement" management model that made Toyota the world's top-selling automobile company and dramatically decreased injury rates at Alcoa.

For example, how about using some visual management tools?

[6 year old] Tiausa then places a smiley sticker to mark her score on a class graph of the test performance, and, after conferring with a classmate, uses a pink crayon to fill in a bar graph in her personal data binder.  After all of her pupils receive their scores and chart their progress in their binders, Laurent calls the class together to compare this week's spelling performance (all 8s, 9s and 10s) to the previous week's (some 5s and 6s) and to discuss what worked well (spelling in their heads, practicing in the car) and what could be done differently to improve next time (checking their work, decorating the bathroom with words on Post-it notes).

Continuous improvement methods in schools is beginning to hit the mainstream.

In the business world, continuous improvement was popularized in post-World War II Japan and is known in various forms as Total Quality Management, lean manufacturing, Kaizen, the Baldrige model and Six Sigma.

The basic idea is that organizations and individuals should set goals, follow a plan to reach those goals, examine the results and come up with strategies for what they will do better the next time. Or, as it's written on the wall of Laurent's classroom, "Plan," "Do," "Study." "Act."

The philosophy spread to education in the 1990s, said Mr. Marino, and in 1998, educational institutions became eligible for the Malcolm Baldrige National Quality Award, which recognizes businesses for excellence in performance improvement.

"What we try to do in an educational setting is apply the theory from the boardroom, the central office, down to the individual student, where even kindergartners are saying, 'Can I be better tomorrow than I am today?'" said Mr. Marino, who is also an associate superintendent in Cedar Rapids, Iowa.

This is beginning, at a very early stage, to change how kids think of themselves, their world, and their part in the learning process.

For Kelly Barsotti, who has taught in Mt. Lebanon for nine years and used the continuous improvement techniques in her second grade class for two years, there's a definite benefit.  "It makes them more aware of their part in the process," she said, after conducting an exercise in which her pupils expertly analyzed a scatterplot of their reading test scores. "For the kids, they are really critically thinking about themselves as learners. If we can get them to do this now, just imagine what they'll be able to do in the future."

"You're having an open dialogue with the kids about their learning," [Mt. Lebanon teacher Jacqueline Zapko] said. "You're asking, 'What's going to work for you, so you can learn?' "

This focus on involving kids with the learning process itself, creating continuous improvement in methods and systems, will some day yield a population that drives life-long learning.  The benefits of that mindset could extend far beyond a group of business workers and leaders that no longer need to learn how to learn.

People Chain Management

The latest Knowledge@Wharton has an intriguing article titled Talent on Demand: Applying Supply Chain Management to People.  As the author notes,

Supply chain managers "ask questions like, 'Do we have the right parts in stock?' 'Do we know where to get these parts when we need them?' and 'Does it cost a lot of money to carry inventory?' These questions are just as relevant to companies that are trying to manage their talent needs," he says. In other words, the principles of supply chain management, with its emphasis on just-in-time manufacturing, can be applied to talent management.

Of course we immediately note that a major B-school has just invoked "just-in-time" instead of "overly complex ERP system" therefore we are compelled to read further.

Underlying supply chain questions is the issue of inventory, which in talent management terms often comes up when employers talk about having a "deep bench" of talent. "You hear that phrase a lot -- 'we have a deep bench,' or 'we have a big talent pipeline' -- and it is said with pride," Cappelli says. "Yet if you think about it in supply chain terms, a deep bench is the equivalent of lots of inventory, which- sounds terrible when we think of products. In fact, it is worse when we talk about talent. That's because an inventory of talent is much more costly than an inventory of widgets. Talent doesn't sit on the shelf like widgets do. You have to keep paying talent. And the best way to have a piece of talent walk away is to tell it to sit on the shelf and wait for opportunity. Anyone who is ambitious will leave, and then you will lose the big upfront investment you made in that person."

But that is based on the presumption that talent is still a cost... a figment of traditional accounting methods.  To use some of the phraseology of that snippet, talent shouldn't sit on the shelf like widgets do.  Talent is an asset that should be leveraged; if it sits on a shelf it becomes a cost.  That is lean leadership.

Reducing bottlenecks is another supply chain concept relevant to talent-on-demand. The CIA had this problem when it faced a two-year waiting list to get people through security clearances, according to Cappelli. "New hires were stacked up with nothing to do, exactly the way goods can get stacked up in an assembly line. It's important to remember that the assembly line can move only as fast as the slowest part."

Which is tied to batch thinking, perhaps driven by an anomaly that could be called "batch supply?"

Cappelli says. "You see this in many companies, including those that hire people only once a year, like college grads. Say they hire 50 graduates in June into training slots. At the end of the year, they have 50 people expecting to move from the training program into more permanent positions. Why doesn't the employer stagger the process and hire people twice a year instead of once? Not all college grads prefer to start work in June; some want to travel and start later in the year." The advantage of staggering the hires is that the company then needs only half the number of training positions and, more important, can adjust the amount of hiring in the latter period to changes in demand.

Capelli then goes on to describe some of the more innovative talent management practices at major corporations.  Just a few examples:

He describes the sophisticated forecasting model at Dow, which incorporates traditional statistical-based forecasting with such factors as the political and business climate in each of Dow's countries of operation, changes in labor and employment legislation, and business plans for the operating units.

Chubb "opened up its internal labor market by eliminating both job tenure and supervisor approval as requirements for changing jobs within the company."

During the IT downturn in 2001 and after, Cisco offered a "voluntary sabbatical" to its employees in which the company agreed to pay one-third of their salaries while they spent time working at nonprofit organizations."

The concept of talent management being analogous to supply chain management is an interesting one.  Just remember that talent is an asset, not a cost.

A Little Different: Google Sightseeing

I'm coming off a hectic week of dealing with some family medical issues, so instead of diving right into lean manufacturing and enterprise-related topics, I thought I'd share something a little different.  In fact, perhaps I'll broaden the focus of the blog a bit by creating an occasional series on "A Little Different."

We've written before about the potential of Google Earth, that free software that lets you access high-resolution satellite imagery and then zoom into any part of the planet.  The resolution can be pretty incredible, even giving you the ability to see individual people on streets.  I know of a couple of companies that use it for competitive intelligence by counting the number of cars in the parking lots of their competitors to gauge business activity.

A couple days ago I came across Google Sightseeing, a website with a tagline of "Why bother seeing the world for real?"  I guess it was only a matter of time.  Now you can visit all of those far-off natural wonders, zooming in from space.  Some pretty amazing photos of places like the Golden Gate Bridge, the Taj Mahal, Leaning Tower of Pisa... you get the picture.  Literally.

But there's another page on the site that tells me that some people have just a bit too much time on  their hands.  As they're zooming in from space they find objects and activities that just happened to be captured by the satellite cameras.  Some of which are, well, unusual.  And potentially embarrassing.  Take for example the series of images of rooftop sunbathers, some of whom obviously believed they could count on a bit more privacy.  Surprise!  But most are simply intriguing... the satellites happened to catch a mid-air refueling in action, crop circles, flocks of birds, strange sculptures... you name it.

Beware, it's addictive!       

Lego's Outsourcing Adventure, Part Trois

Over the last few years we've chronicled the travails of Lego, the Danish maker of plastic children's toys.  I like the product and have credited my early experiences with it with turning me into an engineer, whether that's good or bad, but the company leadership could use a little help.  First in mid-2006 Bill told us about their initial decisions to outsource manufacturing.

The only trick the ponies from McKinsey know is outsourcing, which is exactly what [CEO] Jørgen Vig Knudstorp did.  The work in the U.S. plant in Connecticut is being sent off to Mexico.  The Danish town of Billund where Lego is headquartered and the factory has long been the biggest employer in town, is being decimated as most of the work is being farmed out to Flextronics to do in the Czech Republic.

Lego already owns the plant in Kladno in the Czech Republic where the work from Denmark is being sent.  The plant, the employees and the equipment are merely being turned over to Flextronics to run.  If McKinsey folks know any other tricks besides outsourcing, manufacturing management apparently is not one of them.  The only change is who is going to manage the plant.  The McKinsey management expert obviously thinks that Flextronics is the better manager than himself.

Even more curious is that Jørgen has outsourced the plastics and packaging work to Flextronics, but has retained the little bit of electronic work Lego does for their Technic and Bionicle product lines.  The 'tronics' part of Flextronics denotes that they have long been primarily an electronics contract manufacturer.  Yet Jorgen's insight led him to keep that work in house, and have an electronics company with a track record of failure in the Czech Republic take over management of an injection molded plastics plant.

Sorry, I tried to snip that quote down a bit, but it was just too good.  You can't make that stuff up.  Then last year, after only a few months, we began to hear of problems.

The Lego corporation's large scale outsourcing has created so many problems that there will not be any downsizing of jobs in Danish factories in 2007. The plan was to cut the workforce in Billund from 1200 to 300, and outsource the jobs to their partner Flextronics in Kladno Czech Republic, so writes the newspaper "Børsen" [A paper akin to the Wall Street Journal].

We've never been big fans of the large consulting houses, but recently I've given McKinsey some kudos for their focus on lean.  Too bad some of their folks, or at least their alumni, don't practice what they preach.  Jorgen's focus on outsourcing has led to problems throughout Lego.  Core competencies were moved to a contract manufacturer that had failed with previous projects.  The inability to remove people, perhaps luckily, led to outsourcing not achieving cost reduction goals.

Now it appears one of the final chapters of Lego's outsourcing adventure may have been written. One of our long-time readers from across the pond found the following news:

Kvaliteten og effektiviteten har simpelthen ikke været god nok på den produktion, som man har outsourcet til en fabrik i Tjekkiet.

Oops... sorry.  I guess I shouldn't assume all of you know how to read Danish.

Lego drops partnership with Flextronics - Quality and effectiveness have simply not been good enough for the production that was outsourced to a Czech factory.

“We have talked about how we can be more effective and decided to run the factory ourselves.  We would rather do that which is the most effective that stick to a decision that is two years old, even though it of-course sends a signal about a shift in strategy” says CEO Jørgen Vig Knudstorp.

It's Lego, who owns the factory in the Czech Republic, but Flextronics who has managed the operation the last two years. In that period it has in vain tried to reach the quality- and efficiency goals that Lego has arranged. Flextronics however still handles production for Lego in Hungary and Mexico, but also here Lego dissatisfied with the cooperation, and they are working energetically on quality- and efficiency improvements.

Pretty amazing since Flextronics is one of the world's largest contract manufacturers and should be able to figure out how to manufacture plastic toys.  But what's even more amazing, or sad, is the turmoil and cost this adventure created.

When will they learn?

Fun With Statistics, Fad Edition

In this edition of Fun With Statistics, we ask you to be careful of fads, especially those driven by popular passion.  We all want to be environmentally sensitive; it's simply a good thing to do.  Whether or not you agree that global warming is caused by humans, reducing pollutants and green house gases is still a noble objective.  Didn't Greenland really used to be green?  Hmm...

But how about ethanol fuel and bamboo products?  Ethanol is touted as a great replacement for petroleum-based fuel, although as we pointed out last December there is still a debate whether it is a net positive or negative from an energy output standpoint when processing energy is taken into account.  Now some people are wondering about how ethanol production will affect global warming.

A study published in the latest issue of Science finds that corn-based ethanol, a type of biofuel pushed heavily in the U.S., will nearly double the output of greenhouse-gas emissions instead of reducing them by about one-fifth by some estimates. A separate paper in Science concludes that clearing native habitats to grow crops for biofuel generally will lead to more carbon emissions.

That's on top of some of the other indirect effects.

The findings are the latest to take aim at biofuels, which have already been blamed for pushing up prices of corn and other food crops, as well as straining water supplies.

Have you noticed how popular bamboo products are?  On the surface there's a good reason.  Take bamboo t-shirts for example.

Bamboo naturally grows at a fast rate even when you don't place any fertilization, chemicals or pesticides on them. This means that there is always an ample amount of bamboo available to make the shirts. Another great thing about these are that they are antibacterial because of properties in the plant. They are also antifungal and do not hold sweat as other cotton t-shirts can. This means that you won't have to wash it as much as a cotton shirts which saves on energy.

But, as you probably suspected, there is another side of the story.  A side that isn't exactly eco-friendly.

The not so eco-friendly part and the biggest part is in the way that they are made. The t-shirts are made using the bamboo but the process is highly pollutant and harmful to the workers manufacturing the shirts. They use a hydrolysis alkalization process to soak the bamboo leaves and shoots in sodium hydroxide and carbon disulfide. It is then placed in a bleaching solution in which it goes through many phases before it is complete. All of these chemicals give off a harmful vapor that could result in health problems for the individuals working.

That doesn't sound all that great.  Bottom line: dig into a manufacturing or business fad.  Is the popularly-accepted benefit based on reality?  All reality?

Lenovo, and Soon 10,000 More

Last month we told you how Lenovo, the Chinese company that bought the rights to the IBM computer line, is moving manufacturing facilities out of China.

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.

Now it sounds like they may be riding the edge of a wave.  A wave, by the way, that we predicted way back in late 2006.  Damn we're good!  And we don't even have a crystal ball.  Now the Chinese themselves are talking about the problem of rapidly rising costs.

Surging costs on the mainland could soon force thousands of factories in southern Guangdong province to close and encourage companies to relocate to Vietnam or other lower-cost centers, companies and industry officials said yesterday.

Some 60,000 to 70,000 factories in the Pearl River Delta region - which includes Guangdong - are owned by companies from neighboring Hong Kong, and the Chinese Manufacturers' Association of Hong Kong says 10,000 of them could close or merge in the next few months. "Costs at some of these factories have risen 30-50 percent in the past few years - 100 percent in some cases," Paul Yin, president of the Chinese Manufacturers' Association, said by telephone.

That's a boatload of factories!  And it's not purely direct tangible costs that are rising, but the cost of regulatory complexity and limitations.

However, Yin said labor costs are rising across the mainland. A new labor law introduced on Jan 1 that aims to protect workers makes it more difficult for companies to hire and fire workers, retain short-term workers, and it enforces overtime pay. 

So if you move a factory to China to capitalize on cheaper labor and general manufacturing costs, and those costs rise 50% a year... hmmm...   Maybe it would have been easier to focus on some internal improvements instead.  Unless you are truly trying to tap the nascent Chinese market itself.