Evolving Excellence

More Problems is a Good Thing

By Kevin Meyer

We all know how easy it is to jump to the quick and easy conclusion that people are the cause of problems.  We see it every day in every organization - verbal warnings, written warnings, terminations.  Off with their heads!  As if that is doing anything about the problems itself.

The reality is that virtually no one wants to create or cause a problem.  It happens, but it's exceedingly rare.  Ineffective, confusing, or contradictory processes are generally at the root of the problem.

The FAA appears to understand - thankfully as it's a critical function that I rely on a few times a month.  The headline sounds ominous... until you read deeper.

New numbers released by the Federal Aviation Administration show reports of air-traffic errors have nearly doubled in three years. The number of reported incidents in 2007 was 1040, and that number rose to 1887 in 2010, an 81 percent increase.

Egads!  But here's the good news.

Diane Spitaliere, manager of media relations for the FAA, told Fox News that passengers should not be alarmed by the increase in errors, because part of the increase was due to better reporting methods implemented in 2008. The new method protects controllers from punishment for errors they voluntarily report.

Since the non-punitive culture of error-reporting went into effect, the FAA says it has been receiving about 250 reports a week. “The FAA’s mission is to keep air travelers safe," Spitaliere said. "Over the past several years, the FAA has transitioned to a non-punitive error-reporting system at its air traffic facilities.

What's the real benefit?

This cultural change in safety reporting has produced a wealth of information to help the FAA identify potential risks in the system and take swift action to address them.

"The FAA takes all errors seriously but we believe increased reporting will result in an even safer aviation system.” The chairman of the National Air Traffic Controllers Association, Steven Hansen, apparently agrees. He has said that if authorities don't know about the problems, they don’t know what to fix.

To fix the process you must first understand the failures occuring in the process.  If you focus on the person caught up in the failed process you won't learn about many of the failures and therefore won't have the ability to even start to fix and improve the process.

Lessons from the History and Hypocrisy of Politics

By Kevin Meyer

This post is going to tick off a bunch of folks from both ends of the political spectrum, but there's a limit to how much centrist libertarians like myself can take before our heads explode.  Perhaps it takes being such a centrist, thinking instead of blindly rationalizing the illogical and downright ridiculous like those that cling to either extreme, to see the connections and systems involved.

So I've thrown all my balderdash and bloveating together in one post so those so inclined can simply blissfully ignore today and wait until something more meaningful tomorrow.  However there are some organizational lessons we can derive from this nonsense.

Let's start with a dose of history that seems to be forgotten by those demonstrating against Wisconsin Governor Scott Walker's plan to scale back public employee union collective bargaining rights.  Does anyone remember who once said "it's impossible to collectively bargain with the government?"  Or perhaps who called public employee unions "unthinkable and intolerable?"  Some right-wing Tea Party nutcase?  Nope, George Meany, president of the AFL-CIO, and that liberal icon and welfare state creator himself, President Franklin Delano Roosevelt.

The founders of the labor movement viewed unions as a vehicle to get workers more of the profits they help create. Government workers, however, don’t generate profits. They merely negotiate for more tax money. When government unions strike, they strike against taxpayers.

Government collective bargaining means voters do not have the final say on public policy. Instead their elected representatives must negotiate spending and policy decisions with unions. That is not exactly democratic – a fact that unions once recognized. George Meany was not alone. Up through the 1950s, unions widely agreed that collective bargaining had no place in government.

So what happened over the last few decades?  Quite simply, bad management.  And that's where I get to tick off the other side of the spectrum.  I'm not opposed to unions or collective bargaining - in my opinion they are the result of bad management and leadership in both the private and public sector.  Those organizations were treating and paying their employees like they were simply pairs of hands - instead of humans with a remarkably valuable brain attached to those hands.

A funny thing happens when you realize there's a brain involved: you are able to tap into a creative energy that generates more value than you are paying for, therefore you treat the repository of that brain much better perhaps including paying more, which thereby makes the brainy employee no longer believe a union is required to "combat" management.  That's why unions don't seem to take hold in the best organizations - there's really no need.

If you have a union, let alone are combating a union, you probably deserve it.  If that union negotiated for benefits that are damaging your competitive ability, then shame on you for being on the other half of that negotiation and agreeing to it - and not realizing there was a mutually beneficial way forward by valuing the brain attached to the hands.  Yes Governer Walker, there is another way.  Try it.

The lesson: understand the true value and opportunity of your resources, especially the people in your organization.

That's not negating that something has to be done about the problem of mounting public pension liabilities.  Only the dwindling number of followers of the increasingly irrelevant Paul Krugman still believe that Keynesian economics works - how many more costly attempts do we need?  Like it or not public pensions need to be renegotiated.  Sounds like the Wisconsin unions, as well as those of other states, are willing to do so.  Spending needs to be cut - in all areas, yes including defense.

A few folks look back at history and say we should simply return to the higher tax rates of yesteryear, simply because significant growth was also occurring during that period.  There's just one big problem with that simplistic solution - it isn't yesteryear.  History is information, a guide, not a rule.  The world is a radically different place. 

Geographical boundaries no longer restrict the flow of income, wealth, and capital.  As many of us are keenly aware, global competition for wealth and knowledge is intense.  Just as with state boundaries becoming meaningless leading to massive wealth and population migration from states like New York to states like Florida and Arizona, raising taxes now do the same on a global scale.  Wealth and capital rapidly migrate to those parts of the world where it can be used more effectively.  That's already happening with many countries reducing personal and corporate tax rates - and generating more income from more business and investment activity - while some countries like the U.S. remain stubbornly high with some folks even wanting rates to go higher.  Raising taxes almost always creates a net reduction in tax revenue these days.

The lesson: know history, but also understand the context of that history so appropriate lessons can be derived.

It's been amusing to watch lawmakers from Wisconsin and Indiana flee to neighboring states to avoid voting on bills they don't like, often to the applause of constituents sharing their political views.  But wait a minute - wasn't it only a year or two ago that that same party was decrying the "tyranny of the minority" when filibusters were used in a similar fashion.  What goes around comes around... and then goes around.  You were elected to work, you happen to be in the minority, live with it.  Debate and change people's opinions and perhaps things will change the next time around.  Ignoring duty is a dangerous precedent.

I was also puzzled by Obama's recent decision to not defend the Defense of Marriage Act (DOMA).  Now I don't personally agree with DOMA either, but simply not defending it creates an interesting precedent.  Could we imagine a future President deciding not to defend a duly enacted law he decides she (!) doesn't support... like health care?  Although deciding not to defend is different than deciding not to enforce - the latter would effectively create a constitutional crisis.  Perhaps it already has.

The lesson: do your job.  If you don't like it, debate and work to change the decision.  Don't just ignore it - or even worse continue to punt the problem down the road.

On a similar note, the right often pretends to agree with libertarians that the government should get out of people's lives - and then they try their own social engineering that sometimes approaches or even surpasses the entangled social constructs created by the left.  An example?  How about marriage.  These fights on who can marry who are mind-bending.  Lately it seems like I can point to more same sex relationships that are more stable than most traditional relationships I know of.  So why doesn't government simply get out of the marriage business altogether?  Poof!  Problem solved.  Marriage is a social and religious construct, not government.

The lesson: are you creating some of your own problems but just putting your nose where it doesn't belong?  Perhaps by simply redefining your operational boundaries some problems will go away.

That points to another mindset that somehow needs to change: that spending correlates to results.  Education is a prime example - the U.S. spends more by nearly 40% than countries like Finland, Japan, and Norway.  But some folks still insist we should pay more?  Be serious.  Lean education anyone?  The same concepts can apply to all public sectors.

The lesson: before jumping to the easy answer of increased spending, look inward to identify efficiencies.  And those efficiencies are not usually reductions in brains, but reductions in complexity.

Over the past week I've come across no fewer than three articles from left-leaning folks claiming Social Security should be left out of the current budget reduction efforts because "it doesn't contribute to the deficit."  There are generally two aspects of this bizarre argument and it took me a while to understand the perspective that generates it.

The first is simple - the argument that "Social Security is fine for almost another 20 years" and "even after that it can pay out 70% of planned benefits" - and with that they consider it sound and solvent.  Nothing like admitting there's a problem staring you in the face and then kicking the can down the road.  20 years ain't long - to many of us 1990 seems like yesterday.

But the more interesting argument is how Social Security is supposedly a zero drag on the economy.  It finally hit me that those making the argument haven't had the benefit of managing large complex systems - just operating in singular entities. Perspectives are narrowed and the blinders are on.

Yes Social Security is currently roughly neutral, technically off budget, and funds have actually been sucked out of it to pay for unrelated pet projects - an irresponsible budget machination wrought by multiple administrations of both parties.  But as part of an overall system, even a standalone self-funding agency or operation is still an issue if the system has problems. 

An analogous example would be a company with with one profitable division and five unprofitable divisions.  The profitable division simply cannot stand alone in the system if the other divisions are deemed worthy or necessary - it has to be considered as part of the whole. The entire system exists within a pool of limited resources - tax and general income dollars in the case of the public sector - and decisions need to be made that potentially impact even the profitable division.  Increasing draws on that limited pool, even if converting that increased draw results in greater offsetting benefits and therefore an illusion of solvency by the profitable division, still reduces the funds available to the other divisions.  And if those unprofitable divisions are doing worthwhile things - like many aspects of government - it becomes an even greater problem.  And now if you consider the system to be the global economy and not just the U.S. economy - keeping in mind globalized competitive effects - well, you get the picture.  I hope.

A similar situation exists in organizations that have been forced to downsize - there's generally extreme difficulty adjusting to the reality of simply being smaller with fewer resources.  Any number of projects can still be identified that are worthy of investment and able to generate positive returns - but the funds available for investment simply don't exist at the same level.  Good and profitable still doesn't mean possible.

The lesson: consider the entire system, not individual entities.  Think more global - and I don't necessarily mean that in terms of geography.

But now I'll bounce to the other side of the spectrum to upset my right wing friends.  Why does my Social Security withholding stop when I hit a relatively modest income level?  If Social Security was designed to be a safety net, why should I expect to receive payments if I have been fortunate and successful?  I guess it wouldn't bother me if that changed. However if it was supposed to be just a safety net, why has it morphed into a full retirement plan for many folks?

The lesson: we do have an obligation to support the less fortunate.  That makes us good stewards of society, and we never know when we might become part of that demographic.  It happens.

Time to wrap this up.  Thanks for listening, perhaps even considering and thinking, and I promise you I'll be back to lean tomorrow!

Yes, There is Manufacturing in San Francisco

By Kevin Meyer

And I don't mean San Francisco, Mexico.  This is "high cost" San Francisco in nutty "high cost" California in the "uncompetitive" United States.  I used to talk a lot about American Apparel as an example of a manufacturer of traditionally low margin clothing products that was also successful in California, but I've held back lately due to some of the... uh.. "controversial" aspects of the CEO.  Maybe I've found a few more examples to embarass the pants off of companies that think they can't compete from the U.S.

Thanks to regular reader David for pointing out this recent article in The Atlantic.

There are 200 to 300 businesses that actively manufacture products in San Francisco. I work for one of those companies - Timbuk2 Designs. Timbuk2 has been making custom bags in San Francisco since 1989.

We were started by bike messenger Rob Honeycutt, who became fascinated with just-in-time manufacturing and applied the Toyota model to the making of messenger bags. He hired a team of highly skilled sewers, several of whom are still with the business. One of Timbuk2's sewing leads, Hui Wu, has been with Timbuk2 for thirteen years, and she and her 15 person team - 13 sewers, 2 cutters - can make up to 400 bags a day in our San Francisco factory. Wu and her team are fully cross-trained so they can work on any machine, and their skill is incredible.

You can probably already see the threads I'll weave in describing why they're successful - a knowledge of Toyota principles and practices, hiring for experience and talent instead of just a pair of hands, cross-training.

It may not sound modern or even possible, but local manufacturing is happening in American cities and it's actually working. Here's why.

Kate Sofis of SFMade - a non-profit dedicated to supporting and growing manufacturing in San Francisco - explains, "Companies here share a few very noteworthy traits. They are almost all consumer-products companies [that are] design-driven, intensely customer focused, increasingly sell direct, and often marry technology in their business model."

Larger companies, specifically Nike and Converse, manufacture their products in Asia and FedEx them directly to the customer. The model works well for everyone but the customer who has to wait 3 - 6 weeks to receive a product. But because Timbuk2 is local (i.e. in the USA), we manufacture and ship custom bags in 2 - 3 business days. And if the customer is in San Francisco, we can do same-day manufacturing and delivery.

Units of one shipped fast.  As opposed to having to wait for a container load(s) and hope the design is still in style.  WalMart fell victim to that problem last year.  The ability to rapidly test new designs is another competitive advantage.

Low minimums and speed to market are other huge advantages. We can make and sell one unit of a bag to see if anyone bites. Betabrand, another company that designs and manufactures in San Francisco, similarly benefits from producing locally. Betabrand's founder Chris Lindland explained, "Quick lead times and limited batches allow Betabrand to test out new ideas in a snap and quickly follow up when they have a hit."

We see that story time and time again.  Smaller and smaller batches creating the ability to rapidly incorporate new designs and get them into customers' hands in days or even hours.  Lower inventory, especially inventory at risk from a quality issue or style change.

If clothing and other consumer goods manufacturers can compete from higher cost and even highly regulated areas, then anyone who thinks they have to chase supposed lower labor costs overseas should be embarassed.

Making or Breaking Culture

by BILL WADDELL

In one of the best performing companies I have worked with it was within a very few hours of my arrival for my first visit that I heard the story.  A few years before the husband of a thirty plus year employee had been released by the doctors treating his cancer - sent home to die.  There was nothing more they could do for him.  The employee was nobody of note.  She had been a hard working assembler the whole thirty years.  She had never contributed any spectacular improvement ideas - she had just showed up for work every day and given the company her best effort.  When the CEO heard of her tragedy, he personally went out to the shop floor, put his arm around her and consoled her ... and sent her home, to stay there with full pay for as long as she needed to be with her husband until the end; a couple of months as it turned out.

The story became company legend.  Everyone in the place knew of it, and it was repeated for every new employee by someone or another.  It was significant because it demonstrated senior management walking the talk when it came to employees being their greatest asset.  The CEO truly appreciated the loyalty she had shown the company, and he honestly felt that standing behind her when she needed the company was a 'no brainer'.  He had not viewed it as a particularly noteworthy or difficult decision at the time.  I should mention that this was no mom and pop operation. It is a good sized outfit with better than a thousand employees and a few hundred million in sales.

Good companies have similar stories.  Employees commit to the company because they have seen the company commit to them.  Most noteworthy, these companies are not restricted by policy manuals, or fear of discrimination suits when it comes to doing the right thing.

There are other companies - too many of them - in which the primary role of HR seems to be to protect the company from its own employees.  In such places, the woman never would have been sent home.  HR would have warned the CEO that to do any special favors for her would create a precedent whereby every employee with an ill relative would demand the same treatment - and sue for discrimination if they were not granted the same.  HR would warn the CEO that every employee whose spuse had a head cold would demand time off with pay.  And the spineless CEO would have used such a warning as justification for doing nothing.  "I feel sorry for you - I really do, but if I were to show you any special consideration it would be unfair to the rest of the staff since we can't do it for everyone ... so sorry."

Such a company seems to be Crane Interiors in Tennessee.  Teresa Danford, a factory employee, had the unmitigated gall - the complete disregard for company policy - to take a cell phone call from Lance Corporal Mark Rhyne - her son who is serving in Afghanistan.  Her son can only call once a month or so when he gets access to a SAT phone. "'There is nothing in this world that would stop a mother from answering a phone call from her son and what if it was not my son? What if he'd been hurt and someone was trying to contact me?' asked Danford."

The company's reaction:  Three days off without pay even though it was her first violation of the policy, and a warning that if it happens again she will be fired.  Crane HR Manager Larry Officer explained that the policy is the policy - no exceptions, no ifs, ands or buts.  I can hear Larry now, explaining that if he overlooks Ms. Danford's violation he won't be able to discipline Joe Blow next week when he takes a cell phone call from his bookie ... typical bureaucratic HR blather. 

In fact, Larry, it would be quite easy. You tell Ms. Danford that everyone in management is happy to hear that her son is safe and well, and to please tell him how proud and grateful they are for his service to his country next time she hears from him.  Then you tell Joe Blow the company has a new rule - people with family members serving their country in harms way get to take SAT phone calls - and that he should be ashamed for daring to compare himself to Ms Danford; and that he gets three days off without pay, and if he wants to sue the company he is welcome to give it his best shot.  The company is willing to take its chances with the judge when all of the facts come out.  And even if they lose and have to give Joe back the three days pay, they will still do the same thing if it comes up again.

Whether Larry made this absurd decision, or if he is merely the front man for owners Larry Bicklin and Tom Evans, collectively they run the company with the sort of leadership one expects from the local DMV branch.  The whole lot of them should be thoroughly embarrassed, and they ought to give themselves three days off without pay. I am willing to bet that all three of them feel free to answer their cell phones whenever they please.

In the first company senior management creates a culture of loyalty and employee commitment because they are led by people who do not let policy, rules or the threat of legal repercussions get in the way of doing the right thing.  Fairness, decency and a genuine respect for employees as unique, whole people drive decision making - not policy manuals.  In companies such as Crane Interiors, excellence is unattainable because the employees Larry so diligently protects the company from will never take them there.

The Outsourcing Lesson of Boeing - Part 2

By Kevin Meyer

Yesterday I gave you the first lesson of Boeing's 787 Dreamliner outsourcing adventure - the savings from outsourcing design and subassembly manufacturing don't always offset the costs.  Today we have the second lesson.  A short one, but potentially the most devastating to a company that believes it can save a short-term buck by chasing what looks like a cheaper outsourcing option.

Three years ago I told you how the same overseas companies that Boeing had outsourced some development and subassembly manufacturing to were beginning to develop planes of their own.  Key Boeing corporate knowledge - presumably valuable - was being transferred to organizations that could become competitors.  So where are we today?  Those competitors have arrived.

Recent pronouncements by Boeing chief executive Jim McNerney that the airframer prefers to take a clean-sheet approach to the next-generation narrowbody are underpinned to a degree by a genuine concern about new entrant aircraft from Bombardier and Comac of China. Pointing specifically to Comac's aggressiveness with its C919 narrowbody and the other new entrant aircraft from Canada, Japan and Russia, Boeing Commercial Airplanes vice president of strategic planning and analysis Jerry Allyne told attendees at the 36th annual FAA Aviation Forecast Conference: "We spend a lot of time asking ourselves how we are going to compete."

One way to compete is to avoid giving the competition your key knowledge that has been developed at a huge cost over several decades.  But I guess it's too late for that.

Allyne later told ATI and Flightglobal it was tough to predict which manufacturer would survive, but in the long-term with their government support and 50-year planning window, "the Chinese are unstoppable".

A twenty- or thirty-year developmental jump thanks to transferred knowledge doesn't hurt either.

So you saved a buck on labor cost.  What have you lost?

The Outsourcing Lesson of Boeing - Part 1

By Kevin Meyer

For years we've kept you updated on Boeing's outsourcing adventures and how that game has created major problems for the 787 Dreamliner program and the company as a whole.  A year or so ago even the company was beginning to admit that a lesson had been learned.  Recently an article in The Los Angeles Times of all publications also described the lesson.

The biggest mistake people make when talking about the outsourcing of U.S. jobs by U.S. companies is to treat it as a moral issue.

Sure, it's immoral to abandon your loyal American workers in search of cheap labor overseas. But the real problem with outsourcing, if you don't think it through, is that it can wreck your business and cost you a bundle.

Case in point: Boeing and its 787 Dreamliner.

"Wreck your business and cost you a bundle."  Doesn't get any more blunt - and factual - than that.

Much of the blame belongs to the company's quantum leap in farming out the design and manufacture of crucial components to suppliers around the nation and in foreign countries such as Italy, Sweden, China, and South Korea. Boeing's dream was to save money. The reality is that it would have been cheaper to keep a lot of this work in-house.

The 787 has more foreign-made content — 30% — than any other Boeing plane, according to the Society of Professional Engineering Employees in Aerospace, the union representing Boeing engineers. That compares with just over 5% in the company's workhorse 747 airliner.

And the impact of that outsourcing?

Boeing's goal, it seems, was to convert its storied aircraft factory near Seattle to a mere assembly plant, bolting together modules designed and produced elsewhere as though from kits. The drawbacks of this approach emerged early. Some of the pieces manufactured by far-flung suppliers didn't fit together. Some subcontractors couldn't meet their output quotas, creating huge production logjams when critical parts weren't available in the necessary sequence.

The company has begun to recognize and even admit the mistake.

Boeing executives now admit that the company's aggressive outsourcing put it in partnership with suppliers that weren't up to the job. They say Boeing didn't recognize that sending so much work abroad would demand more intensive management from the home plant, not less.

No kidding.  A bunch of us could have told you that - and we did.  As did others with presumably more influence.

Boeing can't say it wasn't warned. As early as 2001, L.J. Hart-Smith, a Boeing senior technical fellow, produced a prescient analysis projecting that excessive outsourcing would raise Boeing's costs and steer profits to its subcontractors.

As an engineer at McDonnell-Douglas' Long Beach plant, he said, he saw how extensive outsourcing of the DC-10 airliner allowed the suppliers to make all the profits but impoverished the prime manufacturer. "I warned Boeing not to make the same mistake. Everybody there seemed to get the message, except top management."

Among the least profitable jobs in aircraft manufacturing, he pointed out, is final assembly — the job Boeing proposed to retain. But its subcontractors would benefit from free technical assistance from Boeing if they ran into problems, and would hang on to the highly profitable business of producing spare parts over the decades-long life of the aircraft. Their work would be almost risk-free, Hart-Smith observed, because if they ran into really insuperable problems they would simply be bought out by Boeing.

Bingo.  But they should also keep in mind that final assembly done right can also be a value center - and profitable.  A lesson most outsourcing companies, like Apple, also forget.

Boeing's experience shows that it's folly to think that every dollar spent on outsourcing means a cost savings on the finished product.

Compare that to the cost of delays, design and production oversight, and just recently spending a billion to acquire one of those subcontractors, Vought.

That's the first lesson.

I'll Take Waste For $400, Alex

by BILL WADDELL

The geeks are giddy at the news of Watson - IBM's multi-million dollar entrant in Jeopardy - thoroughly trouncing a couple of smart guys.  Some in the investment community are pretty jazzed up at the potential for computers Watson's rousing victory promises, as well.  Most noteworthy is a quote from a guy named Ross Mauri who said, "The implications of this technology in the coming years are going to be phenomenal".  What makes his observation significant is that he is IBM's Vice President for Enterprise Process Transformation.  I would suggest that the implications are phenomenally disastrous if enterprise leadership cannot distinguish trivia from useful information, and Watson has only proven to be the ultimate Rain Man of trivia.

Just about everyone is familiar with the Einstein quote that not all that can be counted counts, and vice versa.  The term for that which can be counted but does not count for much is 'trivia', and this is the area in which computers in general, and Watson in particular, excel.

Put another way, last week I was doing a One Day Assessment at an aluminum extruder and, as I walked through the plant, the engineer giving me the tour and I talked about the unhealthy supremacy of direct labor cost in management decision making.  His observation was right on the money - it is given so much weight because it is so easy to count.  The implications of Watson - potentially dangerously phenomenal implications - are an increase in reliance on things that are easy to count - but don't really count for much.

Expertise at trivia is no great accomplishment.  By the nature of my job I am pretty hard to beat at Jeopardy and Trivial Pursuit.  Just last week I learned how potatoes are planted, flag poles are made and some cool stuff about DNA processing technology I have sworn not to discuss.  I can tell you how cattle are groomed for competition, what happens inside the device that fires Tomahawk missiles, how to skin the bark off a tree at very high speed and how cartons of orange juice are formed, filled and sealed.  I know an amazing amount of such arcane stuff simply because I have been in over 75 factories in the last year.  While all of that makes me a fascinating conversationalist at cocktail parties, it would be a serious mistake to interpret any of it as evidence of wisdom or even common sense.

In Simple Excellence Adam Zak and I describe the way in which the most profitable companies we hae seen distill their business down to the basics - the opposite of the complexity computers seek to master.  More signficant, we describe how those companies make very effective decisions with equal inputs of data, common sense and practical wisdom, and an ethical concern for all of their stakeholders - the things Einstein's quote described as counting even though they can't be counted.

Business is already way out of kilter with a bias toward 'fact based' management, which limits decision making to only those things that can be quantified and counted, largely disregarding the critical things that are a lot harder to neatly dump into a data base for the likes of Watson to cull through.

Watson's victory is little more than a parlor trick - mild amusement for management.  To read any more into it is to head further down a destructive path management has already followed for too long.

All Idiots Think Alike

by BILL WADDELL

If you haven't done so already, you should try to catch an episode of An Idiot Abroad on the Science Channel.  Comedian Ricky Gervais sends his naive, plain-spoken friend Karl Pilkington - the 'idiot - to different countries with a film crew for the sole purpose of getting a laugh out of Karl's blunt observations of other cultures.

In China, shocked at the crude living, sanitary and dietary conditions, Karl reacted to the place with, "I didn’t think it was going to be like this.  I thought it was where they made the iPod.  I think I have the wrong place because this isn’t a place where they need an iPod.  I think they need a toilet roll first.  I think it’s weird because whenever you buy stuff it says Made in China.  I think they would be using it here first." I found myself in total agreement with him.  Having a healthy ego, my first reaction was to sympathize with Karl because he had been branded an idiot when clearly he is not.  Then the realization dawned on me that perhaps the fact that Karl and I see China pretty much the same is not proof of his intelligence ... maybe it only proves that I am as much an idiot as he is.

Just maybe, however, Karl and I are not quite a stupid as we look and often sound.  My reaction to China (and Karl is even more shocked when he gets to India) was similar - to immediately think that this cannot possibly be the great economy of the 21st century.  It was a place of incredible poverty where the overwhelming majority of the people live in wretched poverty without the basic things western countries have been taking for granted for centuries.  I did not take long at all to become convinced that all of the experts cannot possibly have seen the same China I was seeing and I was sure that manufacturing here cannot possibly be a good idea, and certainly not an idea that can sustain.

The growing silence from the northeast is beginning to indicate that Karl might not be an idiot but someone who applies a great deal of common sense.  The only possible indication of stupidity is his failure to appreciate the reprcussions from a distinct lack of political correctness.

But the silence is noticeable.  The academic and investment elites are no longer loudly extolling the virtues of China to the degree they once were.  Perhaps it is because inflation in China is escalating at a dramatic rate.  Perhaps it is because outfits like International Energy Agency are questioning the absurdity of official Chinese economic data - asking how the economy can be growing while energy consumption is shrinking.  Perhaps it is because clothing retailers and outfits like Walmart who have gone all in on China are whining about inflation and the need to raise prices, while the bigger concern for the US economy has been stemming the tide of deflation ... seems it is Chinese inflation that is causing their problems and the average US consumer isn't going to go along with higher prices from these folks.  And perhaps it is because even Wall Street is starting to have second thoughts about the third world geese they were promised would lay an endless stream of golden eggs.

The revolution in Egypt was neither politically nor religion driven.  It was purely a matter of economics, largely the inevitable reaction to a dysfunctional economic system that led to food costs equal to 48% of average household income.  No one can or will long put up with that.  When Karl says China - where food requires 40% of the paychecks - "isn't a place where they need an iPod. I think they need a toilet roll first", he isn't quite the idiot he is made out to be.  Just maybe China is not too far away from an Egyptian-style upheaval.  Maybe India and Vietnam where food gobbles up 61% and 51% of income respectively need toilet rolls a lot more than iPods too.  This compares to food consuming 8-9% of US income.  Big changes are inevitable in these countries.

It seems to me - keeping in mind that I may well be an idiot - that there is a golden opportunity for western manufacturers to get back in the game in a big way.  The customers who dumped you for China or India, and the potential customers who wouldn't let you in the door are in a little bit of trouble.  They are paying a price and don't know what to do about it.  It is only going to get worse for them.  I have visited four companies in the last week or so and every one of them is increasing their business, closing sales that a few years ago would have gone to Chinese suppliers.  Lean manufacturers are sitting on the verge of a tremendous boom. 

I think it is time to stop wringing our hands about the unfairness of it all, get out there and take the economy back, and I think the lean companies can do it.  But then what do I know? I'm the guy who sees the Idiot Abroad as a pretty astute guy.

How To Tell Your Assets From A Hole In The Ground

by BILL WADDELL

I had an email from a reader a little while back asking Kevin and me to delve into how bankers are stifling lean.  My answer to the question is that the dumber and greedier bankers are, the better it is for all concerned.  In particular, the email, speaking of the company for which the writer works owner/president, said ...

"He doesn’t want to reduce any of our inventories because our line of credit is keyed to the value of our inventory (which they consider as an asset).  If we reduce our inventory, we risk having our bank line of credit reduced accordingly."

This is really a case of dumb and dumber.  To begin with, the banker is dumb for lending against inventory.  Inventory is supposed to be valued at 'the lower of cost or market', and virtually every accountant concludes that cost is the lower of the two less a trivial allowance for obsolescence.  The banker's lien against the inventory is supposed to be their security if the borrower defaults - a scenario in which the bank would seize the inventory and sell it off to recover the loan.  There is no conceivable way anyone is going to buy that inventory at the bank's liquidation sale for the same amount the company paid for it.  Market value is always lower than cost, but accountants are not about to give up their game of inflating profits through inventory accounting tricks.

If you have steel that cost you a thousand bucks, why would I pay you a thousand bucks for it when I can go to the steel company and get the same deal?  I don't know for sure where your steel came from or what has been done with it since you bought it.  Why take a chance?  You have to give me a pretty good discount to make me want your steel rather than new stuff.

Who is going to pay you your cost for work in process?  Why would anyone want a pile of half-built widgets valued at a price that includes a lot of allocated overhead expenses?  And, while I may see the value in one of your finished goods, what am I going to do with a thousand of them?  Inventory liquidation sales typically recover ten cents on the dollar, at best.  A banker who lends money based on the inventory value as determined by a manufacturing accountant is a fool.

The real dummy in the equation is the owner/president, however.  To my writer/friend whose anonymity I will respect, you ought to ask the big guy, "Let me get this straight: you don't want to pursue lean and reduce inventory by a thousand dollars and free up that much cash because it would take away the collateral you need to borrow something less than that from the bank?"  Does this guy really not understand that every dollar of inventory reduction is a dollar of additional cash flow - free and clear - no need to pay it back or pay interest on it?  The banker is not the obstacle to lean - the company president is the problem.  The banker is only guilty of not knowing his assets from a hole in the ground.

At the other end of the spectrum, I ran into a guy over the weekend who owns a machining company and, like a lot of manufacturers, business is picking up.  He was bemoaning the fact that his bank won't lend him money needed to buy equipment  necessary to increase his capacity and meet demand.  The bank's reasoning: his P&L hasn't looked strong enough over the last couple of years.  At the same time, his inventory is only turning 4-5 times a year.  He was oblivious to the fact that he had the ability to be his own banker - not too much lean effort and he will start turning that mountain of inventory into cash faster than he can spend it.

I don't know which banker is the greater idiot - the one who will lend money against a bunch of over-valued inventory, or the one who says that because the recession has hammered the second guy's P&L he won't lend him money even though he managed his business well enough to weather the recession.  Either way, the bank is not the problem - it is the president who thinks inventory and banks have some value.

And I don't know which president is worse - they both seem to think that borrowing money and paying interest to a bank makes sense when they are sitting on all the potential cash they need.  Bankers who won't lend money, however, are lean's best friend.  They force companies to get lean and fund themselves.

Lean companies generate cash and enjoy the luxury of calling the shots when the bankers line up in their lobbies, hat in hand, begging for them to put it in their bank.  CEO's groveling before banks - thinking they need them at all while sitting on big inventories - are foolish.

Fun With Statistics - The Global Tax Compendium

By Kevin Meyer

It's been a while since we had a Fun With Statistics post, but fellow blogger Jason Yip just pointed me to PWC's just-released Paying Taxes 2011 report - and that got the wheels turning.  There is so much data here, and so many ways to cut it, that the statistics nuts among us could spend hours diving into it.

The study measures the total tax rate (federal, state, municipal, sales, etc) of 183 economies worldwide as a percentage of total commercial profits, but even more interesting are the measures of the cost of complexity, compliance, time required to comply, and the like.  As the study says:

The study provides useful insights and identifies efficiencies which can benefit both government and business alike. And with six years of data now available, the study gives some interesting perspectives on how the world’s tax regimes have changed during this time – and, more recently, over a period of unprecedented economic turmoil.

Six years of data for 183 economies is quite a bit.  If you want to jump to the individual country rankings you can go here.  Click on the column header for easy sorting.  A couple of things that jumped out to me:

• The United States is 124th out 183 in terms of total tax rate (ranked from lowest to highest rate), sandwiched right between Greece and Russia. Nice company to keep.  Interesting that the total tax rate in the U.S. is greater than Canada (#37), Romania, Finland, Turkey, Poland, Taiwan, Netherlands, UK, New Zealand, Vietnam, Switzerland, Denmark, Bulgaria, Singapore - you get the picture.  Both developed and third world countries that we compete with.  And we wonder why jobs are going overseas.
• In terms of the ease of paying taxes and the time to comply the United States was 62nd and 66th.  Better.  But not as good as Switzerland, Hong Kong, Singapore, and the UK among others.  In the U.S. it took on average of 187 hours per year while in Switzerland it took 63 hours.

That brings up some interesting issues regarding efficiency of tax collection and compliance, and whether the numerous "social engineering" loopholes, deductions, and the like create more burden than they are worth - perhaps even leading to lower compliance and revenue.  From the key findings page:

• 50 economies now have one tax per base - ie combined federal, state, municipal taxes.
• On a similar note, on average, a company pays more than nine different taxes. Corporate income tax accounts for only 38% of the Total Tax Rate (TTR), 25% of the time to comply and 12% of tax payments.  So imagine the efficiency savings those 50 economies with a single tax per base are experiencing - and I bet that turns into improved compliance.
• VAT style consumption taxes are not necessarily efficient.  It takes the case study company longest to comply with consumption taxes, especially VAT. VAT is the predominant form of consumption tax used around the world (148 out of the 183 economies have a VAT type sales tax system). For these economies, it takes nearly 64% as much time again to comply with VAT as it does to comply with corporate income tax.

If you're a datahead like I am, enjoy picking through the numbers!  And be thankful you don't run a company in Gambia where you'd have to pay a 290% total tax rate - hmmm... exactly how does that work?