Evolving Excellence

Update on Lean Manufacturing Company Stocks

For obvious reasons it's been a while since we've updated you on the Superfactory 20... twenty lean manufacturing company stocks that were selected by our readers a couple years ago.  Toward the end of this year we'll update the list itself for 2010.  The following is the performance year-to-date, with the Superfactory Index being the average performance.  You'll notice it is still slightly behind the S&P 500.

Visit leanstocks.com to view this table updated each hour.  And watch for some significant changes to that site as well as leancompanies.com over the upcoming months!

2009 Performance
Name	Price	YTD Performance
HONDA MOTOR CO AD (HMC)	26.30	20.59 %
Intel Corporation (INTC)	16.72	12.06 %
TOYOTA MTR CP ADS (TM)	74.09	11.63 %
DANAHER CP (DHR)	59.62	3.26 %
PENTAIR INC (PNR)	24.85	1.72 %
ILL TOOL WORKS IN (ITW)	36.22	0.58 %
NEWELL RUBBERMAID (NWL)	10.20	-0.87 %
STEELCASE INC (SCS)	5.59	-2.10 %
NIKE INC CL B (NKE)	51.06	-2.78 %
HILLENBRAND INC (HI)	16.92	-3.64 %
S&P 500 INDEX, RTH (^GSPC)	896.42	-3.80 %
TESCO PLC (TSCO.L)	350.50	-4.03 %
SUPERFACTORY INDEX		-4.91 %
DEERE CO (DE)	38.53	-5.82 %
JOHNSON AND JOHNS (JNJ)	55.98	-6.11 %
STANLEY WORKS THE (SWK)	32.44	-6.59 %
PARKER HANNIFIN C (PH)	41.60	-6.81 %
BOEING CO (BA)	40.83	-7.96 %
ABBOTT LABORATORI (ABT)	46.28	-12.17 %
WABTEC CORP (WAB)	32.05	-19.55 %
CATERPILLAR INC (CAT)	31.74	-30.73 %
TEXTRON INC (TXT)	9.33	-38.94 %

A Little Irish Love for Dov

One of our favorite CEOs, Dov Charney of American Apparel, just received some love from The Independent of Ireland.

This summer Charney will bring his fashion genius, famous T-shirts — and maverick personality — to Ireland when American Apparel opens a flag ship store on Dublin’s Grafton Street.

Promoting his company as “sweatshop free”, Charney is a man with a social mission. The company boasts that the clothes are “made in downtown LA”, shunning the outsourcing by other American clothing lines to poorly run Asian factories with poverty stricken employees.

Unlike most of his business competitors, Charney argues it’s possible to produce goods in the US, treat your staff well and still make a profit. He pays his manufacturing staff twice the minimum wage, provides subsidised healthcare, meals, English language classes — and even free massages.

His contented employees are the key to his success, says Charney, who believes that treating his staff well means they are less likely to leave. But he also stops short of seeing himself as a philanthropist.

“American Apparel is not an altruistic company,” he says. “I believe in capitalism and self-interest. Self-interest can involve being generous with others.”

"Self-interest can involve being generous with others"...  interesting concept.  I think I get it.  Maybe.  Dov is one of our favorite CEOs because he dares to buck popular business opinion and just do what makes sense.

Brief background on why I like them so much: this is a $500 million manufacturer of t-shirts, underwear, and the like.  Typically low margin products, the kind of thing that usually comes from Asian and Central American sweatshops.  Not American Apparel.  This company makes over 1 million articles of clothing, per week, from their one factory in Los Angeles and they grew 40% this year.  They pay their 5,000-person workforce significantly above minimum wage (average is $12-$15 per hour), give them full subsidized benefits (such as high quality health care insurance for $8 per week), and they turn a profit.

As I say each time, this should basically embarrass the heck out of any company executive that thinks they have to outsource in order to find cheap labor.  Or at least call into question their fundamental competence as a leader.  If American Apparel can manufacture low margin clothing efficiently enough at a U.S. factory (California no less) to beat the sweatshops, then anyone should be able to.  If they try hard enough.

Here's my final and perhaps most important lesson: do what works.  It's that simple.  Tools, even lean tools, are just tools.  Leadership requires people.  At American Apparel there are no cheesy signs with "Teamwork" and "Challenge" on them.  There are no glitzy glass lobbies.  There is no sign of lean manufacturing in the traditional sense, and they don't profess to be lean.  No heavy lean training of employees, no overwhelming visual controls besides the metrics charts at the cells, no Shingo Prizes or Baldrige Awards.

But there are bunch of people recognized and compensated for their knowledge, creativity, ideas, and experience.  A group of people that realize that speed creates value, knowledge creates ideas, ideas create profit.  They figure out what works, then they do it exceptionally well.

I know I repeat this story every chance I get, but that's because it's important.  Dov may have a lot of other interesting ways in how he bucks traditional business, many of which most of us would agree really do cross the line (read the article if you don't already know this aspect of his "style"), but he also finds what works, then does it well. 

Danaher's Focus

A couple days ago I received the annual report from one of my favorite lean-oriented companies, Danaher.  Like most companies they are grappling with the economic slowdown... sort of.  Sales, income, EPS, cash flow up in 2008.  Granted, growth in income is slower than top line growth, but compare that to most companies in the sectors Danaher plays in.  2009, at least early 2009, could be a different story but we'll have to see.  With the hit the stock price has taken, perhaps an opportunity?  (Full disclosure: I am not a financial advisor, never have been, never want to be, have pretty pathetic performance over the past year, but I do own Danaher stock.)

Danaher buys a lot of companies, and in doing so they generally shed human and physical assets.  Is that lean?  Perhaps questionable, although some would argue that poorly-performing acquisition targets are often full of poorly-performing people... or is that poorly-performing processes?  That's why I call Danaher "lean-oriented"... I'm not really ready to call them truly lean.

But Danaher does have a very robust "Danaher Business System" that guides acquisitions and ongoing activities.  The DBS is obviously core to every activity, judging from how often it is referred to in the opening pages of the annual report.

That helps create focus, which coincidentally is the theme of the report and the topic of one particular paragraph I found interesting:

In both good and bad times, the Danaher Business System (DBS) helps us focus on the “critical few” opportunities and challenges fundamental to each of our businesses’ future performance and success. Our operating bias is to focus on a short to-do list, execute relentlessly and completely and then move on, rather than appear to be advancing across a broad front with only modest results. Amid unprecedented economic uncertainty, strategic focus is even more critical and we can ill afford to waste a day on “B or C” priorities. Simply, it is this focus that helped us to deliver our 2008 performance and will be critical as we seek to outperform in 2009 and beyond.

While each of our businesses has unique opportunities and challenges to address, across the company we have several “A” level priorities on which we are focused, including:

• Building and strengthening our business portfolio;
• Maintaining a strong financial position; and
• Developing and retaining the best team.

This aligns with my Tuesday post on the simplicity that haiku can create.  Create a short to-do list and execute relentlessly.  How many projects and initiatives are you juggling?  Where will you be in a year?  Part-way on all of them, or a slam-dunk full improvement on a few?

Taking the "Gen" out of "Genchi Genbutsu"

Well, GM is in the news again, this time for refusing to cancel its program that gives a company car and company-paid gas for about 8,000 white-collar employees. It's almost too easy to work myself into a righteous wrath over a perk that costs the company $12 million a year, at a time when GM has already received $13 billion from taxpayers and is looking for $16 billion more. But in the grand economic scheme of things these days, it's pretty much a rounding error.

GM claims that the perk, which is formally called the "Product Evaluation Program," is an important tool to improve vehicle quality, because employees can immediately report problems. But Walter McManus, a former GM economist during most of the 1990s, questioned the program's value:

I'm not aware — when I was in market research or in product planning — of anyone at GM ever using the information for any sort of analysis or any product development decisions. No one that I knew took it seriously.

Okay, so we've got some waste here: a program that certainly costs money to administer but doesn't do a damn thing to benefit customers. But to me, the real problem with this program is the way it isolates GM executives from the reality faced by its customers. The principle of genchi genbutsu ("actual place, actual thing," where "gen" means "actual") is designed to ensure that workers (and especially) managers get out their bubbles and see the reality of a situation. Yuji Yokoya, the Toyota chief engineer for the 2004 Sienna minivan is legendary for driving 53,000 miles around North America while developing the minivan, all in an effort to experience the reality of the US market.

You'd think that it would be easy -- even unavoidable -- for GM execs to experience the "actual thing" faced by their customers. All they need to do is simply drive their cars -- you know, to the store, to work, back home -- just like their customers. But leave it to GM to keep their execs in the bubble. What's the long term effect of these twice-yearly free cars twice and free gas? After all, if you're getting it for free, can you really understand what it's like for a consumer to own an SUV that gets 9 mpg when gas costs $4 a gallon?

GM insists its employees appreciate the impact of high fuel prices, but one current GM staffer interviewed for this story said the perk does blind some people. He recalled that when gas spiked last summer, a colleague complained. It wasn't because of the cost. It was because he had to swipe his credit card twice to fill up the tank of his big SUV.

Somehow, I don't think that the inability of gas pumps to register over $100, and the extra effort of the double swipe was the biggest problem facing consumers last year. When you're getting the car and the gas for free, you're not really experiencing the "actual" anything.

So, given the cost and questionably utility of this program why not end it?

GM has talked about ending the program, but a spokesman said employees have built their lives around it. It allows many to live far from their offices and commute at little expense. The spokesman said killing the program now would be "extremely" disruptive.

Ah, now I understand: 8,000 execs who are high enough up the corporate food chain to warrant (and I intentionally don't use the word "merit") free cars and gas can't afford to drive to work? Do they really make so little money that they can't afford to pay for the commute out of their own pockets? Did they really "build their lives" and choose where to live based on the assumption that they'd have free cars and gas in perpetuity? Are they really that asinine? If so, that explains an awful lot about how they can so seriously, and so regularly, misunderstand the customer.

Leave it to GM to take the "gen" out of genchi genbutsu.

Let's Give Dov Some Love

Regular readers know I have a fascination for American Apparel, and even their CEO Dov Charney.  I was lucky enough to get a tour a few months back.

Brief background on why I like them so much: this is a $500 million manufacturer of t-shirts, underwear, and the like.  Typically low margin products, the kind of thing that usually comes from Asian and Central American sweatshops.  Not American Apparel.  This company makes over 1 million articles of clothing, per week, from their one factory in Los Angeles and they grew 40% this year.  They pay their 5,000-person workforce significantly above minimum wage (average is $12-$15 per hour), give them full subsidized benefits (such as high quality health care insurance for $8 per week), and they turn a profit.

As I say each time, this should basically embarrass the heck out of any company executive that thinks they have to outsource in order to find cheap labor.  Or at least call into question their fundamental competence as a leader.  If American Apparel can manufacture low margin clothing efficiently enough at a U.S. factory (California no less) to beat the sweatshops, then anyone should be able to.  If they try hard enough.

Most companies we read about are laying off, complaining about the economy and "unfair" trade barriers, dirty unions, incompetent management, high labor costs, regulations... you name it.  Everything except recognizing the problems with the internals of their organizations, let alone doing something about it.  And the executives are probably paying themselves bonuses to boot just for whining and moaning.

The economy is tough these days.  The clothing business is typically very low margin.  So how's American Apparel doing?  Not too shabby.

American Apparel Inc., the teen clothing retailer whose chief executive has recently faced legal troubles, said Tuesday that its fourth-quarter profit rose 30 percent as same-store sales increased amid new store openings.  American Apparel Inc. announced that for fiscal 2009, it expects net sales in the range of $575-$600 million and income from operations (EBIT) in the range of $55-$65 million.

And the prognosis is apparently good enough for Dov to invest a chunk 'o change himself.

Chairman, CEO and President, 10% Owner of American Apparel Inc (APP) Dov Charney buys 620,362 shares of APP on 03/20/2009 at an average price of $3.14 a share.

Ok all you guys making high tech chips, helicopters... and dare I say cars?  Here's a guy truly invested in his company, paying a decent wage making clothing in California of all places, and beating the socks off his competition.  Does he do lean?  No, he just does what works.

Here's my final and perhaps most important lesson: do what works.  It's that simple.  Tools, even lean tools, are just tools.  Leadership requires people.  At American Apparel there are no cheesy signs with "Teamwork" and "Challenge" on them.  There are no glitzy glass lobbies.  There is no sign of lean manufacturing in the traditional sense, and they don't profess to be lean.  No heavy lean training of employees, no overwhelming visual controls besides the metrics charts at the cells, no Shingo Prizes or Baldrige Awards.

But there are bunch of people recognized and compensated for their knowledge, creativity, ideas, and experience.  A group of people that realize that speed creates value, knowledge creates ideas, ideas create profit.  They figure out what works, then they do it exceptionally well.

Impressive, eh?  If you agree with me, I want you to do something.  I want you to click here to go to Time magazine's Time 100 Finalists, move the slider all the way to the right, and give Dov a nice high ranking.  He may have his peculiarities, some of which those of us in the traditional business world may wish we could partake in without invoking the wrath of HR, but at least he knows how to really run a business. 

Let's give our buddy Dov some love.

Note to Häagen-Dazs: Profit = Price - Cost

Häagen-Dazs, owned by ice cream giant Dreyer's, just announced that they're "downsizing" their pints of ice cream. In a truly Orwellian use of language, the erstwhile standard 16 ounce pint will now be an, um, 14 ounce pint.

Häagen-Dazs said that rising material costs have forced this change. They can't raise prices of their ice cream and remain competitive with Ben & Jerry's and other premium ice creams. So they've opted to shrink portion sizes. In a letter to their franchisees, the company wrote

While the reality is that size sometimes matters, we continue to believe that quality matters more.

Our ice cream is created with only a few select, simple, all-natural ingredients.

That is why we searched six years for the perfect variety of strawberry for our Häagen-Dazs strawberry ice cream and why we paid four times more over the last two years for the raspberries that make it into our Häagen-Dazs raspberry sorbet.

And we wouldn’t think of soaking the raisins for our Häagen-Dazs rum raisin ice cream even a minute less than the 60,480 minutes (42 days, actually) that they currently luxuriate in their rum baths.

Why not? Because then it just wouldn’t be Häagen-Dazs.

Apparently, it "just wouldn’t be Häagen-Dazs" if they did an A3 with their staff to figure out how to reduce the 60,480 minutes of raisin soaking without compromising flavor. Or if they worked with their supply chain to reduce the cost of growing, picking, packing, and shipping strawberries or raspberries so it wouldn't cost four times more. (More than what?)

Sadly, the company operates with the old Price = Cost + Profit mentality, so the only option open to them is to redefine a pint as 14 ounces.

Does that mean that they'll report their earnings in the same way? Will they redefine their net income such that $0.87 in profit  become $1.00?

"Modest Incompetence Simply Won't Do; It's Mindboggling Screw-Ups That Are Required"

by BILL WADDELL

That nugget of wisdom is but one of many you can mine from Warren Buffett's letter to his Berkshire Hathaway shareholders released a few days ago.  That letter - actually a 22 page dissertation on the state of the economy as much as a statement of Berkshire Hathaway's condition - is very well worth the time it will take you to read it.

The quote about the need for mind boggling screw ups refers to CEOs.  According to Buffett, if a CEO can really foul things up and impact a lot of other people, the government will bail him out, as opposed to local screw ups who just affect the CEOs own employees and investors.  He thinks it would be a good idea to haul those major screw-up guys into court. 

Buffett himself really screwed up when he put a ton of money into GE.  He should have read my book and he would have known better.  Investing in Conoco was no stroke of genius either, but that was a little tougher to predict.  The hollowing out of GE's manufacturing capability and turning them into a glorified loan sharking outfit was something he should have seen coming years ago. Still, he is the smartest and most successful investor and business person out there.

I have noted that many of the folks in the lean community have looked in vain to Buffett for endorsement of lean.  I suppose we would all like to see him make some loud, public proclamation that he will only invest in companies that embrace lean.  Said one fellow lean blogger, "The point is, when Warren Buffett speaks, people listen. And if Warren Buffett is saying, in effect, that applying lean principles works, maybe the cause of lean will get some increased attention and a few more devotees. Now Buffett himself didn’t actually say anything about lean."

Expecting the 'Oracle of Omaha' to endorse lean directly strikes me as bit unrealistic.  He is an life-long insurance guy and a professional investor.  He has never really operated anything.  He is well above the fray, pushing 79 years old, and has made so much money that he can't have much motivation to learn too many new tricks.

That said, Buffett's latest letter is, in fact, a clear endorsement of lean.  He most likely doesn't know lean manufacturing from Lean Cuisine, but he knows well managed companies when he sees them.  The letter says of one of holdings:

"CTB, which operates worldwide in the agriculture equipment field, has now picked up six small firms since we purchased it in 2002. At that time, we paid $140 million for the company. Last year its pre-tax earnings were $89 million. Vic Mancinelli, its CEO, followed Berkshire-like operating principles long before our arrival. He focuses on blocking and tackling, day by day doing the little things right and never getting off course. Ten years from now, Vic will be running a much larger operation and, more important, will be earning excellent returns on invested capital."

Check out this CTB outfit that Buffett is so proud of : LIVING LEAN AT CTB

When Buffett says the guy behind this is "following Berkshire-like operating principles" that strikes me as about as solid endorsement of lean as the smartest business guy in America can make.

Thanks, Warren!  Way to go, Vic!

GM Announces There Is Substantial Doubt It Will Survive

No Kidding?

There has been more than "substantial doubt" since October 7, 1986 when the first Toyota was manufactured in the United States.

And the matter has been even more doubtful every year since as GM opted to do everything except pursue lean.

The lean community has had no doubt about the matter for quite some time now.

You can read the sorry story here if you are so inclined.

A Tale of Two Chipmakers

Intel and AMD have been battling it out in the chip business for many years.  The primary front has generally been technology, exclusivity agreements with customers, and pricing, but perhaps the times are changing.  Two adjacent stories in yesterday's paper describe how each company is dealing with this period of severe economic uncertainty from a factory and production standpoint.

First, here's AMD's strategy:

Advanced Micro Devices Inc., Intel's primary rival in microprocessor chips, plans to spin off its manufacturing operations to a joint venture funded by investors from Abu Dhabi.  The Sunnyvale, Calif., company has touted a spinoff of its chip production business as a defining move to reinvent the company and focus primarily on chip design.  The deal would give AMD a cash infusion. 

Along with being the first step in separating the capital intensive manufacturing operations from what has recently been a strong product lineup, the deal should provide a boost to AMD's balance sheet.

So AMD is focusing on improving cash on the balance sheet by eliminating the "burden" of manufacturing.  And Intel?

Intel Corp. disclosed plans to spend $7 billion to upgrade manufacturing technology at its U.S. factories over the next two years, calling on other companies to follow its strategy of investing during the downturn.  Intel said the moves preserve about 7,000 high-wage jobs at factories in Oregon, New Mexico, and Arizona, and it expects the two-year plan to require about 4,000 workers at construction firms and other contractors.

Paul Otellini, Intel's president and chief executive... urged other companies to make similar investments, arguing from Intel's past experience that the proper response to a slump is to give customers new reasons to buy.

Pretty much the polar opposite of AMD's strategy.  To be fair, this difference isn't entirely up to AMD as the companies are in dramatically different cash balance situations.  Intel has over $12 billion available, and is generating $11 billion in cash a year.

But perhaps that balance sheet difference is also the result of similar differences in mindsets and philosophy, which thereby produced those very same results?  Anyone want to hazard a guess at where each company will be in five or twenty years?

End Game at Wiremold

Wiremold has been one of the classic stories of lean success.  Some of the greatest lean practitioners, such as Art Byrne and Orry Fiume, came out of this company.  Many years ago Bob Emiliani told the story of Wiremold in his Shingo Prize winning book, Better Thinking, Better Results, and I have always considered this one of the top books on lean manufacturing.  It is also one of the few to accurately describe the power, and requirement, of the "respect for people" pillar of lean.

The executives at Wiremold, led by Art Byrne, understood that lean was not just about continuous improvement, but also required respect for people. That understanding let them create incredible lean excellence, with rather amazing and inspiring financial results. As Bob writes in the preface to the second edition,

Both "continuous improvement" and "respect for people" must be practiced, not just "continuous improvement" as is normally the case. Art Byrne and his management team understood this... and they thought deeply about what they were doing and its implications on employees, customers, suppliers, investors, and the communities in which they operated. Most executives don't do that.

Unfortunately, as we told you a couple years ago, Bob had to write a second edition of Better Thinking, Better Results in order to update the story.  And was not a pleasant update.

Legrand managers did not bother to learn about Lean and did not heed Art or Orry Fiume's advice to apply Lean management across the corporation. Instead they found reasons not to do Lean - basically, "we're different" - and Wiremold quickly backslid. In fact, Legrand management seemed to actively dismantle almost everything that Art and his management team and people of Wiremold accomplished.

In January of 2006, a standard-cost software system was installed at Wiremold, adding headcount to the finance function and thus completing the return to batch-and-queue thinking and management. Lean management at Wiremold was extinguished just three years after Art and Orry's retirements.

And now what might just be Wiremold's final chapter is being written.

The Wiremold Co., the West Hartford manufacturer once toured by corporate executives from across the country hoping to model its super-efficient operations, said Thursday that plummeting sales will force it to cut half of its workforce at its landmark factory off New Britain Avenue by early 2011.

The article does a good job of describing the company's illustrious history.

With Art Byrne, a nationally recognized expert of "lean management," at the reins in the 1990s, Wiremold was revered by business leaders as one of the first American companies to successfully adopt Toyota's "kaizen" method of teamwork. The company makes wire and cable management systems.  Revenue at the company grew by an average of 19 percent a year, to $471 million in 2000.

And the subsequent decline.

That year [2000], the century-old, family-owned business was bought by Legrand, a French competitor, and executives predicted that the company's reputation only stood to improve. Instead, Byrne and two other top executives left the company, and workers on Thursday said Wiremold seemed to have gone downhill afterward.

Innovative lean tools had been discarded for traditional batch and standard costing, but what about that other pillar, "respect for people"?

Workers leaving the factory during a shift change Thursday, most of whom declined to be identified for fear of retribution, said they were still in shock over the layoffs.

"Fear of retribution."  That pretty much says it all.

The Wiremold story shows how lean thinking can completely transform a company into a competitive powerhouse... and how quickly the success can be demolished by the return of a traditional mindset.  The second edition of Better Thinking, Better Results tells the story.