Evolving Excellence

Will Obama Learn from Europe?

Presidential candidate Barack Obama will soon visit several countries in Europe.  What will he see, and more importantly, what will he learn?

Democratic activists and European intellectuals are ecstatic about Barack Obama's trip to Europe. Europeans see a man they hope will win the presidency. U.S. Democratic activists see their nominee gaining the experience of a continent whose policies -- more pacifist, statist and secular than America's -- they would prefer to emulate. Both sets of people hope Mr. Obama will be influenced by what he sees and emerge a man whose message of change will be informed by stereotypical European aspirations and experiences.

However what he sees may not be what many of his constituents expect.

But the Europe Mr. Obama will visit is quite different from the one Americans often hear about. Over the last decade, much of Europe has very quietly embraced market-based reforms that either draw inspiration from American successes or -- on issues like retirement security -- are even more market-oriented than many U.S. Republicans support.  What's more, these changes have been adopted and implemented by parties left and right.

Such as?

The cutting of corporate income- tax rates is an excellent example of European market-friendly bipartisanship. Germany's right-left coalition of Christian and Social Democrats implemented a large rate cut earlier this year, reducing the top marginal corporate rate to about 30% from 39%. Spain's Socialist and Britain's Labor governments have followed suit, reducing their countries' top corporate rates.

These traditionally left-of-center parties understand that in a globalized economy, wealth and investment are mobile, flowing to those countries that provide hospitable investment climates. As part of a European Union where center-right governments in Greece, Denmark, Ireland and Eastern Europe have dramatically reduced corporate tax rates, they understand that they cannot help workers if they drive away the capital that employs and pays them.

Uh oh... that flies right in the face of a core Obama philosophy.  We've often discussed this capital/tax-driven flight of knowledge in the past.  But this may not be the only eye-opener for Mr. Obama.

Many European countries are also ahead of America when it comes to pension reform. Mr. Obama's main solution to the looming Social Security bankruptcy is to raise taxes on the well-off. To date, he has eschewed other solutions such as raising the retirement age or creating private Social Security accounts. But European center-left parties have no such reservations.

Take Sweden, for example. In the 1990s, a series of center-right and Social Democratic governments reached agreement on wide ranging pension reforms that include a private account option not too different than the one proposed by President George W. Bush.

Now that's something you don't see too often... Sweden and George Bush agreeing on policy.  But egads it's true.  Basically the change in Europe reflects a recognition of reality.

This new European consensus is founded, like all political calculations, partly on conviction and partly on necessity. European center-left politicians have slowly come to respect the power of markets. Much like the so-called "Rubin Democrats," they recognize that the energy and innovation of market actors can better produce wealth than more traditional social democratic economic theory.  European center-left approval of market reforms is also rooted in economic and political necessity. Even social democratic countries benefit from a global economy and hence must compete in it.

Will Mr. Obama learn from what he sees and modify his policy proposals?  On one hand he is raising the ire of the left-wing fringe of his party by already moving to the center on many issues, but on the other he has set some policies in stone without having set foot in the gemba of Iraq an Afghanistan.  I guess time will tell.

Leaving Oz for Kansas Technology

Lately we've been telling you about all the companies that are waking up to the unexpected costs of outsourcing, especially due to rising fuel costs increasing the cost of shipping, and are returning operations back to North America. 

The rising cost of shipping everything from industrial-pump parts to lawn-mower batteries to living-room sofas is forcing some manufacturers to bring production back to North America and freeze plans to send even more work overseas.

But fuel costs aren't the only reason.

There’s no place like home. Dorothy Gale learned this valuable lesson at the end of the timeless film classic, The Wizard of Oz, as she returns to her Kansas farmhouse from the magical land of witches, talking apple trees and munchkins.

Molding service providers see business booming as more device firms move overseas work back to their homeland and benefit from increasingly sophisticated technology offerings here.  One of the ways molding companies are containing costs and maintaining quality in their products is by cutting back on the amount of work that is outsourced overseas.

Containing costs by cutting back on outsourcing.  What a concept!

 

McKinsey Figures Out Value - 20 Years Later

The guys at McKinsey can be some bright puppies... once they figure out they're a decade behind.  First they tried to kill Lego, then they got religion and came out with a five-part series on lean.  Now apparently the lightbulb came on again and they've figured out that traditional organization structures aren't optimal.

When large companies are organized in the traditional division structure, strategic decisions too often fall to managers under pressure to meet budgetary demands.

You don't say!  Actually I wanted to write "no sh*t, Sherlock" but I'll keep this family-friendly.

One way to shake things up is to review the strategy and performance-management processes and to make decisions at the more granular level of value cells. Value cells are smaller units that represent the economics of the individual, simple businesses that any company is built of, such as customer segments, product groups, geographic markets, and new technologies.

Well when you're behind the curve, one way to try to mask that ignorance is by creating new terminology, and I guess "value cells" is their feeble attempt.  But ok, I should be more supportive of the fact that they've come around at all, so let's dive into their latest-breaking twenty year-old wisdom.

Value cells are actually smaller business units, typically segments or geographical markets, along with their backbone functions, such as central production or operations. We think of them as “cells” because they stand apart from the traditional organizational-unit structure of most companies and often have surprisingly different economics.

Yes they do.  Such as...

As a rule of thumb, value cells have standalone economics and must be relatively “homogenous” in regard to their target market, business model, and peers—that is, they must have one target segment, one country or region, or one group of products. The trick is to create financial analyses, such as P&L statements, as if a value cell were a stand-alone business. This is normally not done in a classic divisional structure, where each division’s financials are an amalgam of different products, markets, and costs relating to shared assets.

Wow!  They're really onto something!  Or maybe they took an evening to read any of the innumerable books on value stream management that have been published in the last decade or two.

Focusing more on single cells actually reduces complexity because managers find it much easier to identify and monitor the two or three operational metrics that truly drive performance, as well as to make decisions in a more straightforward way. In essence, the CEO can use value cells to take out a “disintermediation layer” between actual business decisions and the corporate planning process.

Ok, I'll give them credit for inventing "disintermediation layer."  That's a new one for me.  And hopefully I'll never use it again.  I could give you more snippets from their latest new-found wisdom, but I won't bother.  You already know it, and I'm betting many of you already have value stream organizations in place.

I'm looking forward to their latest revelation.  Perhaps "work-in-process inventory offers an opportunity to reduce waste and free up cash."  At their current pace they should stumble on that in another year or two.

Boeing Plays Whack-a-Supplier

I've held off ranting on Boeing for many weeks, but a recent news article on the company pushed me over the edge... again.  We've talked a lot about Boeing over the last few years, from deriding the supply chain convolutions that created the need for Rube Goldberg contraptions like the Dreamlifter to the downsides of transferring knowledge to suppliers that may become competitors.  Alas their woes continue.

What statement raised my ire?

He [Pat Shanahan, general manager of the 787 program] said the program is making steady progress but there are still a number of pieces to put into place, comparing the process to a "giant game of whack-a-mole."

Apparently the company known for incredibly detailed program management has had to resort to basic chaos control.  What the heck is going on?  Surprise surprise, it has something to do with the convoluted supply chain Boeing created.

The 787 program has been delayed three times as Chicago-based Boeing struggled with supply-chain difficulties, a shortage of parts and other problems, pushing back first delivery by about 14 months.

As just one example,

Earlier this month, the fuselage of the fourth 787 test plane was damaged when a worker at key supplier Alenia North America reportedly used the wrong fasteners. The aircraft is now expected to arrive in Everett, Wash., for final assembly two to three weeks later than planned.

A fellow lean blogger reminded me earlier this week of the simulation almost every lean newbie goes through during the first week of training: the airplane game.  Remember the game?  You build simple airplanes out of Lego, paper, or popsicle sticks.  First there's the push-batch simulation, then a large batch kanban, then a true pull one piece flow kanban.  By the end you understand that, although counterintuitive, one piece flow really is far more productive, efficient, and higher quality than push-batch.

But what else did you learn?  That it is very important for each operation to be close to the previous and next operations to minimize transportation and WIP while improving communication and coordination.  We all learned that by sitting around a conference room table.

Pretty ironic that it's called the "airplane game."  Perhaps Boeing should have played it... before spreading their suppliers... and knowledge... to the four corners of the globe instead of nearby Everett. 

The Danger of Attacking Waste

Us leanies hate waste.  We go after it with a passion and vigor that has few equals.  But in our zeal could we be going too far, and actually decrease value?  That's the question that popped into my mind after reading Steve Conover's latest post over at The Skeptical Optimist.  You get a sense of where he's going from his opening ramblings...

I dislike waste as much as anyone else does.  Whenever a baseball pitcher gives up a hit, every pitch thrown during that at-bat turns out to have been wasted.  No doubt about it: all baseball pitchers are wasting their arms on a high percentage of their pitches. 

Whenever a tennis player loses a game, every stroke in it was wasted; likewise, losing the set wastes every game in it, and losing the match wastes every set. Both winning and losing tennis players are wasting a large portion of their energy and talent, aren't they?

If you haven't guess it, here's his point.

The problem with shallow thinking is that in most cases it's impractical or impossible to eliminate the waste, and in many other cases we shouldn't want to eliminate it.  Why?  Because much "waste" is inextricably built into a process that yields overall positive results.

We should still attack waste, but be more careful.

Don't get me wrong: waste that can be eliminated without any undesirable side effects should be eradicated without hesitation.  Let's give the positive, unpredictable surprise every chance to emerge.  Let's eliminate waste that we can isolate from productive spending.  Let's spend and borrow as necessary to encourage the positive Black Swans and to prevent the negative ones.  We need a paradigm shift, and all such progress generates some degree of "waste."  Why not focus on the former instead of the latter? 

Larry Kudlow correctly keeps reminding us of what Reagan used to say: "Okay, you showed me the manure. Now show me the pony."

So be careful when attacking waste.  Trying new ideas, new cell configurations, new training methods... even if they fail they will probably eventually add value.   

Beware the Expensive Castle

Money may not be able to buy love or happiness, but apparently it can definitely create a barrier for the competition.

Intel Corp. is turning 40 years old Friday, and patting itself on the back for pushing the pace of computer-chip progress. Few competitors are applauding, though, for reasons that become clear on a visit to a factory in Hillsboro, Ore.  The Silicon Valley company, supplier of the electronic brains in most computers, is expected to reach nearly $40 billion in revenue this year. So Intel has a lot of money to plow into new products and other initiatives.

They definitely see manufacturing as a competitive advantage and worthy of investment.

Few weapons compare with D1D, the Hillsboro, Ore., plant where silicon wafers move among complex machiens in a huge production area the size of 3.5 football fields.  What sets the plant apart isn't manufacturing capacity but a production recipe that makes the microscopic transistors on Intel's latest chips especially small and fast.

Chipmaking is incredibly expensive, especially in terms of initial capital investment.  New plants can literally cost billions, plus the cost of developing new technologies.  Few companies have the resources required.

"The question is, 'Are companies economically capable of chasing it?'" said Richard Hill, chief executive of Novellus Systems Inc., a toolmaker for the industry.  "Intel is in a class of their own."  Advanced Micro Device Inc., Intel's chief rival, is discussing ways to spend less on manufacturing technology. 

In theory, Intel could slow the pace of miniaturization to try to maximize profit.  The engineers in Oregon don't see that happening.  "I'm not sure we know how to take our foot off the gas," said Mark Bohr, a director in Intel's technology and manufacturing group.

And perhaps that's a problem.  The ability to invest huge sums in factories and technologies is definitely a competitive barrier, but small companies are remarkable in that they can sometimes create a bridge over that mote.  Or perhaps a road that avoids the castle in the first place.  The innovation that changes the fundamental rules of the game, and can sometimes make huge investments immediately worthless.  Presumably Intel is working just as hard to keep an eye on the market and competitor innovation to ensure that doesn't happen.

Nardelli - Customer Advocate?

Chrysler CEO Robert Nardelli is on a mission to change Chrysler's culture.

Over the decades when Detroit's Big Three dominated the nation's auto market, Chrysler, General Motors Corp. and Ford Motor Co. often put their own priorities, like keeping their plants running at full capacity, ahead of satisfying customers. Now, Mr. Nardelli is trying to replace those old habits with some of the no-nonsense management principles that have fueled the success of General Electric Co., one of his former employers.

What are those principles?

300 executives at Chrysler are expected to turn off their BlackBerrys and begin three days of in-house management seminars aimed at putting customers first in all of Chrysler's operations. Mr. Nardelli himself is scheduled to lead a session on the corporate culture of a customer-driven company.

Mr. Nardelli had dozens of top Chrysler executives read "The Ice Cream Maker," a book by quality consultant Subir Chowdhury. He also named a chief customer officer.

It's all about the customer, right?  Those of us in the lean manufacturing world have known that all along.  But wait a minute... is this really the same Mr. Nardelli that had a less than stellar tenure at Home Depot thanks to alienating customers?

The company [Home Depot] started hiring more part-timers and added a salary cap that drove off the more seasoned workers. The retailer also moved about 40% of workers to overnight stocking positions, ostensibly to clear the aisles of clutter. But it left customers searching in vain for someone in an orange apron to ask about picking out the proper power tool.... Before long, the company had a morale problem. Instead of waiting eagerly on customers, workers too often would be found huddling in an aisle griping about management.

I guess I better get a copy of that ice cream book.  It must really be something.

Power to the People

Those of us in the lean manufacturing world have known for a long time that one of the most powerful ways to create change and efficiency is by leveraging the knowledge, creativity, and ideas of people.  You have to give them the knowledge of their environment via metrics and information, provide them with tools and training to learn how to impact that environment, and rewards when positive change occurs.

The same phenomena can obviously be used outside of manufacturing.  For years businesses has had the equipment, and financial incentives, to monitor and adjust their power usage which has helped the electric utilities level demand.  As someone who used to run an operation that built equipment that could test hundreds of communications lasers at a time, during the California power shortages at the turn of the century, I was distinctly aware of this capability each day.

Now the same knowledge, tools, and rewards are being applied to the residential electricity consumer.

Can "smart" meters get consumers to reduce the amount of electricity they use? That's the bet that many U.S. utilities are making.

Facing soaring costs, power companies are equipping millions of homes with advanced meters that monitor energy use much more precisely than regular ones. That makes it easier for consumers to figure out when energy supplies are stretched thin -- and for power companies to get consumers to cut back at those critical times.

First you have to provide the tools and knowledge.

Until recently, programs like these mostly were reserved for big energy users because it was expensive to equip residential customers with smart meters and other control equipment. As the market grows, though, costs are coming down. In many cases, utilities also say that advanced meters will cut operational costs, such as meter readers.

Then the incentive to use that new knowledge and the rewards to change the behavior.  For example:

Customers that cut electricity use at high-stress times will be rewarded with a credit of $1.50 for each kilowatt-hour of electricity reduction. So a customer who cuts consumption, from a baseline amount, by six kilowatt-hours on a single day would receive a $9 credit in addition to direct energy savings of 90 cents.

Individual consumer behavior changes...

Under the program, the Haneys were charged high prices for electricity during the summers of 2006 and 2007 from 1 p.m. to 6 p.m. In addition, on up to five occasions each summer when the grid was especially stressed, the Haneys received an email alert from PSE&G. The utility told them it was imposing "critical peak" pricing the next day and would be charging $1.46 a kilowatt-hour from 1 p.m. to 6 p.m. instead of 23.7 cents.

Mr. Haney, an engineer, says he set the family's programmable thermostat so that the house temperature gradually would rise to about 80 degrees from 70 degrees by 6 p.m. on the critical days. The increase in temperature was so gradual, says Mrs. Haney, a retiree who cares for the couple's grandchildren during the day, that "I didn't notice any difference."

And is rewarded...

Bob and Helene Haney of Cherry Hill, N.J., say they not only reduced their household energy use at key times but also saved $350 in an 18-month period, cutting their utility expense by about 10%.

The change in behavior... the savings... can be very significant to the owner of the constrained resource.

 

One test in New Jersey got dramatic results by boosting rates at times of peak demand. Public Service Electric & Gas Co., a unit of Public Service Group Inc., gave 320 customers advanced meters and special thermostats that let them control their heating and cooling much more precisely. Then the utility imposed high rates at certain times. The result: a dramatic 47% drop in usage among the test group.

Once again, people are much more than just a pair of hands... they have brains.  There's value in 'dem neurons!

 

It's Global, Baby

Let's review some recent statements on the manufacturing economy:

Now many exporters and workshops here have shut their doors. Others, their work floors partly idle, are cutting costs. Some of the migrant workers who came here for jobs are returning home.

Manufacturers say their profits have dwindled as they pay out more for raw materials and energy.

Companies say the government's tougher protection for workers and the environment has made it more expensive to do business.

Pretty dire, eh?  If only we'd stop outsourcing to China and sending jobs overseas to chase cheap labor, right?

Except it is China.

China's strengthening currency has made Honghe's products more expensive for important markets such as the U.S., where the price of Chinese goods surged a record 4.6% in May from the previous year, according to the U.S. Commerce Department. Foreign buyers, used to inexpensive Chinese products and nervous about economic weakness at home, are often refusing to pay more.

China, of course, is sure to remain an export powerhouse for many years. Export figures from China remain strong because the country also supplies industrial machinery and other higher-value products that are less vulnerable to factors such as rising wages.

There is still a real, valid reason for moving manufacturing to China.  Yes, I really said that.

China's domestic market of 1.3 billion people is attractive for companies that want to both export and sell within China.

But many other companies, even after being stung by the rising costs of doing business in China, still don't get it.

With rising costs weakening China's appeal as a manufacturing location, some 17% said they would shift at least some operations to other low-cost countries, like India and Vietnam.

Let the globetrotting begin. 

Leadership in the Internet Age

Lean bloggers are not exactly the biggest fans of Jack Welch, but a couple weeks ago he penned a prescient column for Business Week discussing leadership in today's connected world.  The internet has changed, or at least enabled, several aspects of leadership.

For years now, even low-level employees have been able to reach their leaders simply by writing an e-mail, but increasingly, employees are organizing on company blogs, wikis, online forums, and even social-networking sites, to give their messages urgency and heft. A functional team—located halfway around the planet—can advocate for a change in suppliers or warn of a competitive maneuver that no one in charge seems to see coming.

How should leaders respond?

Leaders should welcome this development, and most do, but it's a mistake to treat it lightly. Once employees engage you by speaking out, albeit electronically, they expect to hear back. We would suggest that it can be just as damaging for a leader not to respond to feedback as it is not to ask for it at all.

That's not the only change.  In the past leaders were lauded for a gut instinct to make the right decisions with limited data.  Now they must rapidly sift through overwhelming amounts of information.

A second important change wrought by the Web concerns leaders' critical responsibility for seeing around corners: anticipating economic events and market trends and adjusting for them. In the past, such foresight came from a mixture of intelligence, experience, good advice, and as much data as you could get your hands on. Obviously, the change lies with the last of these, as the Net, with its bloggers, communities, and newsletters can drown you in data about customers, competitors, and everything else under the sun. Some data are totally useful, some total nonsense.

For leaders, the challenge will be avoiding the energy sinkhole of sorting it all out. Fresh and reliable information is always worth the time it takes to find and analyze it, but seeing around corners will forever involve a measure of insight conjoined with pattern recognition, or put another way, gut instinct.

But the core facet of leadership remains the same.

Real leaders touch people. They get in their skin, filling their hearts with inspiration, courage, and hope. They share the pain in times of loss and are there to celebrate the wins. Sure, leaders can write personal e-mails or "Let's take the hill" missives on the home page. But to rally the team, you need to see, hear, and feel the team, and they need a regular dose of the real you.

And don't forget that a real leader must know how to teach.  Leverage the new access to information and communication, don't hide behind it.