Evolving Excellence

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?

Ok, What Old Fashioned Supply Chain Conference Did I Miss?

Yes, there must have been a conference I missed, because out of the blue I've been deluged with official letters from customers, large and small, that align nearly perfectly into two categories. 

The first is a desire to change payment terms from Net 30 to Net 60, and generally includes colorful and flowery language about "how we're all in this together" and "our success is your success."  Really?  So my small company providing an ongoing cash loan to a Fortune-50, instead of investing in improving processes, equipment, and knowledge, is a partnership?  What was my response?

"No."

I went on to explain that I wasn't in the banking business (especially these days!) and that there would be order entry delays if PO's had to be changed, and shipping delays if I put their Fortune-50 on credit hold.  I was tempted to ask why they were following the strategies of the Detroit Three and whether they wanted the same results.  I also suggested that any supplier who accepted Net 60 obviously had some extra margin, and perhaps there should be some pricing discussions.

The second category of letters has to do with "business continuity."  Sure, we should all be concerned about that.  But shouldn't we always and not just now?  Medical device companies more than most I suppose since it is more difficult to requalify suppliers.  In one case I am being "required" to provide notification of any changes to process, plant, or equipment... three (3) years in advance.  Yes, in this dynamic economic environment.  Look back twelve months to understand why that's impossible.  These days my crystal ball extends out a few weeks.  It must be the fancy smancy ERP systems those big companies have that are wiser than us mere mortals.  So what was my response?

"No."

After a few days have any of those customers responded to my refusals?  No again.  Which tells me this is just an exercise, probably an edict from on high.  Sure they'll suck in some suppliers that believe success is based on top line instead of long term bottom line.  And those supply chain characters will probably get rewarded for those random successes, reinforcing that this is a good policy.  The fruits of true long term partnership take longer to realize.

Customers can really have some strange ideas, and I guess these just follow that trend.  I remember only a couple years ago when a different Fortune-50 asked me to set up a "redundant backup manufacturing location" a couple thousand miles away from California.  They seriously, and I mean seriously, were concerned that at least my part of California would fall into the ocean some day.  I tried to explain that if that happened, a loss of my components would be the least of the world's worries.  They also didn't care that my sole source raw material supplier was just a few miles down the coast and had an actual view of the beach.

I do have one group of customers that are a bit more enlightened.  They all have their flaws, but they are trying.  For example, one is actually doing Net 10 to create a tighter relationship.  It works.  Another is improving overall communication, which means that formal notifications and such are no longer even necessary.

Sure a customer is a customer, but guess which ones I want to create long-term mutually successful relationships with.

Outsourcing & Supply Chains: The Oprah Factor

Oprah Winfrey has appeared in this blog two times in the past, once in relation to my mother in-law and a second time when announcing Craig Woll joining us as an occasional blogger.  Although intentionally rare, I think it's finally time for a third appearance.

Earlier this week Amazon announced it's latest version of the Kindle.  I've been intrigued with the device for several months, and this new version may just tip me toward buying one.  The ability to hold 1,500 books, free wireless download of new books in seconds, being able to have an electronic version of my favorite newspapers waiting on my device each morning.  Sounds appealing and environmentally friendly.

Amazon Inc. is announcing a new version of its Kindle e-book reader on Monday. And, in a sign that the electronic book is gaining clout in the publishing world, Amazon is also expected to say it has acquired a new work by best-selling novelist Stephen King that will be available exclusively, at least for a time, on Kindle.

Before I get to the impact of Oprah, let's take a look at some of the production issues that have impacted the first version of the device.

The $359 Kindle, which allows people to read books in an electronic format, has been out of stock on Amazon's Web site since November, which meant it was unavailable over the crucial holiday shopping season. Now clues from the contract-manufacturing industry in China and Taiwan suggest the Seattle company may have been blindsided by demand for the book-size device and that it has since been ramping up production for the launch of its new Kindle.

The maker of the Kindle's special screens, Taiwanese manufacturer Prime View International, says the Kindle shortages came from Amazon's conservative sales forecast for the device. Prime View adds that Amazon is now trying to avoid repeating the current shortage by asking it to pump out more screens, which it is now doing in case orders increase suddenly.

This is not a small business, although Amazon refuses to disclose specifics.

Citigroup Inc. analyst Mark Mahaney estimates 500,000 of the devices have sold to date, based on data reported by Sprint Nextel Corp., the carrier used by Kindle users to download new books. He forecasts the product will bring Amazon $1.2 billion in sales by 2010.

Ok, I know.  Get to the point already.  So here's the impact of Oprah...

One factor that may have contributed to Amazon's supply problem was an Oct. 24 endorsement by Oprah Winfrey, who called her Kindle "my new favorite thing in the world." Ms. Winfrey's production company, Harpo Inc., says she wasn't paid for that endorsement, and chose to promote the Kindle on her own after being shown one by a friend.

The day of the endorsement, visits to Amazon's Web site were up 6% over the previous Friday, according to Experian PLC's Hitwise. Web traffic going from Oprah.com to Amazon.com increased more than 15,000%.

While Amazon had some warning about her endorsement -- the company offered a $50 coupon to Oprah viewers -- it would have required several months' lead time to ramp up production of the device and ship it from China, say analysts.

Now... how fast could Amazon's offshore contract manufacturers respond?  How long did it take to communicate the change in demand, across time zones, ramp up production, procure additional containers to go on container ships, and then have those ships traverse the largest ocean in the world?  And what would have happened if a glitch was found after those devices were on the high seas?

Aren't long supply chains fun?  And more costly than you'd initially expect...

Building a future of waste.

Containerization is considered one of the most significant breakthroughs in the development of modern logistics and supply chains. The ability to efficiently and cheaply transport finished goods and parts around the globe has been a significant contributor to outsourcing and globalization.

The Wall Street Journal reports today that the next generation of container ships are getting ready to hit the high seas.

The MSC Daniela is a glimpse of the future. The size of an aircraft carrier, the ship completed its maiden run from Asia to Europe this month packed with 13,800 containers, or equivalent units, each big enough to contain all the contents of a three-bedroom house.

Thirty-five ships of Daniela's scale are scheduled to hit water in 2009, doubling the number floating today. They'll make up roughly a quarter of the net increase in container capacity on the high seas. The Asian companies that make up 16 of the top 20 container shippers are also ordering the ships, led by China's Cosco Container Lines with 24. By 2013, some 200 ultralarge ships will be in service around the world.

Meanwhile, a ship capable of fitting 22,000 containers has been designed by South Korea's STX Shipbuilding Co.

This enormous increase in capacity is good news for companies that import:

Shippers are eager to avoid partially filled vessels at almost any cost. "To fill their big boats, these guys will cut their price to any level for customers," said Dirk Visser, an analyst at Dynamar NV, a Dutch consultancy.

With overcapacity due to the global economic downturn and a steep drop in shipping rates, the temptation to expand outsourcing is -- and will continue to be -- powerful. But the financial benefits from expansion of long-distance/low-cost suppliers is chimerical. Yes, today's P&L will look better as transportation costs decline. But the buildup in inventories, the difficulty of spotting and correcting errors (are you listening, Boeing?), and the challenge of responding rapidly to customer demand means that the rewards aren't quite what they seem.

Maybe they should christen this latest ship the MSC Siren.

Look Out Wal-Mart, Here Comes Tesco

The featured article on Superfactory in January is a piece by one of the heavyweights of the lean movement, Richard Schonberger, titled The Skinny on Lean Management.  His primary point deals with how lean affects sales and marketing, and he decidedly takes traditional accounting to task as well.

Lean management doesn’t resonate in marketing and sales. Nor does it among boards, senior executives and investors. Reasons relate to where lean tends to do most of its work - in operations - and its usual presentation as an attack on waste. Obscured are its much greater potential in the distribution pipelines and its strong customer focus.

What lean does, above all else, is provide quick, flexible response to customer demand. But muddling that message are perverse accounting practices that discourage quick delivery well matched to customer usage.

It was one of his final statements that really surprised me.

Wal-Mart is the world’s grand champion of lean supply chains. While advanced IT gets most of the credit, collaboration is the foundation. Wal-Mart’s 2,000-odd suppliers near the retailer’s Bentonville, Ark., headquarters maintain multifunctional teams on site. Daily, along with their Wal-Mart counterparts, they work out pricing, packaging, logistics, promotions, product options, product coding, weights and measures, sharing of actual and forecast demand data, and so forth.

Wal-Mart a "grand champion" of lean supply chains?  That raised my eyebrows more than a bit.  We've taken the company to task several times for pounding on suppliers and creating incredibly long supply chains by outsourcing to China. 

Wal-Mart failed to order enough of these China-made T-shirts last year, and so they and other George-brand basics will remain in short supply in most of its 3,443 U.S. stores until 2007's second half, depriving the retailer of tens of millions of dollars a week it sorely needs. "The issue with apparel is long lead times," says the quietly intense [Chief Merchandising Officer John] Fleming.

Long lead times caused by long supply chains.  Compare that to one of my comments on my visit to American Apparel a couple months ago:

Everything is done at this cluster of buildings, with the exception of some dyeing that is done a few miles away.  Design is done, often (and sometimes infamously) tested by Dov Charney himself, and sent to the factory floor.  Time from raw concept to when a finished product is in the over 200 stores worldwide?  Eight (8) days.  Compare that to the weeks and months it can take to send a container across the ocean.

The outsourcing and long supply chains are definitely not "lean" in my mind.  After talking with Richard on these issues, he did make one good point: "pounding on suppliers" is sometimes more beneficial than being "nice" as Wal-Mart's suppliers, the ones that survive, also tend to become extremely strong competitors in other markets.  They have to in order to make a buck off of Wal-Mart.

I personally don't shop at Wal-Mart, not out of any protest but simply because I find their stores very claustrophobic.  Just too much stuff.  I don't need any more stuff, and my clothes shopping is limited to about three times a year, 90% of which is at one store.  That's all I can handle.  Quality over quantity. 

Wal-Mart does deserve some credit.  They've been very successful... millions of people can now afford products they previously could not, and hundreds of thousands of people have jobs that previously would not have.  Some may not like the quality of job or how the products are made, but those two facts are still real.

I've never been afraid of Wal-Mart, unlike those that said they have become just too big.  We said the same about Montgomery Wards, Sears, Microsoft and others.  Perhaps in a decade we'll say the same about Wal-Mart.  The top of the heap have a tendency to be displaced by game-changing methods and technologies.  A company called Tesco, which we've talked about previously in terms of their lean prowess, may soon put Wal-Mart on the run.

British retailer Tesco entered the U.S. market only last year but already it has managed to put Wal-Mart, the world's No. 1 retailer, on the defensive.  Wal-Mart has good reason to be nervous. Back home in Britain, Tesco has long outpaced the Wal-Mart-owned discount chain Asda. The British giant currently has 34% market share, nearly double that of Asda.

Analysts say that Tesco's big advantage over major international rivals, which also include Germany's AldiLidl, is its unrivaled ability to manage vast reams of data and translate that knowledge into sales. While data crunching may sound dull, it has given Tesco two major advantages: an unmatched ability to operate multiple retail formats—ranging in size from convenience stores to hypermarkets—and the market knowledge to offer what many analysts say is the best and broadest range of house brands from any retailer. and

"Tesco is Wal-Mart's worst nightmare."

Two monster retailers duking it out using high tech tools to get consumers what they want, when they want it, at the lowest possible price.  Sounds pretty good to me.  And fun to watch to boot.

Blinders of Supply Chain Complexity

Another day, another article trying to figure out how to simplify global supply chains... without realizing that the easiest way to simplify them is to eliminate the "global" aspect.  But what more would expect from our friends at McKinsey?

The supply chains of high-tech companies are globe-spanning marvels. Over the past 20 years, looking for ready sources of components, lower-priced labor, and talented designers and engineers, these companies have ranged throughout the world. In a highly competitive and fast-moving marketplace, they have sought to maximize their strengths and flexibility as products change rapidly and prices continue to fall.

Yes, wonders they are.  Too bad they don't work very well.  Why is that?

But the sprawl and complexity of such networks have made it harder to manage end-to-end operations smoothly. Many technology companies are grappling with volatility and disruptions across their supply networks, and eliminating waste from duplicative efforts is an ongoing challenge. As product life cycles shrink, we see inventory buildups in the supply chains of some companies, while others cope with rising distribution costs, on-time delivery problems, or delays in getting new products to market.

The horrors!  Inventory buildup?  Why would anyone expect that when adding a few thousand miles to be traversed by huge container ships?  On-time delivery problems?  Why, who in the world would think that would become a problem when moving manufacturing a few time zones away?

So what's the fundamental problem, according the brainiacs at McKinsey?  Why, "collaboration" of course!  Why the heck is that?

In fact, high-tech companies have let complexity undermine collaboration in their supply chains: they aren’t working as closely as they could with their supply chain partners—sharing information or streamlining processes—to smooth out volatility and eliminate waste.

For a host of reasons rooted in the way they are organized and compete, their executives have been less than enthusiastic about pursuing the benefits of collaboration with their supply chain partners.

I'll try to keep from laughing at the obvious for a moment, and let's dive a little deeper into McKinsey's "analysis."

Closer collaboration in the high-tech industry is an elusive goal. Difficulties arise from the specific nature of high-tech competition and markets, from cultural barriers, and from organizational flaws. In our work with clients, we find that problems in four areas often prevent successful supply chain collaboration

[1] High-tech OEMs need hundreds of components from a broad range of global suppliers, which themselves lie at the center of even farther-flung supply chains comprising second-tier companies that make subcomponents.

[2] OEMs in many industries organize themselves around functional units. But in high technology (and other assembly industries), units such as manufacturing, sales and marketing, and product development often send conflicting forecasts of demand and production to their partners.

[3] OEM forecasts often aren’t granular enough to be useful to supply chain partners. Typically, OEMs set broad targets across a number of product lines rather than provide details on expected unit sales for specific products. That combined with rapid product obsolescence makes getting a fix on true demand difficult.

[4] Given the intense and unpredictable nature of competition, high-tech executives often believe that they must guard information on their business plans and processes closely. This perceived need for confidentiality—OEMs reason that since their suppliers provide parts to competing OEMs, shared data isn’t secure—directly affects suppliers.

Ok... sounds like a lot of problems.  But I'm sure the reduction in labor cost somehow makes up for all of that.  Yeah, right.  Are you sure the root cause is "collaboration," or should you ask "why" a couple more times and end up at "traditional accounting" or "outsourcing is always the answer lemming mindset" or...?

What was the total cost again?  How does that compare to the total cost of working with domestic suppliers, if not your own internal operations?

McKinsey Looks at Supply Chain Complexity

The McKinsey guys just published the results of a survey on supply chain management that has some interesting, albeit expected (at least by us!), conclusions.

Supply chains are increasingly global and complex, as companies aspire to support a variety of strategies, such as entering new markets, increasing speed to customers, and lowering costs. In this survey, we asked operations and other senior executives from around the world about their companies’ supply chain strategies, the factors that influence those strategies, and the ways their companies act on these factors. We also explored how well executives think their companies are meeting their goals, how they manage their supply chains, and the challenges involved in running a global supply chain.

Guess what, supply chains are becoming more complex!

The results show that supply chain risk is rising sharply. Executives point to the greater complexity of products and services, higher energy prices, and increasing financial volatility as top factors influencing their supply chain strategies.

Really!  Let's see... outsourcing an ocean or two away, translating knowledge into different languages and cultures, communicating across time zones, intellectual property... I can think of a few reasons.  So what's being done about it?

Relatively few respondents, however, say that their companies are translating the importance they place on these factors into corporate action.

Should I hazard a guess that this is driven by a reliance on traditional accounting methods?  What is risk?  What is knowledge?  How does that compare with the hourly cost of a pair of hands?  Inquiring minds want to know, especially since it doesn't show up on the P&L or balance sheet... until it's too late.  So since these guys have their heads buried in their P&L's, what happens?

Nor do executives express confidence that their companies are meeting the top strategic goals: reducing costs, improving customer service, and getting products to market faster. In addition, for all the public attention paid to environmental concerns, including global warming, executives report that such issues have little influence on supply chain strategies.

No kidding.  Maybe if they turned off their computers and actually followed their physical supply chain for a few days (or months... some are pretty damn long!), they'd get a sense of what's going on in the real world. 

The Climate Change Chain

For those of you that thought I had lurched a little over the line to the right this week, here's a post in the other direction.  Perhaps this will convince you that I'm pretty violently centrist.  Well, ok, not quite.  From the recent McKinsey Quarterly.

Global executives increasingly identify the environment, including climate change, as a top concern. When it comes to purchasing, however, it appears that companies aren’t necessarily translating the importance they place on climate change into action.

A McKinsey survey of more than 2,000 global executives finds that while nearly half of respondents say that climate change is a somewhat or very important issue to consider in purchasing and supply chain management, fewer than one-quarter report their companies always or frequently take climate change into consideration in these areas. Among high-tech and other manufacturing executives, 54 percent and 56 percent of respondents, respectively, say climate change is important in purchasing, yet these executives were no more likely than average to say it was considered in practice.

Why is this important?

They may be missing an opportunity. Our analysis suggests that for consumer goods makers, high-tech players, and other manufacturers, between 40 and 60 percent of a company’s carbon footprint resides upstream in its supply chain—from raw materials, transport, and packaging to the energy consumed in manufacturing processes. For retailers, the figure can be 80 percent. Therefore, any significant carbon-abatement activities will require collaboration with supply chain partners, first to comprehensively understand the emissions associated with products, and then to analyze abatement opportunities systematically.

It's really not that hard...

Surprisingly perhaps, we find that many of the opportunities to reduce emissions carry no net life-cycle costs—the upfront investment more than pays for itself through lower energy or material usage. Others, however, will require tradeoffs between emissions and profitability, in areas such as logistics and product design (including product specification and functionality).

Such a focus could even create opportunities for enhancing the overall supply chain.

Forward-looking companies are using such discussions as opportunities for supplier development, for example by transferring best practices in manufacturing, purchasing, and R&D—as well as energy efficiency—to key suppliers. This opens the possibility of still lower costs and improved operational performance, in addition to helping suppliers remove more carbon from their supply chains.

And regardless of whether we believe global warming is caused by humans or by natural geosolar cycles, we can all probably agree that reducing environmental waste is a good thing.  Isn't waste reduction what lean is all about?

The Dreamliner Follies Continue

Today's NYTimes unknowingly threw into stark relief the consequences of the different paths taken by Boeing and Brazil's Embraer. Boeing, of course, claims that the outsourcing of the 787 Dreamliner is the epitome of lean manufacturing, even when its many problems point clearly to the folly of  off creating a complex, globe-girdling supply chain. (This blog has covered the 787 fiasco many times.  Read all about it here.)

The latest news, in what has become a grimly comical production saga, is the possibility of further delays due to fuselage damage:

Boeing, already facing a delay of at least 14 months on its new 787 Dreamliner aircraft, has not yet determined if damage to the fourth of six test planes will have an effect on the full program.

The midbody fuselage section built by Global Aeronautica, a Boeing venture with Alenia North America, a unit of Finmeccanica, was damaged in Charleston, S.C., “by an Alenia employee not following proper work procedures,” a Boeing spokeswoman, Yvonne Leach, said Monday night.

You can't blame Boeing for all problems, of course.  They're inevitable, especially when building something as complicated as a plane with an entirely new structure. But it's significant that this particular error occurred with a part that had been outsourced to another company, not at Boeing itself. And although the NYTimes doesn't use lean terminology, "proper work procedures" sure sounds a lot like standard work to me.

Ironically, Boeing can't even determine the ramifications of the damage, because the part hadn't yet been shipped to Everett, where final assembly occurs. So in addition to the waste of rework, there's the waste of waiting, as they twiddle their thumbs before they can determine what course of action to take next.

The newspaper also ran an article on Brazil's challenge in finding enough skilled, educated workers -- particularly engineers. Embraer, which builds private and commercial jets that seat from six to 122 people, is one of the companies that has created its own specialized engineering program:

In 2001, company directors realized that with only three Brazilian universities offering courses in aeronautical engineering there would not be enough graduates available to help them design, build and sell planes in a rapidly growing market. So the company created a program that selects the country’s best engineering graduates and puts them through an 18-month specialization course.

They already have a base in disciplines like electronics, mechanics or design. In Embraer’s classrooms, overlooking a shop floor scattered with fuselages, they learn the skills that will help them become aeronautical engineers.

Júlio Franco, executive vice president for organizational development and personnel, said the company spends $45,000 training each student.

The results? Embraer has doubled in size since the start of the decade and currently has orders in excess of $20 billion. It expects to deliver nearly 200 aircraft to clients this year.

Okay, $20 billion is small potatoes compared to Boeing. But maybe some of the workers that Boeing laid off in years past, and who couldn't find work when Boeing farmed out the Dreamliner, could find some work with Embraer.

Boeing's Credibility is Being Tested

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

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

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

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

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

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

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

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

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