Operations Payoff

Does Productivity Trump Cost?

operationspayoff — Fri, 27 Jan 2012 19:44:38 +0000

The author of a recent article on MSNBC’s web site points out that China’s labor cost is now only about 10% lower than the US. The article seems to suggest that once the lines cross, which is estimated to happen in 2015, it will make sense to bring manufacturing back to the US. Later in the article, the author states that US workers are 4 times more productive than Chinese workers.

It seems to me that higher productivity outweighs the labor cost differential. Many companies forget to measure productivity improvement when looking at labor cost. Productivity is measured as units of output per unit of input, so if a company has $20 revenue for every $4 of labor, the productivity metric is $5.

My point is that there are two sides to the equation: cost and output. If American workers produce four times what Chinese workers produce in the same time period, it appears to me that the lines have already crossed and manufacturing should be brought back now.

As a footnote, there are several other important considerations in this question: cost of inventory in transit, quality, speed to market (closeness to the customer), protection of intellectual property, etc. Cost and output are important, but they aren’t the whole story.

The Six Characteristics of an Effective Vision

operationspayoff — Tue, 24 Jan 2012 22:15:42 +0000

As a follow-up to my last post, I’d like to share my top six characteristics for an effective vision, whether at the project level or the company level.

1) Imaginable. It creates a clear picture of where you want to go with your company, department, or project.

2) Desirable. The vision is appealing to all stakeholders.

3) Feasible. While the vision should aim high, it needs to keep its feet on the ground and be achievable.

4) Focused. A good project vision is focused enough to provide a paradigm for decision-making. As the project proceeds, refer back to the vision, asking, “If we take this action now, will it bring us closer to our vision?”

5) Flexible. The vision should be elastic enough to allow people to take initiative. In other words, the boundaries are wide enough to allow room to play the game and be creative.

6) Communicable. It isn’t a three-inch binder. It’s one page or less, and clear enough that everyone in the organization can understand it.

Change Requires Vision

operationspayoff — Sat, 21 Jan 2012 01:05:35 +0000

Many companies that struggle in their Operations deal with the same questions year after year. They appear to know what the issues are, but they never seem to make things better. Why, when they see what the problems are, can’t leaders make real change in their organizations?

Without vision, teams get lost

I believe there is a vital missing piece to successful change in Operations related organizations. There needs to be a clear strategy with a compelling vision. In my work with Change Management and Operations Strategy, I have noticed that both require a clear vision, one that provides direction, focus, metrics and accountability. Management’s role is to develop that vision and communicate it clearly to the organization.

Many management teams believe they can do things better, but without changing their focus or direction they remain in the same place. In Lean thinking, the vision is the new “target state.” In strategic thinking, this is the new “focus.”

Without a strong vision, teams simply wander around, working hard but not really doing anything different and therefore getting poor results.

Can You Buy Innovation?

operationspayoff — Tue, 17 Jan 2012 22:15:37 +0000

An article published last week on the website Fast Company Design examines the “rise of the innovation professional,” and why assigning someone, either from inside or outside the organization, can’t bring about innovation. This may be difficult news to digest, especially for those who believe that they can buy organizational change and put it on like a new suit.

Sometimes you have to color outside the lines

Change doesn’t work that way – you’ll just be the same company with the same challenges…in a new suit. Not only does this not fool anyone (especially not the employees, who easily recognize a flavor-of-the-month change campaign), but it doesn’t create the Action Imperative required to launch change or foster an innovative culture. The authors echo my own sentiments when they write, “Innovation only occurs if it’s an attitude that runs through a company’s culture.”

Ironically, the desire to transform a culture can be the very thing that prevents transformation from happening because in order to promote innovative thinking, top management needs to relinquish control. Would Apple have emerged as one of the most innovative companies in the world if Steve Jobs had been required to report to his boss every day and color inside the lines?

I couldn’t agree more with the authors’ conclusion that, ”Companies should have the confidence to give [talented employees] the freedom to explore the high-risk messiness and the fuzzy, nonlinear ways in which innovation grows.” By setting boundaries and then loosening their grip on the reins, management can allow the kind of radical innovation that comes from creative thinking and experimentation.

Authors: Paige McKinney, Rick Pay

Agility Requires Speed

operationspayoff — Fri, 13 Jan 2012 22:49:08 +0000

The key to successful supply chain management is reliability and predictability of supply: knowing how much you’re going to get and when you’re going to get it. Take as an example a manufacturer who had trouble finding a reliable source for a simple metal flange used by their plants in Mexico. They had to choose between storing a lot of inventory or changing their supply chain. In this case, they began buying the part in the US and shipping it to their facilities in Mexico.

Another issue is agile operations. There’s a difference between agile and lean. The Toyota production system is actually founded on speed: how can we be faster and still produce a high quality product at a lower cost? The right part in the right place at the right time at the lowest possible cost requires speed, so agility is about being fast, flexible, highly responsive. Lean focuses on eliminating waste – it’s related but not the same.

Communication as an Element of Forecasting

operationspayoff — Tue, 10 Jan 2012 20:41:41 +0000

I can’t overemphasize the importance of communication with Sales. When I was VP of Operations at a manufacturing company my production managers did the planning, and I required them to meet with their sales manager every Monday morning to convey the past week’s results and to update the forecast for the coming week and month. Sales managers know if a major retailer is planning a sale, or if they’re about to get a really big customer. Communication with Sales offers Operations a glimpse into the future.

Likewise, Sales needs to know what Operations is doing. Are machines breaking down? Are there labor problems? Currently I have a client with 180 positions, 30 of which are open because they can’t find qualified workers. That has a tremendous impact on output, so communication is key.

Communication doesn’t end at the front door – we also need to communicate with the supplier base. At my former company the buyers visited our top 10 suppliers twice a year, and those 10 suppliers visited us twice a year, so we came face to face once each quarter. A client of mine, who has one buyer, keeps running out of inventory and the buyer refuses to talk to the suppliers, even on the phone. How can this buyer possibly know what’s happening or what’s coming down the pike?

Last-minute Customization: The Theory of Postponement for Highly Variable Items

operationspayoff — Fri, 06 Jan 2012 20:29:09 +0000

If a product has high variability and low importance you can manage it with inventory, but using Kanban or VMI to allow for a quick response to a spike in demand. For these items you could build subassemblies or stock them in adherence with the theory of postponement.

The Trouble with High Variability

The theory of postponement was developed at Hewlett Packard in Vancouver, Washington and simply means that you finish the customization of the product at the last possible moment. When HP was shipping printers to Europe each printer was the same, but required a user manual in a specific language and a power plug that met regional standards. HP would build printers for France and others for Germany, ship them off, and find that they always shipped the wrong number. The product was highly important for the company but highly variable.

Last-minute Customization

HP learned to customize the product at the last moment by shipping printers without user manuals or power cords. The manuals and cords were added at a facility in Europe, so HP could cut inventory – and the costs associated with holding it – while increasing customer service levels. Engineers or designers can come up with solutions to make manufacturing flexible, enabling you to work around high variability.

Variability and Importance as Factors in Forecasting

operationspayoff — Tue, 03 Jan 2012 23:57:04 +0000

In a previous post I talked about the need to create a single unit of planning that could transcend the language barrier between Sales and Operations. Planning based on product families is one way of making this happen. I know of one company, a food products manufacturer, who plans according to product family (meat, cheese, or nuts, for example) because the same raw materials can be used in a number of products within each of those families. A wholesale distributor, on the other hand, needs to plan for each SKU and forecast accordingly.

If a product has low variability and is highly important, you’ll manage that with inventory, and the inventory has low exposure to obsolescence because you’re likely to sell it. High variability and high importance require you to use flexible production or flexible distribution – JIT types of approaches – because speed is important.

Operations Discipline Starts at the Top

operationspayoff — Wed, 28 Dec 2011 20:19:29 +0000

I recently watched the bowl game between Boise State and Arizona State in which Boise overpowered Arizona in a mismatch brought on by the unbalanced efforts of the BCS. However, Arizona State made it much worse through a total lack of team discipline.

The announcers saw the trouble starting in pre-game warm-ups. It continued throughout the game, manifested in numerous personal fouls, missed assignments and generally sloppy play. The announcers laid the problem directly at the Arizona State coach’s feet, and I agree. Boise State, on the other hand, showed strong discipline from start to finish, which I believe contributed greatly to their win.

Operations discipline – comprised of strong processes, clear constructs and rules, and disciplined behavior and accountability – is created and enforced from the top of the organization. If the leader/coach does not set and enforce guidelines and accountability, the team declines into chaos and loses the important games. Strong operations discipline can prevent this from happening to your team.

Where to Apply Lean

operationspayoff — Tue, 20 Dec 2011 23:13:34 +0000

Many companies begin their Lean journey by targeting labor productivity improvement and cost reduction. One of my clients found that labor was 9% of sales while materials was 45%. If this client reduces labor costs by 10%, they add only one point to their bottom line. A 10% reduction in materials, however, adds 4.5 points to the bottom line. With further analysis, they found that if they reduced overhead by the same amount, they’d see the same 4.5% benefit. In this case, my client will get more bang for their buck by applying Lean to materials and overhead.

As you develop a plan for your own Lean initiative (or other process improvement effort), it’s smart to remember that your business model includes labor, materials and overhead, and the greatest opportunity to increase the bottom line isn’t necessarily always by reducing labor costs. As you target your Lean initiatives, look for initial targets that have the highest return on investment.