A Year of Cost Control: Wrongheaded Business Analysis

            A commentary by an executive of consulting firm Accenture about the wireless telephone service industry embodies a lot of things that are wrong with the way some people view business.

            Stephen Gardiner, an Accenture senior executive, has a piece posted on the company’s Web site that notes the rapid growth of the telco industry is slowing. He observes that

 

            Our research in this area has discovered that global wireless operators with an average annual Operating Expenditure) of $24 billion will need to save 4% in total operating expenses, or a staggering $700 million per year, in order to recover their cost of capital.

 

            Gardiner suggests that 2007 may be “the year of cost control.”

 

            I find that disturbing. It seems to be based on the idea that industries go through cycles. Rapid growth occurs early on, and when that slows, businesses finally get around to managing properly so that they can be profitable in bad times as well as good.

            Gardiner adds,

 

Is 2007 the year of cost control? My answer is not a simple yes or no…

The Telco industry is maturing at different paces. Northern Europe is already thinking about cost reduction and I think the U.S. will be next. Asia has had success in growing new products and services so their focus will remain on delivery for the time being while Southern Europe is still very much in a growth phase.

Cost savings will continue to be a hot topic for Telecom Operators for some time to come. You only have to look at other more mature industries for insights on how big an issue it will be.

 

            Would a lean company think that way? Do you believe that, at any time during the past 50 years, executives at Toyota ever declared a particular year to be a year of cost control? I doubt it.

 

            I’m also amused by Gardiner’s description of how Accenture advises clients to control costs:

Reducing costs should be viewed in a holistic manner, considering the entire enterprise as opposed to just one function. We conceived our framework for cost analysis and modeling after our research suggested that combining top-down targeting with bottom-up transformational diagnostics can help to lead to sustainable cost leadership. I'd also recommend looking at less traditional areas, such as channel optimization and routing, product and offer simplification, and business intelligence.

 

            While I’m all in favor of viewing costs (and all other business issues) in a “holistic manner,” this paragraph sounds to me like business mumbo-jumbo. More importantly, it treats cost control as something to be undertaken at a particular time, rather than something that should be embedded into a company’s DNA – as one part of a lean strategy.

 

            By the way, Accenture does have a few articles on their site specifically about lean and six sigma. But my impression is they don’t really get it.

 

            Accenture is large, successful consulting firm. It’s a shame they are stuck in old ways of viewing business.

 

Time Out

I'll be on vacation until the week of July 30. If my desire to blog becomes overwhelming while I devote the next couple of weeks to self-indulgent leisure time, I may come online before then. However, if I gain sufficient satisfaction from sun, sand, food, drink and family, the blog will be quiet for a while. See you later!

 

Toyota Shifting Production to Lower Labor Costs? It Could Happen

Would Toyota, the embodiment of lean manufacturing and respect for people, ever consider relocating production to reduce labor costs?

            According to recent reports, that’s exactly what Toyota is considering.

            It wouldn’t be a case of shifting production from America to Asia. Rather, Toyota may pull production of the Tacoma out of the NUMMI plant in Fremont, California, and shift it to somewhere else in North America.

            NUMMI (New United Motor Manufacturing Inc.) is a partnership of Toyota and General Motors, formed in 1984. The Fremont plant is the only Toyota plant using UAW labor and one of the highest-labor-cost facilities in the entire American automotive industry.

            One report, in the San Jose Mercury-News, notes that

            NUMMI management stopped short of saying in a statement that it would move Tacoma truck production. It also did not say it would lay off any workers, or consider shutting down the plant. But it stressed that NUMMI must 'improve its competitiveness.'

'The industry's going through a very tough time and many plants have or are scheduled to close,' NUMMI spokesman Lance Tomasu said in a prepared statement. 'NUMMI will only retain its business if it is able to improve its competitiveness.'

The statement added that pressure to compete is felt more intensely at NUMMI than other auto manufacturing plants 'because of California's challenging business environment.' It said NUMMI's labor costs are higher than both the automotive industry average and U.S. manufacturing average, that raw material costs are rising, and that NUMMI's location is far from the majority of its suppliers.

            The Fremont facility also makes the Toyota Corolla and the Pontiac Vibe. But the Tacoma represents 40 percent of the plant’s total output, which was 428,000 vehicles last year.

 

            The current UAW contract at NUMMI expires in August 2009, and a no-layoff clause prevents workforce reductions. So unless the UAW is prepared to make concessions, moving production may be the most attractive alternative.

 

            Do you think this prospect is at odds with Toyota’s commitment to lean and respect for people? Post your comments below.

 

 

           

Easing Airline Delays: What Can Lean Do?

Can a lean approach help address the delays and inconvenience that increasingly plague the nation’s airlines?

            As I read about how bad things are, I can’t help but believe the answer is yes. The problems facing the airlines involve issues of variation and capacity, both of which are frequent targets of lean initiatives.

            Two recent articles in The New York Times prompt these thoughts. One focuses on how bad delays really are – and the answer is, worse than statistics indicate. According to the article by Jeff Bailey and Nate Schweber,

            …statistics track how late airplanes are, not how late passengers are. The longest delays — those resulting from missed connections and canceled flights — involve sitting around for hours or even days in airports and hotels and do not officially get counted. Researchers and consumer advocates have taken notice and urged more accurate reporting.

Researchers at the Massachusetts Institute of Technology did a study several years ago and found that when missed connections and flight cancellations are factored in, the average wait was two-thirds longer than the official statistic. They also determined that as planes become more crowded — and jets have never been as jammed as they are today — the delays grow much longer because it becomes harder to find a seat on a later flight.

That finding prompted the M.I.T. researchers to dust off their study, which they are updating now. But with domestic flights running 85 to 90 percent full, meaning that virtually all planes on desirable routes are full, Cynthia Barnhart, an M.I.T. professor who studies transportation systems, has a pretty good idea of what the new research will show when it is completed this fall: “There will be severe increases in delays,” she said.

            Meanwhile, Joe Sharkey, who writes the “On the Road” column in the Times, describes widespread reports of passengers sitting for as long as 10 hours on delayed planes with nothing to eat or drink. In some cases, toilets backed up. Sharkey comments,

            At the heart of the problem is the fact that airlines have squeezed their capacity and their work force so much that there is not an inch of slack when something goes wrong, including bad weather.

For several years, some airlines have been reducing their unionized maintenance work force and outsourcing routine maintenance, while passengers have been complaining that aircraft cabins are dirty.

With some justification, the airlines blame the Federal Aviation Administration for not upgrading the air traffic control system to handle current demand adequately.

But a growing number of people are directing their anger at the airlines and demanding federal legislation — a so-called passenger bill of rights — that will make the airlines adhere to specific rules on how long passengers can be held on a parked plane, and impose regulations to address cabin ventilation and public health issues like overflowing toilets.

            Variation in flight schedules is, to some extent, inevitable due to weather delays. So how can the airlines deal with that variation without building in costly buffers that make profits impossible?

            I’m not sure what the answer is. But if someone can come up with a practical, lean approach to these problems, I’d love to hear about. Better yet, if you’d like to write a book on this subject, we’d love to talk to you.

 

Ross Robson Interview, Part 2: The Need for Fair Trade

Add Ross Robson to the list business leaders who believe that government action is needed to ensure fair trade for American manufacturers.

            Ross, who is retiring as executive director of the Shingo Prize, had some strong words for the federal government when I spoke with him recently.

            “President Bush, in free trade policies for six or seven years, has done nothing to ensure it’s a level playing field. Congress has done very little,” he said. “The issue of fair trade vs. free trade is critical to the success of manufacturing in the U.S. The current administration has basically been blind to the issue of fair trade.”

            Ross was referring specifically to alleged undervaluation of the yuan, the currency of China. Based on estimates from a variety of sources, he believes the yuan may be undervalued by anywhere from 25 percent to 50 percent.

            “The issue of fair trade showed up rather clearly in the congressional elections. All newly elected or re-elected Democrats had campaigned for fair trade, not just free trade,” he said. “We’ve clearly got to right-size that global marketplace and ensure free trade around the world. I see nothing in the horizon suggesting that’s going to occur in the next few months.”

            On its face, fair trade may not sound like a lean issue. However, my impression is that most lean advocates are almost inherently supporters of free trade. We argue that you don’t need to outsource materials or production to compete with low-wage foreign producers; that you can compete successfully in a global marketplace if a lean strategy drives your operations.

            That becomes more challenging when the marketplace is distorted by undervaluation of currencies and/or government subsidies of foreign businesses. So if we want people to truly see what lean can do, we need the level playing field that comes from fair trade.

 

Ross Robson Interview, Part I: The Obstacles to Lean Implementations

American manufacturers can compete successfully in the global marketplace with lean strategies, but first they have to overcome the obstacle of big egos.

            That’s the sense I get talking with Ross Robson, who is retiring as executive director of the Shingo Prize for Excellence in Manufacturing.

            Ross has always been a passionate advocate of lean manufacturing, and he has been with the Shingo Prize since its inception 19 years ago. A Ph.D., he is also on the faculty of the College of Business of Utah State University, where the Shingo Prize has its headquarters.

            His retirement was announced about a month ago. He will continue working with the Shingo Prize until next spring as director of its public sector prize, developing a partnership with the Department of Defense. He will also retire from the University in September of 2008.

            I recently spent some time on the phone with Ross. Because of his long involvement in lean issues – the Shingo Prize criteria closely parallel Toyota’s principles – I believe he is well-positioned to talk about the state of American manufacturing.

            “My sense is that probably 50 to 60 percent, and maybe as high as 75 percent, of manufacturing companies in North America today are focused on elements of lean manufacturing, lean enterprise,” he told me. “But I would tend to say that at best, five to no more than 10 percent are really doing well at lean. The opportunities remain huge in the U.S. and North America relative to the ‘true north’ implementation of lean enterprise.”

            When I asked him what the chief obstacles are to a broader adoption of true lean principles, Ross didn’t actually use the word ‘ego.’ But he did mention three obstacles, all of which relate to that concept.

            “One of the obstacles is simply new ownership,” he said. “In the world model, not the Toyota model, of leadership, new leaders feel a sense of obligation to come in and leave their mark, and demonstrate that they are in charge. And that model is one of the worst, and one of the biggest challenges to continuous improvement in a company or a business that exists in the marketplace today. It tends to be based on what David Mann in his book calls ‘person-centered leadership’ rather than process-centered leadership.”

            A second issue, Ross contends, is that “particularly in the U.S., we suffer from what I refer to as arrogance, which is the antithesis of good continuous improvement. In other words, we say to ourselves, ‘gee, we’re the richest, most powerful country in the world. Why do we need to, or have to, change?’” He contrasts that with attitudes in Mexico; “I have said for years that if you to to Mexico and say ‘have you thought about…?’ in three months, it’s done. In the U.S., if you say ‘have you thought about…?’ in six years they are still talking about it.”

            The third issue is “the notion that falls into the good old management discussion of power vs. influence. Senior leaders, once they get into a position of authority, don’t want to give up power,” he commented. That’s a problem when it comes to a lean strategy, which involves empowering workers.

            Outside of the Shingo Prize, Ross said his work with students at Utah State has been very rewarding, though he adds that “probably my greatest frustration has been the failure to get students to focus on manufacturing as their career.”

            Despite the ego obstacles and the difficulty finding qualified people, Ross remains optimistic about the future of American manufacturing. However, he also has some strong beliefs about the need for government action in the world marketplace, which I will describe in my next posting.

 

Lean Management, Respect for People and Google

An interesting article about Google in the July 2 issue of Forbes prompts some thoughts about the meaning of the lean concept of respect for people – and how your demonstrate your commitment to that concept.

            Generally, most articles I read about respect for people (and a few I’ve written) are based on the idea that respect for people means respect for their intelligence and abilities. Lean discards the old paradigm of know-all bosses ordering unthinking robots and assumes that what’s best for a company is having employees who are thinking and creative, who contribute to solving a company’s problems and improving its operations.

            That is certainly true. But respect for people can mean more than that. It also includes providing employees with good management, interesting work and fair compensation, as well being attuned to employee satisfaction and morale. Building and sustaining a culture in which employees believe in management’s commitment to respect for people is one of the great challenges of lean management.

            The Forbes article (you have to become a member to access it online) notes that a growing number of employees are leaving Google because of the money. No, they are not underpaid; quite the opposite. Stock options granted since Google went public three years ago are becoming vested, and large numbers of Google employees are rolling in dough:

 

            Insiders figure there are at least 700 people roaming the halls worth a minimum of $5 million, many of them worth multiples of that.

 

            The article also notes that Google has grown from 350 employees five years ago to 13,000 today. Craig Silverstein, the company’s director of technology, says it is “harder for the people at the top to keep things straight.”

            Silverstein, who has made more than $100 million in Google stock, offers an even more fascinating comment when he says that for veterans like him, 'economically, you are volunteering to be here.' He stays because of his interest in solving hard computational problems with other smart colleagues.

            But the article, by Quentin Hardy, notes:

 

            Not everyone feels the same way. Veterans complain of wasted effort on overlapping projects and disaffection with endless work on glorified ad schemes. Bismarck Lepe left almost immediately after his options fully vested on their four-year anniversary. Colin Wong, who started at Google in November 2002, quit in December to do angel investing in Seattle. He left over 'the boredom of just looking at Internet advertising.'

 

            The brain drain is producing some positive effects for Google because some of those leaving are starting new companies – which use Google technology.

            However, it doesn’t appear that Google necessarily intended that to happen. And Google apparently struggles with the challenge of coming up with ways to keep people – and determining who it most wants to keep. Laszlo Bock, Google’s vice president of people operations (now there’s a title) is quoted as saying the company

 

            …is prepared to see a number of people move on and has identified the people it feels it must keep, particularly in Google's core business of Internet search. The company has an advantage there, as search now requires vast computing resources that no startup seems able to match and Google is still in a good place to address the intellectual challenges of making search better. A core of some 200 search veterans are said to be rich and happy where they are.

            Some of Google's marquee names on the business side have been given new chores to keep them happy: Sheryl Sandberg, who developed Google's ad business, now also helps run its charitable foundation, while whiz salesman Omid Kordestani is heading Google's international expansion.

The company has continually tinkered with its incentives for people to stay. Early on Larry Page and Sergey Brin gave 'Founders' Awards' in cash to people who made significant contributions. The handful of employees who pulled off the unusual Dutch auction public offering in August 2004 shared $10 million. The idea was to replicate the windfall rewards of a startup, but it backfired because those who didn't get them felt overlooked. 'It ended up pissing way more people off,' says one veteran.

Google rarely gives Founders' Awards now, preferring to dole out smaller executive awards, often augmented by in- person visits by Page and Brin. 'We are still trying to capture the energy of a startup,' says Bock.

            How do you best demonstrate respect for people? In your own experiences, what has worked best, and what hasn’t? Is losing people inevitable, particularly in a growing organization? Tell us your stories.

 

Nissan: Trying to Be Lean

Toyota gets most of the publicity, but it’s not the only Asian automaker pursuing a lean strategy.

            Nissan is another, or at least it tries to be. At the recent Automotive News Manufacturing Conference, I heard John Miller, vice president of purchasing for Nissan North America, talk about some of the techniques the company employs. He made reference to cross-functional teams, “kaizen-type activity” and other lean methods. He also said, a bit defensively, “we have our own Nissan Production Way.”

            However, for me, the most telling remark came when Miller was asked to characterize the Nissan culture. His comment: “we’re a very self-challenging company; we are never happy.” That, of course, is the right kind of attitude, one that goes to the very heart of continuous improvement.

            The conference also included a tour of Nissan’s 5.4-million-square-foot plant in Smyrna, Tennessee, which the company claims is the largest North American manufacturing plant under one roof. (I thought Toyota’s plant in Georgetown, Kentucky, is larger, but maybe that’s not under one roof.)

            The plant, opened in 1983, is a busy operation with a high degree of automation (approximately 1,000 robots). Nissan employs 8,300 people in mid-Tennessee, and the plant – which makes two cars, two SUVs and a pickup truck – has a capacity of 550,000 vehicles annually.

            Frankly, for a company that professes to be lean, I didn’t see as much in the way of visual controls as I expected at the plant. Perhaps that’s an area in need of some kaizen events.

            By the way, Miller admitted that 2006 was a “challenging” year; for the quarter ending March 31, Nissan reported global operating profit of about $1.9 billion (US), down 7 percent from a year earlier. Net income was about $600 million, down 53.7 percent due to (in order of decreasing magnitude) “provisions taken for the one-time charge for headcount reductions in the U.S. and Japan, lower profit contribution from equity method companies, and higher taxes.” Global sales (number of units sold) were down 2.4 percent, and sales in the U.S. were down 4 percent.

            The figures suggest that Nissan has some distance to go to achieve the kind of lean success enjoyed by Toyota. But its heart seems to be in the right place.

Lean in Education: Continuous Improvement in Elementary Schools

Can you teach lean principles to elementary school students? The Mountain View Whisman School District in Mountain View, California, is doing just that.

            Actually, it’s a two-stage process. The district is engaged in an organized, ongoing effort to train teachers in continuous improvement, and the teachers are then applying that training in the classroom, working with students to improve the educational experience.

            The district has created a video that makes for fascinating viewing. Both teachers and students – as young as five years old – describe what is happening in the classroom.

            This is not the kind of formal lean experience you might find at a manufacturer. As far as I can tell, there is no value stream mapping, no kanban bins, none of the tools of lean.

            You might call it Lean 101, but that would be an overstatement. This is kindergarten lean – in some cases, literally. The techniques being taught and used include setting goals, providing ongoing feedback, identifying problems and working together to find solutions.

            The most immediate benefit from this approach are that the students will achieve more in class and gain greater enjoyment from being in school.

            In the long-term, and perhaps more importantly, these students will become adults who believe in continuous improvement, who view it as a fundamental part of how they operate and what they do.

            This is fantastic. I hope we see this idea spread throughout education.

 

The True Cost of Outsourcing: Loss of Trust

An excellent column in The New York Times this week says a great deal about the dangers of outsourcing and what customers regard as value.

            In his “Economix” column, David Leonhardt discusses the recent recall of Thomas & Friends toy trains after they were found to contain lead paint.

            The trains are made under the auspices of HIT Entertainment, a British company that holds the right to a number of children’s characters, including Thomas & Friends, created by an English writer in the 1940s.

            But HIT has outsourced the actual manufacturing of Thomas trains to RC2, a Chinese company. HIT seems to think that the arrangement included outsourcing of responsibility. Leonhardt writes:

            Except for a small link on the Thomas Web site to RC2’s recall announcement, HIT has otherwise acted as if it has nothing to do with the situation. Its executives haven’t even said that they regret having been promoting toys with lead paint in them. They haven’t said anything publicly.

When I suggested to the company’s public relations agency, Bender/Helper Impact, that this might not be the smartest approach, the agency e-mailed me a two-sentence unsigned statement. It said that HIT appreciated the concerns of its customers and was working with RC2 on the recall, but that the recall was “clearly RC2’s responsibility.”

In effect, HIT has outsourced Thomas’s image, one of its most valuable assets, to RC2. And RC2 has offered a case study of how not to deal with a crisis, which is all the more amazing when you consider that the company also makes toys for giants like Disney, Nickelodeon and Sesame Street.

When it first announced the recall, RC2 said that its customers would have to cover shipping costs to mail back the trains. It reversed that decision after parents reacted angrily, but it is still going to wait about two months to send the postage refunds. Why? “Because finance is in another building,” as one customer service employee on RC2’s toll-free hotline told me.

Most important of all, the company hasn’t yet explained how the lead got into the trains or what it’s doing to avoid a repeat. Like their counterparts at HIT, the RC2 executives have stayed silent.

            Look at this from a lean standpoint. Lean is all about providing customers with value: what they want, when they want it. In this case, value consists of a particular toy that is safe for children. Value also includes trusting the company you do business with. When there is a problem, customers want the company they bought it from to solve that problem – now. And in a flat world, having something made in a faraway place doesn’t cut you any slack with customers. As Leonhardt puts it:

 

            In many businesses, outsourcing has simply grown too big to stay behind the curtain. What happens in Chinese factories determines how good — how reliable and how safe — many products are. So there is no way for executives to distance themselves from China without also distancing themselves from their own product.

 

            Many lean advocates urge manufacturers to look at the true cost of outsourcing, not just the savings from cheap labor, and they usually mention a variety of often-overlooked expenses. One item you usually don’t see on those lists – and should – is loss of trust.