Evolving Excellence

A New Ballgame

2012-06-04T08:16:42-07:00

I read an article the other day describing Macy's strategy to blur the lines between stores and distribution centers. They are keeping a couple of DC's, but looking to ship stuff customers ordered online more and more from store inventories. They currently ship a lot of the items customers go into the store and buy, but they are expanding it to ship online orders from stores. "Today, about 150 Macy's stores are set up for shipping, and by the end of 2012, we expect that number to grow to 292 stores, on top of the inventories in four primary online fulfillment centers,' [chairman, president & CEO] Lundgren said. 'We also are beginning to use store-to-customer shipping to fill online orders."

Makes sense. According to an economist named Kleinman: "The time to ship an item to a customer is shorter from the local retail location than from centralized hubs to a customer that may be half way around the country. Transportation is a larger chunk of fulfillment cost than the cost of real estate. What they are doing is minimizing the cost of transportation while maximizing the efficiency of their existing asset."

Kleinman isn't getting the entire picture, however. Let's bounce over to Kevin's old pals at American Apparel - the Made in the USA clothing people who are always in trouble for sexual harassment, immigration violations or both. For the record, let's make it clear that there is nothing lean about American Apparel. They are losing money and turned inventory at a ludicrous 1.4 times last year. Flow and time are foreign concepts to them. "I've had ideas on Monday and had them hanging in a storefront on Friday in Manhattan," their head of manufacturing said. May well be true, but the average couple of yards of fabric bought by American Apparel take almost 9 months to get to someone's closet. I could make a shirt in China and row it across the Pacific faster than these guys get shirts made and sold in the USA from their factory in LA.

The real lesson is embedded in their accounting statements. Sales - $547 million; Cost of Goods - $252 million ... and still lost money. They lost it because they spent a big chunk of that COGS on all that inventory, but most of it because they wasted $210 million on the 'Cost of Sales' and another $105 million on Admin. The cost of sales is 100% pure non-value adding waste. The value of an American Apparel shirt is not enhanced by a single dime as a result of everything that happens once it is produced - but that is when the real spending at AA begins.

This is the same phenomena we saw with Dollar Shave Club hammering down the price of razors by cutting out the retailers. It is why Amazon is making book stores a thing of the past, why video stores are disappearing, and why music stores are rapidly going the way of the T-Rex.

We are seeing a powerful convergence here. The Internet is becoming more widely available and the graphics make it easier to check out what we can buy on line. Social media is replacing advertising as a warp speed word of mouth engine letting us know what stuff is good - and what isn't, making on line shopping less risky. Energy costs are high - and will probably stay high for a long time. The dismal economy is making us all much more value sensitive, and less willing and able to pay for all of the waste of retailers and massive DC's. It all adds up to the inevitable death of retailing as we know it; the doom of huge, central DC's; and the demise of traditional Madison Avenue thinking and big advertising budgets.

The move by Macy's is an attempt to minimize the waste between factories and end users, as are all of the fumbling attempts at Walmart to figure out a way to merge on line buying with their money-pit massive retail store infrastructure, but not figuring it out yet quite as well as Lowes. Who knows how it will shake out but brick and mortar retailers everywhere are struggling with the fact that either they are adding value in their business, or they are doomed. And paying people minimum wage with no knowledge of the product, no service function, harsh return policies reflecting no responsibility for quality ... all to peddle something I can buy cheaper directly from the manufacturer on line is hardly a viable business plan.

The accountants won't get it so long as they think segregating costs by meaningless distinctions like fixed and variable, direct and overhead, labor and material are important. They will only figure it out when they realize that the cost distinction that really matters is between value adding and non-value adding.

Big money people and businesses vested in the way things have always been will fight it, but to no avail.

The government won't see it. Getting the things we want and need without all of the people working in retail is a huge macro productivity boom, and retail jobs will be lost by the millions, while traditional measures of manufacturing productivity will not improve much. The economic data is all built around sectors - manufacturing, transportation, retailing - and changes in one that decimate another is not something their models can understand.

The big innovation proponents don't see it - they envision innovation as new, whiz-bang technology stuff distributed and sold through the same old outrageously wasteful channels. The Food Network has a show called Invention Hunters, where a couple of guys look at new gadgets people have invented for the kitchen "hoping to find the next million dollar idea". I heard them tell one inventor they needed a manufacturing cost of about $6-7 in order to sell the product for $29.95. Are you kidding me? We think an economic model that charges $3 of non-value adding waste for every $1 of value will sustain in the age of lean and the Internet? Old products sold through high value added channels will dwarf the economic impact of nano-technologies.

Economists - even smart ones like Tyler Cowen - don't see it. He wrote "Some of the major technological marvels of today’s world are not doing so much to create new jobs. They’ll bring big gains but without putting too many people back to work ..." The Internet isn't a big job creator or even a big money maker (dot.com Roman candles notwithstanding). The Internet is the big productivity engine. Millions fewer in non-value adding, non-wealth creating retail jobs; and millions more in manufacturing working for lean companies that can make more customized products in small quantities and ship directly to customers.

The real promise of lean is beginning to take form, and it is exciting to watch. It's looking more and more like the lean book historians will cite fifty years from now isn't about Toyota, but Seeing the Whole. The winners over the next ten years will be whoever sees it first.

The Opportunity of the Gemba

2012-06-03T11:22:57-07:00

By Kevin Meyer

An article on CNN this morning gave me some pause: Fareed Zakaria wondering whether Russia should move its capital from Moscow to Vladivostok - 4,000 miles east. There are several reasons, here are a couple:

Well, the person who proposed the idea, Sergei Karaganov of Moscow's Higher School of Economics, wrote in a state-run newspaper that a capital in the far east would make Russia part of what he calls "the rising world" — closer to dynamic Asian economies and further away from an aging Europe.

Moscow has 78 billionaires — more than any other city in the world. Those billionaires, along with others in the rest of the country, account for 20% of Russia's GDP. Far higher than any country. That doesn't leave much of Russia's economy for businesses and the other 141 million people in the country.

In typical Zakaria style over 90% of the article has nothing to do with the premise suggested by the title, but those two tidbits are worthy of some thought. Fundamentally to shift the perspective of the country, to level certain key demographics, and to develop new opportunities.

It's not the first time something like this has been tried. Turkey moved the capital from Istanbul to Ankara, India's capital moved from Calcutta to Delhi, and Brazil created the inland city of Brasilia - specifically to focus on the untapped opportunity of the area. Most seem to have had some success, although Brasilia is an interesting case. Our friend Tyler Cowen over at Marginal Revolution wrote about it a year ago. From an opportunity standpoint it was a positive, from a physical layout and architectual standpoint it left some things to be desired.

Corporations do the same - Halliburton moving from Houston to Dubai and Boeing moving from Seattle to Chicago, for example. Every now and then there are rumors of Microsoft moving from Seattle to Vancouver, Canada to free itself from tax, visa, and judicial issues in the U.S. In the article linked above, Phil Condit believes the Boeing move was a success in both expected and unexpected ways. One interesting tidbit, albeit a little outside what I'm discussing, is this:

One of the big surprises from the move, he said, was the cohesiveness of the Chicago business community, where Condit encountered CEOs frequently gathering to nail down civic goals ranging from landing new companies to building world-class parks.

“I was surprised by how much that happened,” Condit said. “For whatever reason, Seattle does that way, way less. A meeting in which Starbucks, Microsoft, Costco, Boeing and Weyerhaeuser and a bunch of small businesses are all in the same place — rarely happens in Seattle,” he added. “It happened all the time in Chicago.”

Lean folks understand the concept of the gemba - where value is created. Generally that means the factory floor, and we encourage spending as much time as possible at the gemba to truly understand - and improve - the value creating process. We decry executives that never visit a factory and never dive into learning the root cause of problems - let alone lead by example to teach others how to correctly go about seeing and improving value at the gemba.

At the medical device company I run we leverage the quick daily stand up meeting to accomplish some aspects of this. Shop floor and department level daily meetings roll up to an 8:20 standup by our executive staff, which is videoconferenced to include staff members at our other major facilities in southern California and northern Michigan. We have a set agenda of WOW moments, safety, visitors, key metrics, key projects, monitoring leader standard work, and issues that rolled in from other stand up meetings that day. Yes we do it in under ten minutes, and the level of communication, understanding, and sharing between facilities has improved dramatically.

But where should executive staff - or the heads of governments for that matter - be located? The traditional gemba where value is being created every day? A potential new gemba where opportunity for new value exists but isn't being exploited or managed properly such as moving from Moscow to Vladivostok? Close to the customer? A central location to all facilities and customers as Boeing did?

We wrestled with that issue in a much smaller way when we built our new northern California facility. Should the executive staff and value stream managers be spread out in each of their operations to provide immediate feedback, teaching, and understanding? Or should they be co-located - upstairs from the actual manufacturing floors due to the nature of the footprint we had - to improve communication to create a common long-term strategy?

We actually agonized over it. I had visions of my president's office being a podium on wheels on the manufacturing floor. Remember this example of a cosmetics company from my lean tour of Japan a few years ago? The leaders were literally in the middle of the mayhem, completely connected to the value-creation process.

But our organization had a couple other issues. Our value stream managers and executive staff were strong, and by being embedded with their operations they naturally made a lot of decisions. The leadership growth of next level supervisors and team leaders was being stunted by this. In addition, the executive staff was often sucked into a short-term mindset by focusing so much on the issues of the factory floors, and intra-executive communication was too infrequent and ineffective.

During the building construction we were forced to move several people into a triple-wide trailer. We decided that should be our executive staff and value stream managers. Now co-located, still close to their operations, but far enough away that continual contact wasn't possible. At the same time our staff went through the exercises proposed by Patrick Lencioni's The Five Dysfunctions of a Team. Phenomenal book and if you take a year or so to take a team through each dysfunction - and really work on it - you'll be amazed at the results.

By the end of the two or so years of construction we had a very cohesive executive team that worked better together and focused more on the long term, and a stronger leadership bench of team leaders, supervisors, and managers. So we decided to co-locate the executive team upstairs and not right on the shop floor, with the understanding and commitment that we would go to the gemba, and folks from the gemba would not have to come up to see us. We have been in the new building just a few weeks and so far it's working. And we're happy to be out of a no-frills triple-wide.

So whether you decide to locate an executive team on the existing gemba, into a new potential opportunity gemba, or close to customers it really comes down to leadership. All sources of value, potential value, suppliers, or customers are important. All have innovation, customer, human, and operational processes that can be developed or improved.

You just have to figure out what the problems and opportunities are, go directly to where those situations are and really dig into what is happening, and develop and execute a plan to create as much value, from the perspective of the customer, in the most efficient way possible.

Management Improvement Carnival #168

2012-06-01T04:00:00-07:00

By Kevin Meyer

Evolving Excellence is pleased to once again host the Management Improvement Carnival. Blog posts of note from the last couple weeks include:

As noted in the last Carnival, several bloggers including yours truly took an appropriately harsh look at an article in Harvard Business Review titled It's Time to Rethink Continuous Improvement. One of the best responses was by Jon Miller of Gemba Panta Rei with a post titled How is PDCA Inimical to Innovation? "A few simple ways to successfully integrate continuous improvement to innovation are to lay bare our assumptions (visual management), seek out the voice of the customer (management by fact) and learn from experimentation (kaizen)."
Jamie Flinchbaugh has a thought-provoking post asking Are You Working on the Right Problems? Probably not, especially if you're a manager. "The manager’s problems are why those problems exist. The manager’s problems are why we can’t solve those problems faster."
John Hunter's post on Curious Cat titled Customers Are Often Irrational hit home for me today as I was dealing with a doozy of a poster child. I'll spare you the details, but it could be a great case study on how to screw up a very profitable product line. As John noted, "The problem is not in thinking the customers are being irrational for not buying what you are selling. The problem is in thinking the customers will behave rationally. Your theory should not expect rational behavior."
We continue a rough focus on problem-solving with Mark Graban's post on A Hard Habit to Break. We're all busy, so the temptation to quickly jump into "solutions mode" is great - even if most of us know that's wrong. "Immediately jumping into solutions brainstorming can really short circuit good problem solving. We can waste time going down rat holes, discussing ideas that don’t address the root cause and won’t really address the issue we’ve come together to discuss."
Similar to jumping into solutions mode, Matthew May reminds us in a short video that Doing Something Isn't Always Better than Doing Nothing. Or as he says, quoting National Geographic journalist Boyd Matson, "when the hippos charge, stand still."
In a post titled Quality Improvement in Government? Tim McMahon takes on a topic that befuddles many of us in the lean leadership world - there is so much opportunity for improvement and savings in government, it is known how to do it, but it doesn't happen. "Most elected officials and government executives didn't join government to manage. Instead, they are driven by a deep desire to advance a cause, a policy issue or a political agenda."
In More Learning from an Elementary School, Matt Wrye digs into some observations on learning made at his kids' school. As we transition into professional roles, especially in management, we tend to shift our focus onto execution. "When do we lose that learning zone? When do we switch from learning being the most important to execution being the most important and forget all about learning?"
And finally, I can't resist poking at the Facebook debacle by reminding people how prescient, ok at least for a couple weeks, my Evolving Excellence co-blogger Bill Waddell was with Why Facebook is a Sucker's Bet. Bill and I may disagree on some issues - which livens up the blog just a tad (cough, Steve Jobs, cough) - but on this topic we're in complete agreement. Some of us learned a painful lesson with the dot-com bubble of 2000 - business value still all about real customers and real cash flow. Not "$1B for Instagram because it's cool."

Until next time...!

It's About Time

2012-05-30T06:50:24-07:00

by BILL WADDELL

In the manufacturing world most understand that excellence - lean - centers on cycle time. Manufacturers aren't necessarily all doing a good job with it, but they get it. Taiichi Ohno said, "All we are doing is looking at the time line from the moment the customer gives us an order to the point when we collect the cash. And we are reducing that time line by removing the non-value added wastes."

Many in the service world in their eager rush to embrace lean are making the same set of mistakes manufacturing has bumbled through - looking at only a convenient portion of the time line, rather than the whole thing, and merely pushing the waste up or downstream as a result; or defining waste by some traditional accounting measure rather than as the things that are delaying flow through the time line. Those mistakes, as bad as they are in manufacturing, are even worse in services where quite often the customer is actually in the time line, rather than sitting off to the side waiting for a manufactured product to come out of the process.

You tend to see this a lot in health care where people are 'improving' a lot of stuff, but not necessarily the time line. The essence of lean health care is the four hours it takes from the time you limp into the emergency room with a broken ankle until you leave with a cast on your leg; during which you spent five minutes being diagnosed, two minutes on an x-ray machine, a minute for the x-ray to be read; and fifteen minutes having the cast applied with the remaining three hours and seventeen minutes wasted waiting, filling out forms, waiting, being wheeled around, waiting, being wheeled around some more and then waiting - all the while consuming very expensive space filled with very expensive, idle equipment, and wasting the time of some rather high priced hired help. Focus on cutting down the four hours - make customers (patients) much happier, and along the way save a lot of money by wasting a lot less space, technology and labor.

All of this brings me to London, where wasting people's time is an art form. If you are one of these service business in which the customer is actually part and parcel to Ohno's time line, then your customers are your inventory. Having a lot of customers in process is waste - wasting their time and wasting your money. So what can be made of this:

Years ago, very early in my lean education, I heard a very wise manufacturing executive dismiss a proposal to invest in warehouse automation with the observation that, if inventory is waste, then automating a warehouse is nothing more than a waste management system. Seems to me that spending a half million British pounds - almost 800 large - is the same thing. For that kind of money they could get a clown-car full of theory of constraints experts for a month to eliminate the need for the lines - 'queues' in Britspeak.

The folks peddling the queue management stuff tell us "The Tensator Group has installed more than 3,000 In-Queue Merchandising (IQM) systems - our solutions add value to any retail associated environment." Add value for who? Certainly not the customers. Their systems will create "extended shopping time". Who, I wonder, is out looking for "extended shopping time"? Lest anyone be quick to point out that not everyone is a power shopper - that there are many among that other gender who actually enjoy shopping - I would suggest that enjoying shopping and enjoying standing in line are not the same thing.

I'm not picking on the people at Tensator who make the waste management systems. I'm sure they are good people making good products and they are filling a need. No, I am picking a fight with their customers - the "Retail, Airport & Transport, Health & Safety, Finance, Events & Hospitality, and Pubic Sector" people who buy their products. Every one of them would be far better off obsessing with eliminating the need for standing in line than they would spending money on managing - even trying to profit - from it.

The head games retailers play - putting the milk and bread on opposite ends of the store to make you walk from one end to the other in order to induce you to buy something other than what you are shopping for, laying the store out in a manner that forces people into walking miles to accomplish what could be accomplished in yards - is a fool's game. It is practically begging people to shop online, rather than in the store. The Tensator web site shows a simulation of steering people through lines and waiting areas in a bank. That bank might just as well send their customers links to Quicken Loans and Lending Tree - save the cost of the line management system - since their customers will end up at Quicken and Lending Tree anyway.

No matter what the business, it's all about the time line. Ohno didn't add any caveats or exceptions. Contrary to Tensator's assertions, "in queue experience" and "adding value" are mutually exclusive. Tensator is who you call when the Goldratt Institute says they can't help you ... fat chance of that ever happening.

Memorial Day - And a Jolt of Lean from Ulysses S. Grant

2012-05-25T07:16:24-07:00

By Kevin Meyer

This Memorial Day we remember those who gave their lives in defense of our country, a sacrifice that should give pause to all the childish bickering going on in political circles these days. A hat tip to a lean recruiter friend of ours, Keith Syberg, for letting us know of the following passage from The Personal Memoirs of Ulysses S. Grant:

There never was a corps better organized than was the quartermaster’s corp with the Army of the Potomac in 1864. With a wagon-train that would have extended from the Rapidan to Richmond, stretched along in single file and separated as the teams necessarily would be when moving, we could still carry only three days’ forage and about ten to twelve days’ rations, besides a supply of ammunition.

To overcome all difficulties, the chief quartermaster, General Rufus Ingalls, had marked on each wagon the corps badge with the division color and the number of the brigade. At a glance, the particular brigade to which any wagon belonged could be told. The wagons were also marked to note the contents: if ammunition, whether for artillery or infantry; if forage, whether grain or hay; if rations, whether bread, pork, beans, rice, coffee or whatever it might be.

Empty wagons were never allowed to follow the army or stay in camp. As soon as a wagon was empty, it would return to the base of supply for a load of precisely the same article that had been taken from it. Empty trains were obliged to leave the road free for loaded ones. Arriving near the army they would be parked in fields nearest to the brigades they belonged to. Issues, except of ammunition, were made at night in all cases.

The concept of a lean supply chain is apparently nothing new! Have a great, and relaxing, Memorial Day weekend. Don't forget what we're observing.