In 1996, we hoped that the participants in the extended value stream—the firms stretching all the way from raw materials to the end consumer—were ready to go down a new path beyond meaningless “partnerships” (always fashionable in good times) and margin squeezing (the hallmark of every recession). However, in the giddy period of the New Economy in the late 1990s most firms seemed to focus instead on new information technologies, notably web-based reverse auctions, which were bound to show very limited results.
Reverse auctions always seemed a dubious prospect to us. Unless the customer and the supplier can learn to remove costly waste from their joint value-creating process, there is an inherent limit on the long-term price savings available to the customer. The maximum saving is the amount of margin the supplier can afford to give away over an extended period while still remaining in business. And this is typically a very small number—only a few percent—because the great bulk of the supplier’s price is determined by real costs resulting from the waste in the value stream.
Recently, as customers and suppliers have found the limits of new IT tools and gone through one more recession-driven round of traditional price squeezing, we have introduced a simple mapping tool that can teach the customer and the supplier to see the whole flow of value. This is the extended value stream map that is the logical complement to the facility-level value stream maps popularized by Mike Rother and John Shook in Learning to See, which we described above in our discussion of mapping value streams.
The objective of this tool is not to perform costing studies (although it could be adapted to this task), but instead to raise the shared consciousness of every participant along a given value stream about the performance of the whole stream, the causes of waste, and the best approaches to improvements that can make all participants better off.
By taking a brief walk together, the participants in a shared value stream can quickly determine the Current State and identify the magnitude and sources of the waste, which then can be turned into benefits. For example, on a value stream walk we recently conducted while preparing our workbook Seeing the Whole 9 (similar to dozens of others we have conducted over many years), we found that only 8 of the 73 steps performed to physically transform a product (a windshield wiper and arm for an auto manufacturer) created any value for the end customer (the car buyer). And none of the 25 information processing steps actually created any value. 10 Of the total time involved, only 54 minutes out of the 44 days required to produce the finished product actually created value and none of the 58 days elapsing between placement of an order by a customer and its transmission to the most upstream producer were of any value from the standpoint of the customer (see Figures 15.7 and 15.8 ) .
F IGURE 15.7: C URRENT S TATE E XTENDED V ALUE S TREAM M AP
We also found that demand varied only about 3 percent at the customer end of the value stream but gyrated by 40 percent at the most upstream producer (the raw materials supplier). And as we continued our investigation, we found that defects became 7 times more likely and defective shipments to customers 8 times more likely as we walked back up the stream. In consequence, large inventories were present at many points to buffer the system and protect downstream customers from shortages, and large amounts of rework and expediting occurred at every transition from one firm to the next.
We could also see, however, that all of the wasteful steps and time were absolutely necessary because of the configuration of the value stream and the logic of the shared production process. Perhaps most important, no one looking at their stretch of the value stream alone had much hope of seeing the totality of the waste or of reducing it.
On the basis of our walk it was easy to envision a series of future states the participating firms might create that could make every firm better off. For example, simply agreeing to implement the type of Future State shown in Figure 15.3 within every plant, to introduce flow and pull, should cut throughput time in half and eliminate 25 percent of the wasted steps.
F IGURE 15.8: C URRENT S TATE B OX S CORE
F IGURE 15.9: C URRENT TO F UTURE S TATE 1 B OX S CORE
F IGURE 15.10: F UTURE S TATE 2 E XTENDED V ALUE S TREAM M AP
F IGURE 15.11: C URRENT AND F UTURE S TATE 2 B OX S CORE
F IGURE 15.12: I DEAL S TATE E XTENDED V ALUE S TREAM M AP
A second Future State (see Figures 15.10 and 15.11 ) could introduce leveled pull with frequent replenishment between every firm and facility touching the product. This step could reduce throughput time by another third, eliminate more wasteful steps, and reduce the number of warehouse and cross-dock facilities as well.
Finally, if every feasible step was taken to eliminate handoffs and transport links between the firms and physical operations on the current generation of product, it might be possible to shrink the total lead time from 44 to 2.8 days, which is to say to within the time the customer is willing to wait for the product. If this could be accomplished, the whole value stream could be converted from make-to-forecast to make-to-order, with large cost savings for every firm (see Figures 15.12 and 15.13 ).
And we can even imagine a succeeding Ideal State employing a new generation of product designs and process technologies, so that the manufacturer could produce completed wipers in a single molding step. This would eliminate practically all of the remaining steps and effort and permit production to proceed in line sequence to exactly match the production rate and mix of wipers needed by the final assembler across the road.
Few value streams will ever get this far, but the mapping process itself can at least produce agreement among the value stream partners on the current reality and facilitate achieving one or more future states. If rules can be agreed to on splitting the benefits—and there will probably be no benefits to split if they can’t—this simple mapping process can produce truly meaningful “partnerships” for every value stream, moving a long way toward the Lean Enterprises we described in Chapter 12 .
F IGURE 15.13: C URRENT S TATE TO I DEAL S TATE B OX S CORE
DEVELOP A LEAN GLOBAL STRATEGY
We’ve been amazed in the years since the launch of Lean Thinking that many firms in the manufacturing world have continued to pursue mass production logic with respect to production location. They have disaggregated their value streams, seeking to place each processing step with significant labor content in that global location with the lowest wage costs and seemingly locating the processing steps as far apart as possible. The consequence is that many points are optimized but the whole surely is not.
We recently talked with a household name shoe manufacturer that has moved all of its shoe assembly for products sold in North America to Southeast Asia. This has lowered the labor cost per shoe from the level previously achieved in Mexico, but has also greatly increased the time needed to get products to the customer. The twenty weeks of lead time in the new system effectively make it impossible to reorder during the short selling season of its models. Instead, this firm places all orders with its contract manufacturers on the basis of forecasts and ends up remaindering 40 percent of its shoes in secondary sales channels at very low prices. And this does not count the lost revenues from customers who visited retail stores or the manufacturer’s website and failed to find the models they wanted because they were out of stock.
Similarly, we recently encountered a large components manufacturer that some years ago decided to retain its capital-intensive part fabrication operations in the United States and Canada but moved its labor-intensive assembly operations to northern Mexico. As competitors have duplicated this strategy (moving assembly out of the U.S.) and as Mexican wages have started to rise, the firm is now looking to transfer its assembly operations to China or Vietnam, still shipping parts from the United States. We asked a very simple question: Instead of shipping parts from the U.S. to China and finished products from China to the U.S., with many weeks of cumulative lead time, why not move all of the parts fabrication next to the assembly operation in Mexico so the product can be
ordered and shipped within three days to North American customers?
This mass production logic is also applied to the location of engineering. We recently visited the Mexican engineering center of a well known electronics multinational and found a large team of engineers hard at work on a product to be manufactured in Poland for sale in Europe. We immediately had some simple questions: “Don’t any Polish engineers know anything about electricity? We can understand why you [the multinational] have sought out cheaper engineering resources for your relatively mature product, but why not locate the engineers next to the point of production to gain the many benefits of co-location?”
After reflecting on these experiences—which seem to be typical—we’ve developed a very simple way to think about location for producers currently in high-cost areas. Let’s call it lean math.
• Start with the piece part cost of making your product near your current customers in high-wage countries (the U.S., Western Europe, Japan).
• Compare this number with the piece part cost of making the same item at the global point of lowest factor costs, probably dominated by wage costs. (The low-factor cost location will almost always offer a much lower piece part cost.)
• Add the cost of slow freight to get the product to your customer .
You’ve now done all the math that many purchasing departments seem to perform. Let’s call this mass production math. To get to lean math you need to add some additional costs to piece-part-plus-slow-freight costs to make the calculations more realistic.
• The overhead costs allocated to production in the high-wage location, which usually don’t disappear when production is transferred. Instead, they are reallocated to remaining products, raising their apparent cost.
• The cost of the additional inventory of goods in transit over long distances from the low-wage location to the customer.
• The cost of additional safety stocks to ensure uninterrupted supply.
• The cost of expensive expedited shipments. (You’ll need to be careful here because the plan for the item in question will typically assume that there aren’t any expediting costs, when a bit of casual empiricism will show that there almost always are.)
• The cost of warranty claims if the new facility or supplier has a long learning curve.
• The cost of engineer visits, or resident engineers at the supplier, to get the process right so the product is made to the correct specification with acceptable quality.
• The cost of senior executive visits to set up the operation or to straighten out relationships with managers and suppliers operating in a different business environment. (Note that this may include all manner of payments and considerations, depending on local business practices.)
• The cost of out-of-stocks and lost sales caused by long lead times to obtain the correct specification of the part if demand changes.
• The cost of remaindered goods or of scrapped stocks, ordered to a long-range forecast and never actually needed.
• The potential cost, if you are using a contract manufacturer in the low-cost location, of your supplier soon becoming your competitor.
This is becoming quite a list—and these additional costs are hardly ever visible to the senior executives and purchasing managers who relocate production of an item to a low-wage location based simply on piece-part price plus slow freight. Lean math requires adding three more costs to be complete:
• Currency risks, which can strike quite suddenly when the currency of either the supplying or receiving country shifts.
• Country risks, which can also emerge very suddenly when the shipping country encounters political instabilities or when there is a political reaction in the receiving country as trade deficits and unemployment emerge as political issues .
• Connectivity costs of many sorts in managing product handoffs and information flows in highly complex supply chains across long distances in countries with different business practices.
These latter costs are harder to estimate but are sometimes very large. The only thing a manager can know for sure is that they are very low or zero if products are sourced close to the customer rather than across the globe.
What does lean math usually say about location? We’ve found that most products fit into one of three categories:
• For products where rapid customer response can substantially raise sales and selling prices (probably including the higher-end shoes produced by the firm just mentioned), work hard to conduct every step of the production process as near the customer as possible. In many cases, the full application of lean techniques to production steps that are located immediately adjacent—a process we call value stream compression—can produce an acceptable combination of higher revenues and lower costs in a high labor-cost location.
• For products that are more price-sensitive but where rapid customer response is still important, co-locate all steps in the design and production process—that is, compress the value stream including engineering—at a low labor-cost site within the region of sale. For the U.S. and Canada, this will usually be Mexico; for Western Europe it will be Eastern Europe. By using trucks, which are fast and cheap, rather than boats, which are cheap but slow and often require fast but expensive airfreight backup to deal with inaccurate forecasts, it is still possible to replenish products in two or three days as they are sold or consumed rather than waiting weeks or maintaining large just-incase stocks near the customer. Remember: lean thinkers love trucks (when transport is needed at all), but they try to eliminate boats and planes!
• Finally, for commoditized products that have a fairly high value to weight ratio and where demand can actually be forecast due to stable sales over the long term, co-locate all production steps at the lowest labor-cost point, even outside the region of sale. (The best approach is to compress the value stream to conduct as many steps as possible, including engineering, at the low cost point, requiring only a single transport link to move the finished item from the point of design and manufacture to the market of sale.)
Even when these conditions are met, bear in mind currency risks (because shifts are often quite rapid), country risks (of trade protection in the receiving country and political chaos in the shipping country), and the connectivity costs (ranging from air freight expediting to unplanned engineer visits to the other side of the world to deal with quality issues) that are inherent in managing decompressed value streams. It’s our belief that when all these factors are weighed, this third category is much smaller than most managers currently think .
CONVERT FROM TOP -DOWN LEADERSHIP TO BOTTOM -UP INITIATIVES
As we’ve gained experience in recent years, we’ve become ever more aware that in a truly mature lean business there is a transition from Policy Deployment to Policy Management. 11 This happens when there are value stream managers for every value stream and employees across the enterprise have learned to see. As a result, ideas for further improvements in every value stream continually bubble up to senior management, which needs only reconcile conflicts and make sober judgments on just how many improvement initiatives can be supported at one time.
This happy situation was brought home to us in a conversation with a senior manager at Toyota, in talking about the current state of affairs in the motor industry. He noted that Toyota at this point in its development obtains brilliant results from average managers utilizing brilliant processes, while its competitors often obtain mediocre (or worse) results from brilliant managers utilizing broken processes.
The natural instinct in this situation is to find more brilliant managers; many American firms went down during the bubble economy with only brilliant hands on deck. The correct response is to perfect the process—the value stream—for every value-creating activity and then rejoice in the fact that average people—and this group, if we are honest, includes most of us most of the time—can get brilliant results and get them consistently. A few brilliant process thinkers are still needed, perhaps housed in the Lean Promoti
on Office, to tackle the most difficult problems in perfecting every process as average managers bring these issues to senior management’s attention as part of Policy Management.
The Opportunity Now at Hand
As we’ve noted at a number of points, recessions are precious things because they shake conventional wisdom, even complacent lean wisdom, and motivate mangers to make hard choices. The current era is no exception. We are currently at the point of greatest opportunity during the boom-bust-boom cycle that still plagues market economies. This is because unnecessary investments (and investments in the wrong place) can still be avoided as the economy begins to expand from the trough while the dispiriting job losses of the down cycle are past. But the window of opportunity stays open for only a limited period before tradition reasserts itself and false confidence in a firm’s processes sets in.
The stories in this book are those of firms who were forced to look in the mirror during the recession of 1991 and who found a new and better way of living as lean thinkers during the 1990s. As we’ve seen in this epilogue, they not only did well during the boom but have also prospered in the ensuing recession. The question now is which firms will seize the opportunities of the recession of 2001–03 to become the next wave of lean thinkers pushing the whole economy ahead.
We have all the necessary knowledge. Indeed, we know much more about the lean transformation than we did in the early 1990s. There is, therefore, no excuse for failing to act in this golden moment for lean thinkers.
AFTERWORD
The Lean Network
Our problem in writing this book was never theory. Authors with academic backgrounds will generally have no trouble spinning theories, and this task happily occupied us during the first year of this project (1992–93). But then we needed proof that our theorizing actually works, examples of real managers in real firms who are succeeding by employing ideas similar to ours. This threatened to become a serious problem because we really knew only one industry—automobiles—yet we were determined to apply our ideas to every type of economic activity, including services. It was essential therefore to find chief executives from a wide range of industries in North America, Europe, and Japan who would let us use their experiences, both good and bad, to prove our theories.
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