Our client continues describing how staying close to operations helped with their problem solving (see part 1):

“When we began our lean journey a few weeks ago, we decided to start on the production floor with a specific value stream. We wanted to see results quickly, so we chose a limited scope for our initial efforts: in-house assembly and test operations.

“We started with 5S and then changed the layout to accommodate our plans for flow and pull. Our supervisors did a great job of implementing a simple visual management system so we all know how the schedule is progressing relative to takt time.

“What we didn’t expect were the parts shortages. Our Materials organization just didn’t seem able to deliver parts to support our production schedule.

“After our Gemba Walk and a review of our observations with the management team, we developed a hypothesis for what was causing our parts shortages: a mismatch between the daily pull process we implemented in assembly and our current MRP-based logistics processes.

“While we managed assembly to a level production rate based on customer demand, delivery of parts to assembly was managed by our MRP system – which in turn was driven by a master production schedule that was different than the level production rate set by Assembly. Also, lead times didn’t match the new lean assembly operation on the floor so the timing of parts delivery did not match what was needed on the floor.

“Our team now faced the question: How do we fix this problem? Many in Materials were confident that the MRP system could be adapted to support lean. They wanted to change the Master Production Schedule to match the level production rate in Assembly, while the lead times in the system could be adjusted to match the new lean processes. However, the outside change agent that we were working with, LEAN Affiliates, recommended a different approach: stop using MRP for scheduling delivery of parts and instead use a pull process across the value stream. They described a methodical approach for “uncoupling” MRP so that the ordering and movement of parts is managed as part of an integral pull process along the entire value stream. This made sense to many of us since it eliminated the use of two parts logistics systems – MRP and a pull process – but the effort of uncoupling MRP represented a radically different approach than what we were doing. We worried about the risk of disrupting production and missing customer shipments if anything went wrong.”

[Editor’s note: This story began with a perceived problem with the capacity of the AGV system, but after observing operations for a few hours this management team has discovered an underlying problem: the use of two fundamentally different logistics systems for signaling the delivery of parts.

Next post: Our client decides how to move forward.]

Before the holidays, we talked about staying close to operations, and one specific habit to help do that, The Gemba Walk.

Since then, a client agreed to share his experience with us:

“My staff was reviewing the performance of an automated guided vehicle (AGV) system we implemented earlier in the year. Although initially it reduced the ‘stock to line” delivery time for parts, during the past few months delivery times were creeping back up again. Some thought we needed to increase the system’s capacity by adding a vehicle. But at the same time we knew that our volumes were steady and couldn’t understand the need for more capacity.

“So our Director of Materials and I decided to observe the delivery of parts to one of our lines during one afternoon. We parked ourselves in two different locations for four hours and watched what happened. At the end of the day we listed our most significant observations:

1. Each AGV trip was handling only a fraction of its capacity of parts. Sometimes we would see an AGV pulling only a small box of hardware (fasteners, clips, brackets, etc.)
2. The production lines the AGV system was supporting was down for over an hour because of a parts shortage.
3. While the line was down due to a parts shortage, the AGV system continued to deliver parts to the line (but apparently not the parts that were ‘short’).
4. A team lead (one of many associates who came to us to ask what we were doing) told us that since they implemented their kanban/pull system within their assembly line, the AGV System was not delivering the proper quantity or type of parts to support their schedule.
5. Several of our Associates approached us and expressed how frustrated they are with the continual parts shortages, and the reluctance of Materials to fix the problem.
   
6. There was more WIP than planned in the AGV drop zones for the line. Each drop zone overflowed with approximately twice the WIP they were designed to store.

“We then reviewed these observations with the plant manager, supervisor and team lead to create a hypothesis that would explain these observations.”

[Per our client’s request, we did not divulge the company name on the blog, but they are open to direct conversations about their experiences. Contact us to arrange this.

Next post: Our client develops a hypothesis that explains their observations.]

Mark Graban recently posted about a Fortune Magazine interview with GE’s CEO, Jeff Immelt. While defending GE’s relentless practice of offshore production, Immelt uses two products as examples, jet engines and appliances. Although certainly not Immelt’s point, comparing these two product lines highlights an irony with their supply chains:

- 80% of their jet engine demand is outside the U.S. yet they manufacture in the U.S.

- Much of their appliance business is domestic, yet they manufacture those outside of the U.S.

It’s a funny but sad visual: somewhere in the middle of the ocean the GE appliance ship from China and the GE jet engine ship from the US are passing in the night.

In contrast, the best manufacturing companies set up shop close to their customer base to simplify their supply chain, shorten lead times, and minimize waste (like inventory and transportation).

If this is the case, then why does GE burden itself with these long, costly overseas supply chains?

Maybe GE can’t manufacture jet engines overseas because their overseas operations don’t have the quality capability…

And maybe GE can’t manufacture appliances in the U.S. because their domestic operations are not lean.

Indeed, being competitive with local labor costs is a challenge that the best lean companies can solve. For more about this, see Bill Waddell’s post Josef’s Geography Lesson.

When you boil it all down, the essential element in lean manufacturing success is manufacturing talent. If the folks running manufacturing operations are smart and committed, you’re probably going to do OK. If they’re not, you will fail. Most of the companies I come into contact these days have plenty of commitment and enthusiasm from their manufacturing leadership team, but they are so far off the mark from a knowledge and skills perspective that lean is a pipe dream.

Companies would never dream of hiring someone in Accounting, IT or Engineering unless that person has a college degree and strong experience. Yet they routinely fill just about every operations position from within, putting hard working and dedicated people from the shop floor into positions of supervision, team leadership, planning, scheduling and buying. More often than not, these folks have a high school diploma and an in depth knowledge of how things have always been done in the plant … and nothing more.

Most glaring is the near universal tendency to put such people in planning and scheduling jobs. Lean is all about flow, yet management has so little appreciation for the knowledge and skill required to optimize factory flow that the people responsible are often the least educated, least outside experienced people among the salaried ranks of the company. More often than not, these folks are little more than MRP mechanics, who know how to put data into the system and extract it as needed to push paper onto the factory floor, but wholly ignorant of how the system works, why it does what it does, or how lean principles differ from their current methods.

Before launching a serious lean transformation, I would suggest that the top executive have HR do a little analysis and figure out for each department within the company, what percentage of the staff is degreed and what percentage has significant outside experience in their technical area.

The reason the factory is not a whole lot leaner should be pretty obvious when the exercise is complete. You get what you pay for, and if the company policy is to pay top dollar for highly qualified financial talent, but to run the factory with the cream of the local high school’s graduating class, lean isn’t going to happen in the very near future.

Just in case there is any lingering confusion out there, I thought I’d take a few minutes to make it clear that you cannot deploy a kanban, or pull system, to get parts from China to your factory in the U.S. - at least you can’t do it and make any money at it. The size of the kanban would be astronomical - enough parts to protect a 30-60 day long supply chain tail including a big enough buffer to protect against anything and everything that might happen to cause a fluctuation in demand during that time - and to keep from shutting your plant down, that buffer has to be set at 2-3 sigma, and you can’t afford it.

So if you want to buy parts from China, you have to use MRP or some similar form of push voodoo to bring in what you think you might need in the future. That means you need some sort of MRP type forecasting and master scheduling witchcraft on the front end of the business … and all of that means you are not really lean. You are a traditional manufacturer with some lean looking stuff in the middle of the process.

Lean is not aimed at every kind of waste, or any kind of waste, or whatever management decides to classify as waste. It was designed to support a specific set of seven wastes in the manufacturing process and lean is very effective at attacking those wastes. One of the seven is waste of transport. All of the time material is en route from one place to another with no value being added to it, money is being wasted, quality is being degraded, and customer service is slipping downhill. When you decide to buy major pieces of the product on the other side of the globe, you are making a conscious decision to build a very big chunk of waste smack dab in the middle of the process. You can put all the perfume on that pig you want to, but you cannot make that process lean.

There are two distinct paths in manufacturing: The one that deploys lean tools to attack the seven forms of waste, and the one that deliberately builds waste as a tradeoff in pursuit of cheap labor. The first company is lean; the second can never be lean.

Just thought I’d clear that up.

What do you suppose the cost of a Lego block is when it pops out of an injection molding machine? A penny, maybe? Two at the most. It takes an extraordinary amount of waste for that penny toy to become a premium priced addition to your kid’s toy box.

It will be palletized and un-palletized three or four times, at least. It will move in and out of three massive, automated distribution centers, tracked by two different RFID systems, roll down miles of conveyor, shrink wrapped, un-shrink wrapped and re-shrinkwrapped, scanned into and out of two ERP systems and one MRP system. Since the time to move that plastic block that many times through that many systems across a continent or two is pretty substantial, the fraction of a second it takes to actually make the block has to be planned and scheduled months in advance using globally integrated forecasting technology.

By the time the ‘Global Supply Chain In The Information Age’ folks get done with it, that toy with value measured in pennies has a cost measured in dollars. The Lego company was doing OK until a few years ago. They were under competitive pressure, of course, and they were working on building their market in a lot of innovative ways - some worked and others didn’t. Then something happened that is awfully hard to explain, but the Lego folks swapped ‘nurture the child’ for ‘nurture the semiconductor’ in their corporate culture. Oracle and IBM were very well nurtured, but it seems that just about anyone peddling warehouse, planning or tracking technology got at least a warm hug.

If anyone bothered to map the process a Lego block follows from start to finish, they would have to be insane to miss the reason why Lego found themselves losing money after all of this technology was deployed. It was so ludicrous that at one point, they were making blocks in their factory in Connecticut, packing, palletizing, shrink wrapping and loading it into trailers - then hauling it across the parking lot to their distribution center to undo all of it and put it into warehouse racks. If the product has to go to Walmart or Target - Lego’s largest customers - it is unwrapped and labeled with an RFID tag, then re-wrapped.

The ERP mindset is so ingrained at Lego that their customers had to hack into their system to get what they wanted. Their ‘Lego Factory’ product offered customers a tool to go online and design the structure they wanted to build with Lego blocks, then Lego would convert that into requirements for each little plastic block it took to make it. When customers found they were paying for more blocks than they needed, always having several left over, they hacked into Lego’s system and found that Lego was calculating the block requirements in lot sizes. If the true requirement was for, say 23 pieces, and Lego batched them in lots of 10, the system would calculate demand for 30 then ship and bill that many. Customers found they could go into Lego’s system and figure out the real demand using little more than logic and common sense.

Lurching from one strategic fad to the next, rather than taking a long look at the exorbitant waste in the system, management’s next move was to outsource. The problem, they determined, was high labor cost. People could be had for 20-35% less in the Czech Republic, said the CFO, so off they went. The operation in the U.S. is being closed and that work sent to Juarez, Mexico. It has apparently never occurred to them to simply stop doing much of this non-valued added shuffling of little plastic blocks and save 100% of the labor cost.

Automating a process without first getting the waste out of it simply enables you to waste money at speeds you previously though to be impossible. Outsourcing to get 1/3 off of something you don’t need in the first place is hardly a bargain.

Management at Lego and everywhere else has to have a very clear vision of their value steam from start to finish, and a firm strategy to optimize that value stream. Being driven by labor costs, rather than the critical metric of the ‘Value Added Ratio’ – the time during which the product is having its value increased in the eyes of the customer, as a percentage of the total time – leads to stories like the Lego tale.

Inventory is waste – and inventory management systems are Waste Management Systems. In moving it all to the Czech Republic and Mexico, Lego has simply found cheaper garbage men.