The following is an actual chart from a recent One Day Assessment, showing the distribution of one particular manufacturer's costs. It is not unusual. Guess what management's priority was?
Yep – labor costs. That was their main reason for calling me in. And management had already built one plant in China and was seriously considering moving most or all of this plant there in order to get a handle on that unreasonable Western labor cost.
What is most shocking is how little management knows or concerns itself with materials and supply chain costs – not just at this company, but at most companies. This chart could easily have come from the last twenty – or thirty – companies I have visited. I could show a comparable balance sheet chart for these guys showing how their whopping five or six annual turns resulted in inventory being the single biggest block of non-productive cash. Yet the common thread among so many companies is an appalling lack of supply chain knowledge and focus on the part of senior management.
Another company I visited a couple of months back was turning inventory two and a half times a year – and had made supply chain leadership a part time responsibility of someone in sales and marketing. With little knowledge and less accountability the principle of not being able to sell from an empty wagon was in full force – and senior management had bought into the notion that their industry was unique and such dismal supply chain execution was a necessity in their business. Of course, no one in senior management had ever worked in any other industry and, therefore, had no way of knowing whether their industry was actually so different (it wasn't).
Where did the idea originate that sales, marketing, accounting, engineering, IT and HR all need experienced, degreed professionals, while supply chain is the logical role for all of the good intentioned bright folks in the company with no such credentials? Not to take anything away from the buyers and schedulers in just about every manufacturer with a great attitude and a high school diploma, but how on earth did we arrive at the point at which they biggest element of cost and investment is perceived to be something requiring the least qualifications – and therefore the least compensation – in the organization?
A few months back I came across this story of Chicago based Peerless Industries– folks who make the mounting hardware for the televisions and computer monitors you see up in the air in hospitals and airports. They are an increasingly lean company; and also a company which decided manufacturing in Chicago is a better idea than manufacturing in China. To my point, they are also one of the few companies I have seen led by someone who proudly puts the designation 'CPIM' after his name. Their head honcho, Michael Campagna, has a supply chain background, which seems to me to be one of the best backgrounds for someone to lead a company with a cost and investment structure like the one in the chart above.
CPIM – proof of MRP wizardry– ihardly proves expertise in core lean principles, but it is a great starting point for the knowledge required to optimize flow. At the very least, it is proof that someone understands the importance of managing the supply chain.
Contrary to the myth the most prolific bank robber in history – Willie Sutton – never said he robbed banks because "that's where the money is". He wrote, however, that robbing banks made sense because the secret to financial success is to "go where the money is and go there often". That advice should be taken by the senior management of just about every manufacturing company. You don't have to have APICS certification to run the place, but you have to have a great deal of respect for the importance of managing the supply chain. It is not a job for amateurs, easily left to anyone with a good work ethic and a an encyclopedic knowledge of your company's part numbers. It is serious business. Senior management has to look to supply chain management, and look to it often.
The true lean companies turn inventory faster – and better – than the rest. They outperform the global outsourcers in large part because they use their shorter supply chain to great advantage. It isn't rocket science, but it does require management with enough sense to look at the chart above and realize that controlling the little sliver of cost off to the right is hardly the most important element of success.