I just returned from a get-together with the Honda Suppliers Group where I had the honor of ranting to the assembled gang about accounting, management, MRP and my usual litany of manufacturing travesties; and while I was there I had the opportunity to see a number of their "Lean Showcase" presentations. A Lean Showcase is a short dog and pony show a supplier puts on to highlight their lean accomplishments since the last session. By far, the most impressive was a half hour or so spiel by an engineering senorita from a Methode plant in Reynosa, Mexico. She and the rest of the folks running the plant are doing just about all the right things except for one that they are powerless to correct – their very existence is a gross contributor to one of the core 7 wastes: The waste of transport. Making electrical and electronic components in Mexico then shipping them to Ohio pours a lot of money down the drain and ties up a lot of inventory.
A guy named Michael Stolarczyk writes a pretty good logistics blog – as logistics blogs go, anyway – and while he is a tad late to the lean accounting party, his article on logistics costs is a good one. The only problem with the article, his blog and the logistics community in general is that they never get around to challenging the basic problem with the Methode plant in Reynosa – why manufacture thousands of miles away from the customer to begin with?
Instead of pondering the best way to get cost visibility in the supply chain, why not simply chop the supply chain by 90% and not worry about it? The starting assumption with the big systems crowd is that making stuff in China to sell in the U.S. or Europe makes financial sense. With that as a given, the need to have sophisticated tracking systems jumps to the top of the priority list.
In one of his blog posts, Stolarczyk cites as an example: "A typical apparel company, for example, might source fabric from China, manufacture garments in Malaysia, send them to Italy for custom design work, then ship final products to a 3PL warehouse in the United States for delivery to major department stores around the country."
Given that scenario, he explains that "sophisticated logistics technology" is not a luxury, but a necessity. It seems to me that, if that scenario is real, sophisticated logistics technology is throwing away good money after bad. The management of any outfit that thinks a China to Malaysia to Italy to the United States flow for a yard of cloth is cost efficient is certifiably insane. They don’t need a sophisticated logistics system or better accounting – they need a basic lesson in common sense, or psychiatric help, or both.
Stolarczyk is absolutely correct in urging the need for better financial understanding of logistics costs, but the opening principle for optimizing logistics should be a clear understanding that logistics is 100% waste and the best way to optimize logistics is to eliminate it. Companies that do not understand the cost of logistics, as Stolarczyk eloquently explains, compounded by ignorance with manufacturing accounting tunnel visioned on labor cost, do incredibly stupid things – like sending a shirt across four countries in three continents in order to save a dollar in direct labor.
The cost of logistics is an unavoidable fact of economic life – but only because the raw material needed to make something is not always near the customer. If someone in the Arizona desert wants an oak desk, the oak is going to have to be hauled in because oak trees are hard to come by amid the cactus. Any logistics expense beyond that, however, is inherently wasteful. Hauling the oak from the eastern US to China to cut it up and slap it together in the shape of a desk, then hauling it back to Arizona, and thinking that is good economics, is a tribute to moronic accounting.
Lean manufacturing is regional, or local, manufacturing. There is a very good reason why Pella operates regional factories, rather than one massive plant in Pella, Iowa or Ningbo, China. Hauling raw material in bulk is always cheaper than shipping finished goods. So they pay to haul the stuff it takes to make a great window to the the neighborhood where people want to buy windows. Then they pay very little to get the window from their plant to the customer.
My hat is off to the creative and innovative hard working folks in Reynosa who are doing everything possible to be as lean a plant as you’ll find on this earth. What Methode ought to do to assure their success is to process the immigration paperwork and move the whole crowd up to Ohio. If the Methode folks can’t see the inevitable financial boom such a move would generate, they need to get themselves a new accounting system.