The In-N-Out of Value

by BILL WADDELL

My recent post on In-N-Out Burger drew several good comments – one in particular I believe is well worth the time to follow up.  Brian Buck wrote that companies pour so much money and effort into other, peripheral products rather than focus on their core business because "they do not have as much faith in their core product to explore and develop it to be better value".  He is absolutely right, although I might have said they do not 'appreciate' or 'understand' their core product well enough.  Perhaps lack of faith is what leads to lack of appreciation and understanding.  In any event, they miss the mark.

The best lean companies I have seen relentlessly improve the value of their core product through never ending focus from all levels.  There is a danger in writing work instructions too tightly in a lean environment filled with trained, knowledgeable empowered people.  In such an environment, people are continually tweaking the product and the process by minute degrees, making improvements that are often too small for the cost system or even the quality system to detect, but over time they are closing the gap between the product cost and its value to customers, and closing the gap between what the customer pays and the value received.  In other words, both the company and the customer continually get more and more for their money.

Lack of focus makes this sort of continuous improvement impossible.  Abraham Lincoln was fond of an old Greek adage, "The fox knows many things, the hedgehog one great thing", and pointing out that in a battle between a fox and a hedgehog, despite being slower, less clever, less powerful and with fewer weapons, the singular focus of the hedgehog always prevails.  Companies like In-N-Out Burger, and Toyota, and Wahl Clipper and the rest of the superior performers are a whole lot more like hedgehogs than foxes.

Those companies not only allow people to tweak the machine by a fraction of a degree to see what happens, they encourage it.  At the same time, engineers in back rooms are tweaking things.  And at the same time they are doing kaizen-type activities with varying degrees of formality in which the folks on the shop floor and the engineers are tweaking things together.  Everybody is thinking about tiny improvements all the time, individually and as part of a team, and everybody is encouraged to act.  Companies that make anything and everything cannot achieve the focus necessary to build a company full of cooperative, tweaking experts on much of anything.

This is completely lost when the process is outsourced.  There was a time when I fell for the old manufacturing principle that ECN's were disruptive and major cost drivers, and that measuring and minimizing ECN's was a good thing.  I have learned, however, that this is only true in poorly run companies in which products are designed in a back room, and thrown over the wall at the factory — then an onslaught of ECN's is necessary to fix all of the flaws that the people in the plant could have prevented had they been involved in the design effort.

In good companies – lean companies – there is also an onslaught of ECN's as engineers scramble to keep up with the incessant grind of incremental improvements in product value.  A fatal flaw in the the outsourcing model is that the engineers don't design the product and throw it over the wall – they throw it across the ocean.  Then they get back exactly what they designed, warts and all.  It is nigh impossible to tweak from 8,000 miles away no matter what sort of communications and information age we are in.  And the Chinese folks making things, no matter how well intentioned they may be, rarely have the experience to do much meaningful tweaking and are almost never empowered to do so.

So two companies start at the same place with comparable designs.  One outsources much or maybe all of the manufacturing, and the product and the resulting value proposition remains static.  The second company deploys an vertically integrated lean approach and a slow, grinding, incremental improvement in the value proposition begins.  Eventually the lean company always prevails.

The root cause of the flawed thinking of the outsourcing companies lies in the lack of knowledge and appreciation – faith, according to Brian – in the product.  Burgers are burgers, cars are cars, and clippers are clippers if you only know the product in the abstract.  Companies run by financial people  or professional managers who have never worked with product or the process tend to see the business as numbers.- a set of cost and technical specifications.  The kid fresh from Harvard with an MBA going to work for McKinsey is an outsourcing advocate because he has no feel for the product at all.  It exists as a number on a spreadsheet.

The entrepreneurs who started the furniture companies in North Carolina, the car companies in Detroit, the local restaurant that was bought by the national chain, and just about every company that once was great and now is mediocre – or gone completely – never saw their products and processes as numbers.  They saw them as living things that could always be improved … always capable of rendering greater value.