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.
Michael LaChapelle says
There are huge opportunities to use Lean to go after Overhead and SG&A, as well.
Here’s a case study on using Lean to reduce SG&A:
http://www.guidonps.com/ideas-and-resources/case-studies/other-industries/applying-lean-six-sigma-to-reduce-selling-general-and-administrative-expenses
Jason Morin says
As a manager in third-party logistics, I often see Fortune 500 consumer goods companies erect mammoth distribution centers (+1,000,000 sq. ft) to hold their finished goods inventory. One company consistently averages 4-6 annual turns in their inventory while leading consumer goods companies should be well into double digits or even the teens. As a result, this company continues to build these giant DCs, rather than proactively addressing their inventory issue at an organizational level. It blows my mind the money tied up in inventory, not to mention the tens of millions in warehousing costs to build and operate such massive distribution centers.
Dean Reimer says
Doesn’t make much sense, does it? Focusing such a huge amount of energy on a small slice of the pie. If you visited some auto-related web forums when GM was in its (pre-government involvement) death spiral you would find much of the blame laid at the cost of labor. Yet the data clearly showed that labor was a small chunk of the cost of building a car. For some reason it is much easier to blame the cost of people than it is to look at the rest of an operation.
W. L. Kramer says
Sadly, this is all too true. The explanation I hear most often from senior managers is that labor (by which they mean head count)is the only easily controlled cost in the short run. Materials costs, the thinking goes, are determined by very efficient markets and can only be moderated by buying HUGE quantities to get volume discounts – thereby making the working capital problem worse. Overhead is attacked in terms of trying to reduce indirect labor, but not as vigorously because it includes costs like managers (us).
What disturbs me even more, though, is that companies do not more aggressively attack the lost labor costs due to long setup times, excessive material handling work, unexamined movement waste, and massive process downtime. I have personally seen numerous instances of real productivity being 20% less than it should have been due to unrecorded and unanalyzed process delay. This area alone can yield substantial savings right now!
Tony says
The real way to attack the material costs is through good design – the design phase is where most of the costs are set; beating up suppliers just helps on the margins.
But many companies treat engineers like interchangeable jelly beans. They’re not. It really helps to have the designers close to the factory — how else can they learn how to design for manufacturing ease?
david foster says
Dean Reimer (re GM)…”Yet the data clearly showed that labor was a small chunk of the cost of building a car”
Union-imposed work rules, though, can also strongly impact the other categories of the income statement by inhibiting process redesign and good flow, thereby leading to more work-in-process inventory and less efficient utilization of capital assets.
Bill Waddell says
You’re right, of course, David. Ford is the only American auto maker to figure it out, though. This is preciseily why they have announced that they are not concerned with wage rates in the next negotiations with the UAW – job classifications and work rules are the critical issues. They want to get down to only 2 job classifications precisely so they can address the indirect waste you poiint out.
Stephen Hodgson, CPIM says
I understand the frustration. Most of the time there is never a worry if we have too much of something – it’s when we are missing something that problems get noticed. Why do the managers not pay any attention to the mountains of inventory that are piled up everywhere? Why do they completely ignore inventory turns – not even bothering to figure them out? We will eventually use them is the excuse, but so what?
Instead, the talk is about watching overtime hours or installing a new automated machine to cut people out of the process. And more warehousing space, I don’t want to forget that.
I’m painting with a broad brush – that certainly isn’t the case always and ever.
Thanks to this blog I now hold a copy of JIT IS FLOW beside my Introduction to Materials Management textbook right in my office. Lean never interested me until seeing these posts, now it is like a disease. Not a bad thing for a young professional just starting out…
Keep up the good work!
Bill Waddell says
Thanks for the good words, Stephen. I have found that the disease you caught can’t be cured. It will be yours for life.