Economy of scale is great when you've got it. The problem comes when you try to create it out of thin air. That tunnel visioned pursuit of economies of scale is apparent nowhere more clearly than in freight management. Listen to the wailing and gnashing of teeth that is coming from freight and logistics managers, along with simple minded accountants, at evil Walmart's latest oppressive move to take control of their inbound freight.
"The price cuts Wal-Mart is seeking are twice as much as the cost for transporting goods in some cases, said officials from two suppliers. In two instances, Wal-Mart asked for a 6 percent reduction in the price it pays for products based on its own cost calculation, while suppliers estimated the actual expense was equal to about 3 percent, the people said."
Now I don't know who these particular suppliers are, of course, and maybe they are right – but I doubt it. Peter Drucker in an amazingly forward looking article he wrote way back in 1990 called "The Emerging Theory of Manufacturing" wrote "the new system sees the plant as little more than a wide place in the manufacturing stream". Just how "wide'the plant is depends largely on just how hung up the freight people are on gaining economies of scale from truckload and container load shipments to save a few percent on the material cost. In way too many manufacturers the drive to save pennies from truckload scale sabotages the entire lean effort.
Buy stuff from China – or from two states away for that matter - when you only need a pallet a day of whatever you are buying to meet customer demand. The freight guy, aided and abetted by cost accounting, and measured and given raises and bonuses based on freight cost as a percentage of material cost, raises a ruckus and makes an eloquent case for buying truckloads of the material – a month's worth at a time. So instead of paying 6% for a bunch of LTL or LCL shipments, he pays 3% for truckloads and container loads.
Instead of Drucker's "stream", you end up with a dry creek bed for 3.8 weeks, then a dam burst akin to the Johnstown flood. Floor space is consumed, racks and forklifts are wearing out,material handlers are working overtime, transactions to keep track of it all, cycle counting programs flourish, and each item is handled multiple times – but the freight guy saved his 3%. All that other stuff is just overhead which can't be directly tied to the individual material items – so it isn't entered into the equation. And, of course, not factored into the metric used to measure the freight person's performance.
Then along comes the lean wizard with his tool bag of Toyota tricks – starting with SMED to eliminate batch production and the question begs to be answered – why? Reducing manufacturing batches isn't going to accomplish much since the inventory is pretty much already there. It won't significantly reduce any of those overhead costs. And the leanie urges kanbans and pull systems. Mathematically doable, but it will be a lot like dumping another truckload of dirt on one side of Mount Everest when somebody takes a truckload away from the other side.
So material flows into the factory like a python swallowing a pig, rendering the lean tools (which were all created to facilitate flow) next to useless – and senior management and financial people say they can't see the benefits of lean …… Go figure!
The same dis-economy from freight scale hammers the plant on the other side where sales folks, armed with garbage numbers from accounting, are out offering truckload discounts, and minimum order quantities – selling whole pigs when they pop out of the other end of the python.
Walmart gets the best of all worlds by taking control of the freight – consolidating partial loads into truckloads, as well as eliminating the empty back hauls. It is a strategy that makes sense – for lean suppliers. For them it can be a real win-win, especially if it results in lower prices to end customers and higher volumes for everyone.
Scale is determined by the true demand of end customers. Freight costs are hardly a justification for manipulating it and wreaking havoc on flow from the supply chains through the value streams and out into the distribution channels. The challenge for the freight manager in a lean enterprise is to achieve the best economy within the scale set by demand. That's is why milk runs and cooperative freight arrangements make so much sense.
" 'The vendors might say, 'My other overhead costs will rise,' " said Gallese, who has spent 25 years in the industry. 'And Wal-Mart will say, 'That's your problem.' " Any vendor who would say that does have a problem, and it starts with letting the little freight and accounting tail wag the enterprise dog.