By Kevin Meyer

Over the past several weeks we've penned many posts about manufacturers that have woken up to the hidden costs of offshore manufacturing or outsourcing and have decided to return to America.  By focusing on improving internal efficiencies and recognizing the extra tangible and intangible costs of global supply chains, cash floating on the high seas, communication problems, and long problem recognition and resolution chains they realize they can offset the supposedly "lower cost" of China and elsewhere.  But just when we begin to get a warmer feeling in our heart we get jolted back to the reality that many, if not most, manufacturers just don't get it. 

The latest Manufacturing News has today's jolt of dolt.

If you can't beat China and can't get the U.S. government to understand what you're up against, then you may as well join them. That is what Evergreen Solar has decided to do, shifting production of solar fabrication and assembly from its factory in Devens, Mass., to Wuhan, China. Evergreen Solar CEO Rick Feldt went to Washington, D.C., and met with Energy Secretary Steven Chu and Commerce Secretary Gary Locke. He told them Chinese government policies made U.S. production uncompetitive.

Without an adequate response from the U.S. government to counter competitive forces working against domestic production, "we are going to China as quickly as we can," Feldt told the analysts. "The issue for us is just how long does it take to get there. We've got the China operations underway as we speak." The company expects to spend $50 million this year on its Wuhan, China, facility.

Better call the waaahmulance...  waah waah...

Evergreen Solar's Massachusetts plant is producing panels at $2.05 per watt, down from $2.24 per watt in the third quarter of 2009. But the 100-megawatt Chinese facility will produce panels for $1.25 per watt, going down to $1.00 per watt by the end of 2012.

Yes a tough challenge.  But look at what they've already done.

The company expects to produce 20 to 25 megawatts of solar cells per quarter in China by early 2011. During that time, the company expects to reduce costs at its Devens [Massachusetts USA] facility to about $1.50 per watt "as we transition panel assembly to China," said Feldt.

Not too shabby, although still quite a ways to go.  But what do these guys decide to do?

In response to the Chinese competitive challenge, Evergreen Solar has two options. It can try to counter China's advantage by reducing its costs in Massachusetts as low as possible, or "get to China as fast as we can," said El-Hillow. "We've tossed internally about becoming more aggressive in Washington, trying to get them to understand the situation that we face as a solar manufacturer and leveraging our wafer technology. There's no silver bullet here. It's an incredibly tough situation." Added CEO Feldt: "The issue for us is just how long does it take to get [to China]."

Waaah.... unbelievable.  The magical government solution.  Of course they've tasted the milk already.

In 2007, the company received $23 million in grants from the State of Massachusetts to build its facility on state-owned property in Devens. It also received $17.5 million in low-interest loans along with a 30-year lease on the property.

And then they found a new use for those taxpayer funds.

Evergreen spent $8.5 million in its fourth quarter on the transition of panel assembly operations from Devens, Mass., to China.

I wonder if those taxpayers realize what their investment is doing. 

I also wonder where they'd be if they put half as much time working on internal improvements instead of whining and lobbying our representatives.  And they should wonder why their high tech operation isn't as efficient as the likes of American Apparel, who beats the socks off (literally) of overseas sweatshops while paying 4,000+ people above minimum wage plus health benefits in the low cost nation of Los Angeles.  One of my favorite examples of a company that simply focuses internally, which happens to have just been called a small cap long-term winner by Motley Fool.

Waaaah... waaaah...

Hey Dov, wanna run a solar panel operation?

By Kevin Meyer

Today's Wall Street Journal has an interesting article on how some companies are using meeting rooms at other companies for offsite meetings, instead of the traditional hotel or resort.  The thought is that seeing other companies will foster increased creativity, especially when compared to the oft cold and sterile environment of the local Hilton. 

I agree - my executive staff has been meeting quarterly at a nearby winery.  Contemplating business issues while overlooking vineyards makes it easier to make the tough calls, which are then followed up by some wine-enhanced team re-building.  Important lesson: always anoint a scribe so the memory of all the great decisions persists after the teambuilding.

When Spartan Motors Inc. CEO John Sztykiel met with his executive team this past fall, he drove to a conference room at manufacturer Peckham Inc., 26 miles away. It is an offbeat tactic that the chief executive has devised for saving money and generating new ideas: holding meetings at other companies' offices.

Managers at companies including specialty-vehicle maker Spartan and utility Duke Energy Corp. say the change of scene encourages creativity and lets employees pick up smart ideas from other companies. At some firms, the practice grew out of the recession, but executives plan to keep doing it as the economy improves. It can be thousands of dollars cheaper than conducting off-site meetings at hotels or rented venues.

New ideas and venues are great, right?  Yes, if used correctly - I'll get back to that in a minute.  Here's one thing those executives realize, which ties right into lean:

Mr. Sztykiel held his August strategy meeting at Peckham; it cost him just $87 to feed eight people breakfast and lunch. He has held two more meetings at Peckham since. While there, he toured the manufacturing facility and noticed piles of fabric within walking distance of the forklift truck and the manufacturing area. The fabric got cut within 20 yards of the shelves where it is stored.

That got him thinking about ways to reduce distances at his own business. He is moving materials storage closer to Spartan's manufacturing facility, and is looking for closer suppliers to reduce delivery times.

Mr. Sztykiel was also impressed with one of Peckham's energy-saving initiatives: waterless urinals, which he plans to install at Spartan.

Great ideas.  But as I mentioned a month ago, be careful.

Why?  Two reasons.  The first is that there's a limit to how many new things you can simply add to an organization.  5S?  Sure, let's try it.  Kaizen?  Of course we must have it.  Value stream mapping?  Obviously a requirement, so let's do that too.  But how many organizations take the time to identify the problem they are trying to solve, do a root cause, and determine if that newfangled tool is the right approach?  Practically zilch.

Which brings me to my second reason for failure: not taking the time to figure out exactly how the new tool or practice should integrate into existing systems and cultures.  So first we need to figure out if there's a problem and what a possible solution might be, then we need to ensure that solution is customized.

That's the problem with simply finding and adopting best practices, especially when they are of the "gee whiz" variety.  And now organizations that have successful systems are actually marketing access to those systems, even if they probably have no clue why they work or how they can be applied to other organizations.

Best practices are only "best" if they make sense for your organization, and often they don't.  What is the opportunity or problem to be solved?  How does solving that problem compare with others in terms of prioritization and therefore allocation and timing of resources?  What alternatives to the "best practice" are there, and which is the best match to the problem, organization culture, and other factors?

By Kevin Meyer Today's Wall Street Journal has an interesting article on how some companies are using meeting rooms at other companies for offsite meetings, instead of the traditional hotel or resort. The thought is that seeing other companies will... Kevin Meyer

By Kevin Meyer

Nearly a year ago Bill told you how GM's plan to reduce its dealer network was just a fraction of what needed to be done.  At the time GM had 6,300 dealers selling an average of 468 vehicles each, compared to Toyota which had 1,800 dealers selling an average of 1,250 vehicles each.  GM proposed closing 2,600 dealers which take the average to a still underperforming 797 vehicles each, obviously assuming constant sales.

Well that 2,600 reduction was soon whittled down to 2,000 and now it has been reduced even further.

General Motors Co. is reinstating at least 660 of the more than 2,000 showrooms it had planned to drop, a partial reversal of a consolidation plan that caused pain and fear in cities and towns across the country when first disclosed last year.

Toyota now has 1,452 dealerships in the U.S., each of which last year sold an average of 1,219 vehicles. GM has about 5,500 dealerships and sold 2.1 million vehicles last year, an average of about 376 a store.

Of course we can understand why this happened since GM is now effectively controlled by the government.

Lawmakers had pressured GM on behalf of local businesses, forcing it to first offer arbitration to dismissed dealers. The company last year was bailed out by the U.S. government, which now owns 60%.

Policy trumping good business.  No surprise.  So why is the number of vehicles sold a big deal? The Wall Street Journal describes part of the problem:

In many markets, GM, Chrysler and Ford dealers compete as much or more against other dealers of those companies, and undercut each other on price. After years of losing money, many have been left with old and outmoded facilities, while dealers for companies like Toyota Motor Corp. and Honda Motor Co. have been able to update and expand their showrooms and amenities.

And Bill describes how those dealers then react in order to bring in more money to survive.

I was surprised to learn that the average dealer loses money on a new car sale, but makes a great deal of money selling parts and service.  Maybe you already knew that.  I am sure that this is true for GM dealers much more than for Honda and Toyota dealers simply because the smaller dealer base in the Japanese supply chains sells so many more cars per dealer - so much less fixed cost per car sold. By deploying such an obese dealer network, GM has put the dealers in the service business - with the unintended consequence of making defects the dealer's best friend.

Reducing inventory and reducing cost is good business, which increases the value to the customer.  GM, or GM's nanny, has decided to go in the opposite direction - at a time when customer demand is down no less. 

What's really scary is that the old discontinuity between "sales" and "demand" continues to exist, and wasn't even confronted by the author of the WSJ article.

Reinstating dealers and taking orders to restock their lots could help GM improve its market share as Mr. Whitacre desires, and help the company regain the lead in U.S. vehicle sales.

Restocking lots is simply increasing inventory, not a sale - unless you have screwy accounting like GM which records a sale when a vehicle moves out of the factory, not when a final consumer decides they want to buy it.  It has no impact on market share.  Customer demand is customer demand, regardless of how many vehicles sit waiting for an owner.

Increasing inventory in the face of decreasing demand obviously makes no sense, but remember this is being driven by GM's puppeteers, the same group of jokers that came up with "cash for clunkers"... and we know how financially irresponsible that was:

More importantly, 5 million barrels of oil at $70 per barrel costs about $350 million dollars. So, the government paid $3 billion of our tax dollars to save $350 million.

We spent $8.57 for every dollar we saved.

I'm pretty sure they will do a great job with our health care, though.

Yeah, right.

By Kevin Meyer Nearly a year ago Bill told you how GM's plan to reduce its dealer network was just a fraction of what needed to be done. At the time GM had 6,300 dealers selling an average of 468... Kevin Meyer

Each month new articles, book reviews, and other content are added to the Superfactory website. The new content is featured in the monthly e-newsletter which goes out to 50,000 subscribers worldwide, and we will also post a monthly heads-up on this blog.

New content in March includes:

The featured article is by Bob Emiliani and is titled Putting Lean Into Orbit.  The following is a brief excerpt, and you can read the entire article here.

Last January Jim Womack sent an e-letter to the Lean community titled "Beyond Lean", meaning that it was time for the Lean community to move beyond its benchmark company, Toyota. Perhaps so, but there is still much to learn from them, including how Lean thinking is not actually part of anyone's DNA. Lean leaders can make decisions that are just as dumb as anyone else. While it may be appropriate to move beyond Toyota, we must remain firmly fixed on the "Continuous Improvement" and "Respect for People" principles, practice Lean management in a non-zero-sum manner, and achieve flow in demand-driven buyers' markets for goods and services.

In his e-letter to the Lean community, Jim said:

"Lean methods for product development, fulfillment from order to delivery, supply stream management, customer support, and management of the overall enterprise are now well known and widely accepted in concept. We’ve won the battle of ideas on how to operate and improve processes. But creating management systems and organizations that can practice (not just preach) lean every day year after year turns out to be a lot harder. "

While the last sentence is accurate, I very much disagree that Lean methods are "now well known and widely accepted in concept" and that "we've won the battle of ideas." If that were true - even only in concept - there would be a year of headlines in The Wall Street Journal about the death of conventional management (the editorial page would go berserk); neoclassical economists would torch their shops and take the insurance money; Yasuhiro Monden, Art Byrne, Gary Kaplan, Brian Maskell, and Cliff Ransom would become full-time analysts on CNBC; and every course in business schools worldwide would undergo massive revision.

The featured book this month is The Lean Machine by Dantar Oosterwal.  The following is a brief summary, click here for more information.

There may be no more iconic American brand than Harley-Davidson. But like many storied companies, Harley has had to evolve to stay on top and at times its very existence has been threatened. Practically extinct in the mid-1980's, the company began a miraculous turnaround centered on a product development and manufacturing revolution. With dramatic improvements in efficiency and bottom-line results, Harley returned to dominance. At the core of this incredible story was author Dantar Oosterwal, who brings the transformation of Harley-Davidson to life in "The Lean Machine". Filled with crucial lessons for any product development environment, it's also a great American success story.

Our partner Gemba Academy is celebrating its one year anniversary by running a promotion.  During the month of March the first 500 subscribers to an online training video package will also receive the equivalent DVD package at no additional cost.  As an example, with the Complete Lean Package of 73 video modules this promotion is worth $795!  Learn more here.

We continually update the other major sections of the website, including:

• PowerPoint Presentations: Over 115 downloadable PowerPoint presentations on lean manufacturing, lean leadership, lean industries, quality, lean enterprise, and safety concepts.  Special promotion: purchase a Package or Bundle of presentations and receive the Gemba Academy Lean Starter Package DVD ($97 value) at no cost.
• Factory Toolbox: Almost 300 downloadable forms, procedure templates, assessments, and tools to help you not reinvent the wheel.
• Events Calendar: a listing of lean excellence seminars, workshops, training, and conferences worldwide
• Topic Information: Summaries and resources on over 40 enterprise excellence topics.
• Virtual Factory Tours: Web and streaming video tours of over 100 factories.

For all you LinkedIn junkies, we have created a LinkedIn group for Superfactory, which now has over 3,500 members.  Join the group to  network with other Superfactory enthusiasts and to show our logo on your profile.  If you haven't explored LinkedIn, check it out to see why over 17 million professionals use it for networking.

We are always looking for new articles and other content.  Contact us via the Superfactory website if you would like to contribute to our knowledge base.

Each month new articles, book reviews, and other content are added to the Superfactory website. The new content is featured in the monthly e-newsletter which goes out to 50,000 subscribers worldwide, and we will also post a monthly heads-up on... Kevin Meyer

by BILL WADDELL

The explanation from those on high for throwing American manufacturing - as well as manufacturing in western Europe and Australia - under the bus is the Theory of Comparative Advantage.  Even Barack Obama cited it in his "Economic Report of the President" sent to Congress last month.  The definition of the theory he provided, however, while right down the line consistent with how the economists and academics describe it to everyone these days, is a tad off from how the guy who thought it up described it.

Our President - who most assuredly did not write his report, or probably even read it; that work was left to the big brained economists who are steering the economic ship of state so masterfully for him these days - defined comparative advantage as the idea, "that nations specialize in producing the goods that they can produce cheaply relative to other goods."  David Ricardo, an English guy who actually thought up the theory and wrote about it in a book back in 1817 never used the word "cheap".  He made it pretty clear that the theory was all about productivity.  His big idea was that there is greater economy for everyone by finding the best combination of making stuff here, there and everywhere that creates the greatest overall output of stuff relative to the total labor hours everyone is expending.  He said every country should do what they do best - best meaning most productively - and then swap stuff back and forth, instead of each country trying to do everything.  That way the whole world gets the most stuff for the least work.

The idea that the theory is about productivity, rather than "cheap" is not buried in some obscure passage in the book.  It is front and center - Chapter 1, Section 1, page 1, paragraph 1, sentence 1:

"The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour."  When an economist - or a President - defines the theory as having to do with "cheap" rather than "the quantity of labour" - productivity - it is kind of like a kid doing a book report on Tom Sawyer, and not knowing Tom was an orphan.  Pretty strong evidence he didn't actually read the book.

I suspect what happened is this:

About twenty five years ago, a bunch of Harvard and Yale grads were crying in their single malt scotch at a Wall Street watering hole bemoaning the explosion of Toyota on the economic scene, seeing the future and realizing that it looked pretty grim for Wall Street.  While good old Ford and GM operated wildly out of control with great profits one year and deep losses the next, Toyota was like the proverbial tortoise - making a lot of money but doing it slowly and consistently, growing both the top line and the bottom line every year at a very steady rate.  The thought that everyone might become lean and operate like Toyota was their worst nightmare.  "Toyota stockholders buy and sell their stock every fifteen years," they cried, "compared to every few months for the out of control companies.  How can we make any money when the stock doesn't churn?"   "And what good is inside information about a company that is completely transparent, and whose strategy never changes, having no surprises?"  They looked at lean manufacturing and saw their impending doom - the worst of fates - the possibility that they would actually have to go to work in order to make any money - a fate worse than death itself.

But help was on the horizon.  Not every Harvard and Yale grad went to Wall Street.  A few stayed behind in the ivy covered halls because, darn it, college was just too much fun to leave.  So the boys on the Street called their friends back on campus and asked if they had any good ideas to solve this looming crisis - after all, their old college buddies were the idea men.  And one of them vaguely remembered Ricardo and Comparative Advantage.  He hadn't read it - there was a big polo match that weekend so he just used the Cliff Notes - but it seemed appropriate because what the guys on Wall Street needed was a comparative advantage over lean thinking.

That a comparative advantage was needed was just common sense, so the boys ordered up another round of drinks, started brainstorming and came up with a few common sense thoughts:

Compared to complying with environmental regulations in the United States, there is an advantage to making stuff where they don't care about the environment.

Compared to complying with occupational health and safety regulations, there is an advantage to making stuff where workers can be treated like animals.

Compared to American productivity and wages, there is an advantage to making stuff in countries where the pay is so dismal that it more than makes up for the fact that productivity is much worse.

Compared to the transparency requirements in the United States there is a big advantage to making stuff in countries where no one can know what is really going on.

Compared to being responsible for people being hurt by the products they make, there is an advantage to making stuff in a country where American consumers can't touch them.

Mostly, compared to investors making a lot of money in a long-term secure manner, there is a great big advantage for us on the Street to buying up every small manufacturer we can get our hands on and moving them to such a place that these advantage can be realized, then selling them before the rubes out shopping in Walmart figure out that the products are no good any more.

Best of all, compared to accepting any responsibility for employees, customers, communities, the country or anyone else, there is a huge advantage for us in just grabbing as much cash as we can as fast as we can and buying as many toys as we can.

They scribbled on the back of a linen bar napkin, which they sent off to their buddies back at school to polish up into academic language.  It was subsequently sent off to their old fraternity brothers holding down the top jobs in the White House, Treasury, the SEC and the Fed; and the rest is history.

Now I can't prove it, but I am pretty sure that is how it happened.

The best evidence I can cite is the recent news involving Apple and Steve Jobs.  The richest man from Steve's innovations is not Steve, but a fellow by the name of Terry Tai-Ming Gou, who controls a company called Hon Hai Precision, which owns Foxconn, which is the maker of just about everything Apple - as well as a lot of stuff for Dell, HP, Intel, Play Station and Cisco.  He is the big money maker in the innovation-comparative advantage engine because he is the guy who brings this scotch-induced new theory of comparative advantage to life.  Terry is worth about $5.5 billion has some 450,000 employees - the overwhelming majority of them in places where people have to put up with just about anything Terry tells them to. He rules his comparative advantage empire form a castle in Europe, rather than his flagship 270,000 employee operation in Shenzhen - or Vietnam, Mexico or the other places where he provides a comparative advantage over ethical, decent management.

In recent weeks, Terry's plant in Mexico was lit on fire- some say by disgruntled current employees, Terry says by 30 disgruntled ex-employees - over a brouhaha over late buses and overtime pay.  One disgruntled ex-employee coming back for vengeance is the American way - I can't imagine how you can disgruntle 30 people from a Mexican minimum wage job to the point that they come back en-masse to burn the place down, but that appears to be just another day in the life at Foxconn.

A Reuters photographer was kicked, beaten and dragged  by Foxconn security folks for having the audacity to take a picture of a Foxconn factory from the public street in front of the plant.  And, of course, most folks have heard of the Foxconn employee who either lost or stole a prototype iPhone who made the strange decision to jump from his 12th floor apartment window as he was being searched, interrogated and assaulted by Foxconn security.

Now Apple has released its audit of Foxconn - a litany of acknowledgments of employee abuse, child labor, making folks pay for the privilege of dollar a day jobs and on and on - 17 'core violations' in Terry's factories.  Foxconn has admitted to them, with a 'but hey, we've only been working on these violations since 2006 and we're getting better'. 

On the home front, Steve took a bit of a setback when a federal appeals court ruled that Apple shareholders can refile their lawsuit to get what Steve thinks is so unreasonable - access to the books of the company they own so they can get to the bottom of the  back-dated stock options scheme.

It seems to me that Apple - and many, many others - are living the dream under this new definition of comparative advantage.  The boys on the Street have averted catastrophe, and named Steve (and by proxy his partner Terry) the CEO of the decade for his masterful job of turning their creative economics into a most impressive financial advantage for them compared to managers who engage in constructive work for a living, and do so with integrity, love for their community and their country, and respect for the people who work for them. 

And Barack Obama has educated Congress - and the American people - that this is just how comparative advantage is supposed to work.

by BILL WADDELL The explanation from those on high for throwing American manufacturing - as well as manufacturing in western Europe and Australia - under the bus is the Theory of Comparative Advantage. Even Barack Obama cited it in his... Bill Waddell

By Kevin Meyer

Mike Collins has penned an article in Product Design and Development that does a good job of showing how more and more companies are waking up to the realities of offshore outsourcing... and are returning home.  His factors are right on target, and he cites some real examples.

Supply chain delays:

Jerry Hoopman of Amfor Electronics is a contract manufacturer in Oregon that builds a wide range of cable assemblies for other OEMs. Many of these assemblies are made in China, but Amfor has been having trouble guaranteeing their customers accurate delivery dates because of unforeseen delays in the supply chain.

Quality:

Gregory Price is founder of Oregon Small Wind Energy Association and works with manufacturers of small wind energy systems. He says that many of these small companies have tried to reduce costs by sending parts to Asia. Many orders for key parts in the turbine are either damaged in shipment or do not pass the quality test when they are received. This causes problems for the manufacturer in terms of promised delivery dates and after service problems after the system is installed.

Financial terms:

Four Northern California companies have reshored products from China to Wright Engineered Plastics. The CEO Barbara Roberts says, “Chinese manufacturers won’t ship until the product is completely paid for, and then transportation could add another 30 days or more. That’s a double whammy.”

Supply chain cost:

Trevor Dunthorne, Vice President of Operations for All-Clad Metalcrafters in Canonsville, PA knows a lot about the long supply chains from Asia. All-Clad Metalcrafters manufactures very high-end cookware that Trevor says is the best cookware in the world. The Chinese supplier does a good job of manufacturing the lids. The quality is very high and within the standards of the other cookware. But Trevor was concerned with the very long supply chain and the risks involved. He says, “If you can reduce the length of the supply chain, you can reduce the cost of capital. This frees up cash flow that can be used in the company on other projects.

Intellectual property:

Farouk Shami has built a $1 billion manufacturing company to make hair irons and other handheld appliances. He is moving all of his production from China back to Texas. He cites loss of control over production and distribution as the primary reasons, but he also says, “the company spends $500,000 per month fighting counterfeits, most of which originate in China.”

Innovation speed:

NCR is bringing all of its production of ATM machines back to a facility in Columbus, GA. The senior managers concluded that to really achieve innovation they had to be closer to their innovation center in Duluth — and closer to Universities and vendors. Part of the reason is that they want to be able to customize some products and get to the market quickly.

Once again, if you can get past the barriers of traditional accounting and back into the real world, the only valid reason to move offshore is to get closer to offshore customers.

By Kevin Meyer Mike Collins has penned an article in Product Design and Development that does a good job of showing how more and more companies are waking up to the realities of offshore outsourcing... and are returning home. His... Kevin Meyer

A year ago we partnered in the launch of Gemba Academy.The idea had been fermenting for some time, but it took a while for the technology required to deliver HD-quality online training videos globally to become available. We started simply – 1 course with 12 videos and 0 customers.  After a year we now offer more than 70 videos covering a wide range of topics including 5S, the 7 Wastes, Value Stream Mapping, Quick Changeover, and Practical Problem Solving.  Over 1,000 organizations use the products.

So, to celebrate our 1 year anniversary we’ve decided to run a special promotion. The gist of the promotion is this… anyone that purchases an online subscription to a single course or a package of courses receives the accompanying DVD or DVDs absolutely free.

For example, if someone subscribes to our most popular online offering – The Complete Lean Package - for either 6 months or 1 year they’ll also receive the Complete Lean Package on DVD (an 11 DVD set valued at $795) FREE of charge.  This promotion is effective immediately but is only valid for the first 500 customers or until March 31, 2010 – whichever comes first. 

To learn more please visit Gemba Academy for all the details.

By Kevin Meyer

Grim Reader is always one of my favorite reads as Eric never fails to challenge my intellectual capacity. Of course some of you will claim that’s no major challenge.

A couple weeks ago he started a series that dived into a pet peeve of mine: the inane ability of regulations and policy programs to create layers of unintended consequences. In the past I’ve referred to it as a poking the balloon… push in one place and something will happen elsewhere, often where least expected.

Eric begins with a simple mathematical model to show that conundrum, then eloquently makes the point I’ve long promoted:

A favorite theme of mine is the idea that every organizational regime contains elements of its own destruction, and that no regime is free of this. I believe that this is the fundamental fallacy with the technocratic state and is the analytical blind spot for policy wonks. They seem to believe that any imperfection may be corrected with precise policy adjustments. But at every step, they "discover" new problems.

He provides one real-world example – I’m sure each of us could recall a dozen others.

As part of anti-malarial campaign in the northern states of the island of Borneo in the late 1950's, the World Health Organization sprayed DDT and other insecticides to kill the mosquito vector for malaria. As a consequence of this effort, the incidence of malaria in the region fell dramatically. However, there were two unintended consequences of this action. There was an increase in the rate of decay of the thatched roofs covering the long houses because a moth caterpillar that ingests the thatch avoided the DDT but their parasite, the larvae of a small wasp, did not. Also, the domestic cats roaming through the houses were poisoned by the DDT as a consequence of rubbing against the walls and then licking the insecticide off their fur. In some villages, the loss of cats allowed rats to enter, which raised concerns of rodent-related diseases such as typhus and the plague. To rectify this problem in one remote village, several dozen cats were collected in coastal towns and parachuted by the Royal Air Force in a special container to replace those killed by the insecticides.

Parachuting cats – got to love it. He also tells the mind-blowing story of what happened when the Florida everglades were drained to reduce disease-carrying mosquitoes, which created sugar plantations, which caused sugar prices to dive, and then the really bizarre solution eventually proposed by Clinton and Gore.

The bottom line?

Each displacement to an equilibrium will cause at least one change in the equilibrium. At least one adjustment needs to be made to restore the equilibrium to efficiency. This is Second Best theory at its simplest. However, few analysts go beyond that and recognize that each of the secondary disturbances, the "corrections", will also create disequilibria that must be adjusted with 3rd and 4th order corrections. In their analysis, somehow, the original disturbance -- the market failure -- must be corrected, but the secondary disturbance -- regulation -- is perfect? Maybe in a one or two dimensional model, but the real world is not one or two dimensional.

Yes we’re picking on government here – perhaps because it is simply so easy. But similar circumstances and patterns exist in any organization – any bureaucracy - and yes any political party. How often do we attack a problem by looking at only that problem… without analyzing the root cause and potential peripheral and secondary effects of the proposed solution. Regulation, whether handed down from on high by a government nanny or some corporate suit, is like inspecting in quality. It doesn’t really solve anything. The original process creating the defect is still there and all you’re doing is adding more cost to inspect and find the defect after all the value-added has been sunk into the process. Then propagating secondary and tertiary and so on effects are created by the layers of regulatory band-aids that try to corral the cascading effects.

Unmanageable, unsustainable, and increasingly costly and inefficient. Even today we have some wonks that want to “regulate cost out of the process” in health care or by the nonsense and anti-partner concept of extending payment terms to Net-60 or longer. Good luck with that.

Fix the fundamental original process, don’t poke the balloon.

By Kevin Meyer

After being able to stay grounded the entire month of January, I made up for it in February by being on a plane practically every other day – just a tad busy and hence the lack of substantive posts recently. Although one trip was for a week of R&R on the little tropical isle of Dominica, I already feel the need for another of my famous (or infamous if you ask my wife) last minute jaunts to Kona. At this rate I’ll renew my United 1K status in a couple months, especially after upcoming trips to Japan, China, and Germany. Not necessarily something to be proud of, although it does make travel easier.

But I digress; that has nothing to do with today’s rant. Thanks for your patience.

Most of you know that I’m not exactly a big fan of Harvard’s ivory tower nonsense, and Dan’s post last week was a great example why. However I do subscribe to one of their newsletters that does provide some insight – Negotiation, put out by the Harvard Law School’s Program on Negotiation. There are real world examples, stories, and real Q&A from real readers in the real industry. The focus is… you guessed it… negotiation tactics and methods.

The lead article in their February issue is “Are you asking the right questions?” and provides some simple insight into the raw fundamentals of initial negotiation steps. The very first step?

Negotiators commonly assume that the purpose of querying their counterparts is to find out what they want. When you know what the other side wants, you’ll be able to frame a deal they’ll find acceptable, right? Actually, Bazerman and Malhotra argue, focusing exclusively on what people want can distract you from a more useful goal: finding out why they want it.

Pretty obvious in hindsight, right? But how many of us typically negotiate solely with the exchange of goods and services in mind - without understanding the underlying desires and interests?

Asking “Why?” in addition to “What?” encourages negotiators to reveal the interests behind their positions. By turning a conversation from an exchange of demands to a discussion of interests, you are likely to unearth information that could lead to the discovery of common ground.

Further into the article the author creates an interesting alignment with the classic “five why” method of root cause analysis.

• Instead of asking “Which offer do you like best?” ask “Which offer do you like best, and why?”
• Instead of asking “How can we make this offer more appealing to you?” ask “What are your favorite aspects of this offer, and why?”

Just two of the examples that were cited.

The word “why” is surprisingly powerful – whether you’re diving into the root cause of a manufacturing problem, negotiating a complex deal, or asking your wife for clarification on some strange request. Come to think of it, there might be situations where the best strategy is to simply do and not ask questions.

by BILL WADDELL

I am heading back to the land of kangaroos and koalas soon to partner for a couple of weeks with KAON Consulting and the State of Queensland.  In fact, Kevin and I are looking hard at the entire Pacific Rim, including Australia, New Zealand, Indonesia and Singapore where we are seeing a growing wave of interest in lean thinking.

To get my mind in that particularly unique Australian mode I have spent more time than usual reading the local news and came across a gem of an idea from a small business consultant from New South Wales by the name of Valerie Khoo: Mapping the Customer Journey.  It is a cousin to - but not the same as - value stream mapping and, while Valerie is a small business expert, I see this as even more valuable for a big business.  In my experience, the bigger the company the more arduous the customer journey often is.

The whole idea is to look at your company from the customer's point of view - to flow chart the experience from start to finish.  This is one of those 'why didn't I think of that' ideas.  Lean thinking already centers on going to the gemba to get the factory floor perspective on things, rather than sit in an office and delude yourself into thinking you can get a full understanding from reports and data.  And we are certainly focused on value stream mapping how the process works from a cross-functional, but strictly internal point of view.  This strikes me as a great adjunct to lean when we can layer the customer process over the internal value stream process.

I am not to enamored with her suggestion to use mind-mapping software - I like her 'markers and a flipchart' approach a lot better.  And she is pretty thin on what to do with the information - I think it is a great structure for metrics.  Look at how well each step of the customer journey is performed from the customer's point of view.

Regardless, I believe Valerie is onto something that an be a great addition to the body of lean principles and practices.  I am going to have to start paying more attention to the Aussies.  I am beginning to think that underneath that 'no-worries', 'put another shrimp on the barbie' exterior they are some very clever minds at work.

by BILL WADDELL

Last week Dan posted a piece about some guys who reinvented the lean wheel over on the Harvard Business Review, and dubbed it M4L4M - More For Less For More.  Cute name, huh?  They wrote that M4L4M is "a strategy that places an emphasis on delivering more value for less cost for more people."  I submitted a comment to their post that, strangely enough, three days later they finally published, telling them that:

"a strategy that places an emphasis on delivering more value for less cost for more people" sounds a whole lot like our description of lean from a couple of months back:

"The objective is to continually improve the percentage of money spent on useful endeavors - making sure more of it is gong to things customers perceive to be of value and worth paying for, and less of it to waste."

Now maybe it took so long to post my comment because they are a bunch of wild and crazy guys who have been too busy partying it up all weekend in Cambridge and haven't checked their site; and maybe they have sat on it because they spent the weekend hunkered down with their lawyers worrying about plagiarism charges - not to worry boys, I know that to have stolen the idea you would have had to descend from the rarefied air of Harvard to read common trash like Evolving Excellence, which most certainly has never happened.

The problem is that ideas are worthless if they are not original.  Thinking of things that have already been thought of is pretty much a waste of time, and no one gets rich reinventing wheels, lean or anything else.  Ideas are academia's stock in trade.  Nothing wrong with that - God knows we need all the good ideas we can get - but there is a basic dynamic at play here.

These guys, and most of academia, are a whole lot like Michael Keaton in the hilarious movie, Night Shift. 

"Wanna know why I carry this tape recorder?  To tape things.  See, I'm an idea man, Chuck.  I got ideas coming at me all day.  I couldn't even fight 'em off if I wanted. Wait a second!  Hold the phone! Hold the phone!

What if you mix the mayonnaise in the can, with the tuna fish? Or - hold it Chuck - I got it! Take live tuna fish and feed 'em mayonnaise! Oh, this is great!" 

They are idea men, but the average academic doesn't have the experience and detailed knowledge to take the idea and work it into something useful.  That works out well, because most of us don't have the breadth of knowledge or the time to think of big ideas and grand philosophies.  We stand on the shoulders of the thinkers and philosophers who think of the big things. They conjure up the big idea - then folks like me, Kevin, Dan, and just about all of the Evolving Excellence readers take the idea and mold it, shape it, hammer out the edges, and modify it a bit - often quite a bit - to turn the academic theory into useful application and results.

The problem this arrangement presents for academia is that they stop getting paid after the idea goes into the hands of the practitioners.  The economist David Ricardo of Comparative Advantage fame quoted his French contemporary Jean-Baptiste Say, "The first man who knew how to soften metals by fire, is not the creator of the value which that process adds to the melted metal.  That value is the result of the physical action of fire added to the industry and capital of those who availed themselves of this knowledge."  In other words, an idea or a theory is pretty much useless until someone actually runs with it to make something better. That quote has a lot to say about the folly of building an economy around innovation without manufacturing, but it also puts ideas into perspective.

Lean, or M4L4M or any other theory, only has value when it is put into practice - and then the lion's share of the reward goes to those turned the idea into reality.  Jim Womack makes a little bit of money for the theory of lean, consultants like me then make a little bit of money for working it into a practical form a client company can use, and then the company makes a huge amount of money -as they rightfully should - when they use the ideas and modifications in the real, tangible production of better products at a lower cost. The originators of the idea are left behind in the money making process - they have outlived their usefulness when the idea is made known, because they often cannot contribute to putting the idea into practical form.  So after the book sales drop off and the invitations to run the lecture circuit drop off, the idea man has to go back and think up a whole new idea.  The royalties from yesterday's philosophies are pretty thin.  So the academic comes up with a new idea - drapes a new buzzword over it to stake his claim to its originality - and goes about selling it as the next great thing.

The academic community has largely abandoned lean because it is way beyond theory and, therefore, way beyond their ability to contribute to the detailed molding, twisting, shaping and pounding it into practical form.  They are working on the next big idea, because that is what they do and that is what they get paid to do.  I'm sure it is tragic for them to find that a big idea like M4L4M has already been discovered - and back to the drawing board they must go - but back they will go and the academic idea/buzzword factory will continue full force, and it will be up to the rest of the world to continue as we always have, and cull the few good ideas from the many bad ones and reinventions of old ideas.

by BILL WADDELL

Some day someone will write a book about the thirty year battle between GM and Toyota to be the biggest that, like Otus and Ephialtes of Greek mythology, ended with the two giants killing each other, while the wilier good guys got away.  The Congressional hearings yesterday in which Akio Toyoda was raked over the coals by a gaggle of grandstanding lawyer-politicians - mostly from districts that include competing car company operations, with a heavy bias toward Democrats from Michigan - is little more than theater of the absurd with little bearing on Toyota's problems or its needed corrections.  There is some irony, I suppose, in watching the same jackals who picked apart the carcass of GM circling a wounded Toyota looking for opportunity.  In the long run, however, the government has little to do with the woes of either company.

It is also interesting, but more a distraction than anything worth engaging in, to observe the folks who made a big emotional investment in one of the two companies or the other struggle to continue the fight and assert claims to moral victory.  In Japan a vast conspiracy theory has grown legs, with many believing that Toyota did nothing wrong and that this whole fiasco is a plot between GM and its government owners to destroy Toyota; while the 'I told you so' cries of jubilation pouring out of Michigan are deafening, but pathetic.

The big lesson to be learned is the folly that comes from pursuing the wrong objectives.  Toyota self-destructed as a result of changing their goal from being the best to being the biggest.  GM hung onto brands and acquisitions - refusing to acknowledge failures - for far too long.  Had they scaled back on their own ten or fifteen years ago with a paring knife they most likely would not have had to be scaled back with a government wielded meat cleaver last year.

Tom Johnson from Portland State University, who has always been able to see further down the road than the rest of us, warned years ago of the destruction that inevitably comes from pursuing growth for its own sake.  He pointed out that companies are systems, much like a human being or any other animal.  An ant should not aspire to be the size of an elephant, and people should not set their goal on being as big as they possibly can.  Systems thrive when they are the right size for their environment.  The folks running Toyota should know that the life span of a Sumo wrestler is considerably shorter than that of a healthy person.

Most companies don't understand this, however.  It is only because they are not particularly good at what they do that keeps them from racing down the same path as GM and Toyota.  The fact that they have not died from extreme obesity is not for lack of trying. The sales and marketing effort is usually aimed first and foremost at selling more - who they sell to or what they sell is not important.  The goal is to 'grow the top line', and it is operations's problem to deal with the peaks and valleys of volume and the ensuing capacity over and under utilization that results.  They do not operate as an integrated business - working together to continually find the right level of volume to enable them to best utilize their physical and human resources.

I recently worked with a company that could teach the folks running both Toyota and GM a thing or two on the subject.  This contract manufacturer subjects potential new customers to a ten point assessment prior to quoting on new business with them - and more than half of the potential customers their sales function brings to them fail the test, and these folks refuse to quote their business.  They are selective about who they sell to and are constantly looking for the right volumes and the right fit.  Needless to say, these people are profitable, and growing, but at a slow and steady rate that keeps them strong and healthy.

More and more manufacturers are figuring out that, beyond lean factory techniques lies lean accounting; and they start to use 'Real Numbers' to borrow Jean Cunningham's phrase. The real numbers make clear the need bringing sales and marketing into the lean scheme, using pricing strategically - based on total spending rather than unit standard costs - as the device to continually dial volumes into the right capacity utilization levels, and as the device to make stable employment a weapon rather than a burden.   

The moral of the GM versus Toyota story is that running the business by cutting the sales folks loose to grow by any means - the faster the better - then tasking the rest of the business with following them up the peaks and down into the valleys - is folly.  The objective is to seek the right size for the business you are in, and grow as you can and should, but to do so by adding muscle, not fat.

By Dan Markovitz

In a post guaranteed to get Bill Waddell up on his horse about Ivy League MBA pinheads, the Harvard Business Review blog just published a piece on "More for Less for More." The authors (who don't actually advertise themselves as Harvard MBAs) maintain that we're entering a new age of scarcity -- diminishing availability of natural resources, and increasing frugality of consumers. As a result,

We believe that this new age of scarcity in the face of ever more demanding consumers will require a new strategy for disruptive innovation and growth that we call More for Less for More (M4L4M): a strategy that places an emphasis on delivering more value for less cost for more people.

Hmm...sounds surprisingly like lean, doesn't it? But why use an established and widely accepted term when you can coin a new word that carries a fancy abbreviation (M4L4M)?

Of course, you can't publish something in HBR without either using the word "innovation" or "disruption" (preferably of the creative kind). Kudos to the authors for innovating the use of "disruptive" as an adjective so that they could combine the two words.

What exactly is disruptive about creative value with less cost? The authors explain that

More for More, the current approach taken by most Western firms, charges customers a hefty premium for often over-engineered products. Less for More is China's low-cost strategy of creating stripped down products that cost less and manufacturing them on a large scale for global markets. Unlike these two approaches, M4L4M offers firms a new way to reconcile multiple, seemingly contradictory financial equations: deliver more experiential value to customers while simultaneously reducing the cost and delivering that value to a greater number of people.

Let's leave aside for the moment the claim that "most Western firms" over-engineer their products -- though I would like to see some evidence that my toaster oven or washing machine is over-engineered. Let's also leave aside the claim that China's factories are creating stripped down products for global markets. Last time I checked, there's a huge volume of contract manufacturing from US and other western companies, and those products are far from "stripped down." Check out an iPhone, or virtually any other high-tech consumer electronic.

But what's up with the claim that M4L4M offers firms a "new way" to deliver more value at lower cost. Have the authors never heard of a small company called Toyota? Or any of the other companies around the world that are aggressively pursuing lean?

The authors conclude with the promise of case studies of US companies that are adopting M4L4M. And they promise to

explain how, as a forward-thinking business leader, you can redesign your organization to deliver more value at less cost for more customers.

Sounds like we're on track for another flavor of the month business strategy. There's a new buzzword, an impenetrable abbreviation, the prospect of both innovation and disruption, and most importantly, the promise that all it takes is a forward-thinking CEO to make the change happen. Sign me up!

By BILL WADDELL

Abraham Lincoln talked in parables quite often and one of his favorites was to ask someone, "If you call his tail a leg, how many legs does a dog have?."  The answer, of course, is four.  Calling a tail a leg doesn't make it one.  Same is true with car batteries, it seems.

The folks running Sears have been about three or four steps behind from the get-go on just about everything, including their acquisition of Kmart.  Now it seems they have hired a brand management guy from P&G - the Houdinis of the consumer products world - the masters of illusion over substance.  The folks who built an empire on the principle that what is in the bottle doesn't matter - it is the image you create through advertising that has the real value - convincing you a tail is leg because they call it one.  Only people are onto them.

Sears didn't know the jig was up, however, when they hired a P&G tap dancer by the name of Guenther Trieb "to develop a brand-building factory that grows the business, the brand equity and shareholder value of Craftsman, Kenmore and DieHard."  The idea is to have other stores sell products with the Craftsman, Kenmore and Die Hard brand names, and have Sears cash a commission check on every sale because, after all, the value is in the name, and people are going to scoop up this stuff because of the brand name regardless of whether the goods are a better value than the competing stuff or not.  The soap peddler said, "We believe this will be the next big thing in corporate America."

That's a hoot.

As even the Tribune reporter figured out. "Just how much money Sears can make by selling products that it doesn't manufacture itself is questionable," she wrote.

Walmart has already laughed them out of Bentonville, and apparently just about everyone else has too.  What the boys running Sears didn't think about is that their Die Hard batteries are made by Johnson Controls, and guess who makes Walmart brand batteries:  Yep, Johnson Controls.  The hole in the brand management strategy is pretty plain to see.  Why would anyone want to pay a premium for a Johnson Controls battery just because it says Die Hard on it, enabling Sears to take their brand commission, when they can buy a Johnson Controls batterythat says EverStart (the Walmart brand) without paying a premium to a middle man for nothing but a brand name?

Manufacturers everywhere should take heed.  For years the conventional wisdom has been to avoid trashing your brand by private labeling your product.  If the Acme Manufacturing Company is out there selling their proprietary Acme Widgets, they would not want to dilute the Acme brand name by manufacturing the same thing for Walmart, enabling them to sell WallyWorld Widgets right next to yours.

China has changed all of that.  There are no Chinese brand names to speak of.  Chinese factories - whether they are owned by US companies like Johnson Controls - or by Chinese companies more and more make the same thing for just about anyone who wants to buy them.  That is the hard lesson so many American companies have learned.  You can't get more for your Chinese made product with your hot shot brand on it than the retailer can get by private labeling the same product at a mirror image Chinese plant down the street from yours, or often from the same Chinese plant that is making your product.

The price and the sales of your product are not a function of your brand name - they are a function of the quality, utility and reliability of the product - its value to the consumer.  Make a good product and people will buy it at a fair price - and it doesn't matter much whether they buy it under your name or someone else's.  That is the lesson Johnson Controls learned - no great shakes at lean manufacturing by the way.  But they understand that it doesn't matter whether the battery says Delphi (which they also make), Walmart, or Pep Boys.  They are going to sell batteries or not because they are good or not.

If you make a good product and someone wants to buy it and slap their label on it instead of yours - let 'em have at it.  the only way it will detract from your own brand is if the price you are charging for your own brand isn't worth it - which is going to catch up with you sooner rather than later anyway.  Just ask Guenther over at Sears.

By Kevin Meyer

The last couple years have been tough for many organizations, and for some the downturn is continuing.  How you treat your knowledge assets will be critical when business picks up.

Restructurings, consolidation, salary freezes, a shifting health-care cost burden, furloughs, 401(k) match eliminations...this list, as you know, goes on and on. Did your company cancel this year's Christmas party? These are common responses to our changing corporate landscape. And they can be necessary. Businesses that don't step up and react to reality are unlikely to survive over the long term.

That's one side of the equation - the immediate issue.  But a long-term perspective is critical as well.

My concern is that, cumulatively, these negative actions are tugging at and fraying the delicate bonds of loyalty that tie employees to their employers. I believe it will be the companies that manage to deftly balance the necessary tough competitive actions with genuine compassion for their employees that will win big in the future.

People have long memories. What they don't have right now are a whole lot of career options. And they will judge their employer by how equitably they feel they were treated during the down market. So how exactly do you steer your company through this in a way that won't drive your people into the arms of the first headhunter who calls? Just as vital: How to take the tough steps while energizing your workforce instead of paralyzing them?

One common tactic is "share the pain."

As counterintuitive as it may sound, consider going deeper than you might on staff reductions, rather than nibbling around the edges hoping for a quick market turnaround. Some companies believe in "share the pain" scenarios, where everyone gets to sacrifice equally at the corporate altar. I'm not a fan of such strategies unless they address a short-term crisis in which a company expects to be reducing forces and hiring within the same year. In my view, these practices ensure that 100% of your workforce is demoralized, vs. the 10% to 20% whom you really can't afford in the current climate.

Based on multiple experiences, unfortunately, I agree.  Forcing everyone to reduce hours works for one to three months.  After that morale issues, coupled with the fact that high performers can almost always find a new job even in the worst of economies, begin to take their toll.

And how should leaders act?

There's a strong tendency for executives in tight spots to simply clam up, fearing they don't have the answers people want to hear. To avoid appearing inadequate, they'll issue the occasional all-employee e-mail or canned Webcast. But you'll find that you don't need to have all the answers. You'll discover that the rumor mill has painted the most pessimistic picture imaginable, and you will quickly be able to dispel numerous falsehoods and present a clearer and more optimistic view. These times call for a personal touch. Employees who get to see and hear their leaders are far more likely to buy into a future beyond the crisis.

Another power of a real gemba walk.  Get out and touch the process, challenge the process, teach your team... and talk to them.  Information - solid, open, true information - creates confidence.  And confidence in leadership will help create the high-performing team that is so critical to weather a downturn.