The Detrimental Impact of Cutting Costs at All Costs: A Case of the Goose and the Golden Eggs

Manuficient - Golden Eggs

A factory and all its glory is a business asset. Within a factory, you have many things at play: people, processes, technology, culture, waste, organizations and sub-organizations, hierarchy, opportunities, dreams, breakthroughs, failures, successes, entitlements, disenfranchisement, rewards, consequences – this list can go on forever. Its possible (and no doubt has happened) for a person to live a majority of their life inside the four walls of a factory. The job of a factory is to make stuff at the highest possible quality and lowest possible cost. From a purely economic viewpoint, you pump money into a factory and it pumps valuable product out. The intent is to pump out more value that you are pumping in because this is what generates wealth. This creates a dynamic where wealth can be maximized in two ways: one is to maximize the value being pumped out; the other is to minimize the money being pumped in. Let’s look at the merits of each approach separately:

Maximum Value Creation: Most manufacturing businesses are built on this principle. This is what gets sold and what customers come to know and love about the company. When you see the product on the shelf at Walmart, it says “look at all these fantastic features” and “new and improved”. Entire companies are built on the value that they bring to their customers’ lives. The factory is an asset that creates value for both the company and it’s customers. When a manufacturing company creates a valuable product, it can grow until the market becomes saturated. Up until that point, the company is presumably profitable, products are selling faster than you can make them – let the good times roll. Many people don’t realize that Lean Manufacturing was created as an approach to maximize value creation and strengthen the company’s viability. At some point, the market does become saturated and the company’s growth becomes flat – or even worse, starts trending the other way as many companies saw between 2008 and 2011. People come to miss those good ol’ times when the financial statements always had great news to share. With increasing pressures from all angles to turn those numbers from red back to black, many companies start looking at alternative ways to grow wealth.

Minimum Cost Operations: Cutting costs is another way for a company to grow wealth. A company should not carry costs that are not needed. In fact every company has an obligation to its stakeholders, especially its shareholders and customers to remove unnecessary costs from its business processes. The challenge is removing costs without compromising the value that it has brought to its customers’ lives. Cost cutting should be a careful, continuous, and deliberate process as to continue nurturing and protecting the asset that is the factory. Factories thrive on happy employees, innovation, and streamlined processes. When cost cutting impedes on any one of these critical factors, the factory as an asset becomes malnourished and productivity suffers. When the manufacturing base becomes malnourished, the company overall may soon find itself in trouble. Many companies have gone as far as divesting completely in their in-house manufacturing base and instead opted for outsourcing to China and other countries to take advantage of lower labor costs. This is done at many expenses, including destroying the innovation pipeline, losing core capabilities, shipping jobs abroad, and funneling American dollars to other countries. Unfortunately, its difficult to capture these costs in a financial statement. This approach essentially delegates the company’s most important job, to maximize value creation – in other words, compromising their core capability to create value for their customers.

Growth for a manufacturing business is achieved by maximizing the amount of value being created in its processes. As such, value creation should never be de-prioritized to cutting costs. However, every company has the obligation to continuously reduce operating costs while maximizing value. This is the true and original intent of Lean, Six Sigma, Agile Manufacturing and other continuous improvement initiatives. As the definition of value changes for customers, so should the manufacturing processes. This requires agility and continuous innovation, which every healthy factory needs.

Copyright © Calvin L Williams blog at calvinlwilliams.com [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.

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What is Manufacturing Strategy and Implementation?

Manuficient - Strategy & Implementation

What is Manufacturing Strategy and Implementation?

Manufacturing Strategy

Manufacturing strategy consists of bringing the three primary pillars of manufacturing effectiveness into perfect alignment. The three pillars include organizational leadership, customers (or consumers), and operations execution. Let’s dive into each of these pillars to better assess the role of each in manufacturing strategy:

Organizational Leadership – The role of Organizational Leadership is to first decide who the company will serve and how. There is an art to choosing your customer, which is an optimization of two primary criteria: easy (for the company) to please and happy to pay what the company needs them to pay. Granted your company may not have a tremendous degree of control over either of these levers but getting this as right as possible at the onset primes the company for growth and success. A less than optimal arrangement sets the company up for some painful realities of doing business. Leadership needs to decide if its worth the trouble / effort to keep a segment of customers happy or if it makes sense to simply choose another customer to serve. This has to be weighed along with the company’s mission, financial goals, and other business obligations.

The Customer – The customer’s role in manufacturing strategy is to define when to deliver it, how many to make, what variant to make, and where to put it. Since no one customer can explicitly provide this information for you (unless you only have one customer, ie Walmart), excellent data needs to be collected and used as a guide to understanding these expectations. Customers speak to the manufacturing process in two ways:

1) By pulling their wallets out and making the purchase. This is the single most powerful way that customers communicate. Here is where the data is extremely useful. Ideally, you would be able to capture the entire body of purchasing data within your industry or sector for analysis. This would include not only your own company but your competitors’ data as well. Again, the answers you want to glean from the data are when, how many, what variant, who buys it and where to put it in order to meet or exceed business goals.

2) The other way customers communicate is through feedback. In today’s world, feedback is readily shared through both formal and informal channels. In the information age that we live, there is no excuse for companies to not know, with intimate detail, what their customers are experiencing with the company’s products. This is vital information that needs to be systematically aggregated and used as a critical input to the company-wide continuous improvement processes. The sooner the company can identify patterns in feedback (including feedback for competitors’ products) and get positive changes incorporated into the manufacturing process, the stronger case that company makes to win and keep business.

Operations Execution – Once the customer is chosen and you know how they like it, its the job of Operations to execute to perfection. This means optimal quality, cost, and service levels with perfectly healthy and happy employees on the shop floor doing the work. This means having a robust culture of innovation to not only meet customer expectations but to be able to continuously delight above and beyond the competition. This also means having the agility to change capabilities on a dime to keep pace with changing customer tastes and preferences. And finally, this means leading the way on technological advancement to continuously drive greater agility and perfection in execution.

Implementation

Implementation is the ability to establish absolute alignment between all three pillars mentioned above and taking the steps needed to create perfect synchronization between the three. This is evident when the vision in the C-Suite can be witnessed in action on the plant floor. This is only achievable by establishing and cultivating a culture of problem-solving, and the problems being solved can be tied directly to the results from the aggregated feedback analysis from customers. If the business requires V quantities of W product at X price to be delivered to Y customer by Z time, then perfection means achieving this standard without fail and with outstanding quality. Implementation is engineering the business system to deliver perfection. The implementation process includes three primary steps: assess, design, and test. These steps should be repeated until the business system verifiably delivers to your standard of perfection. Once this is done, you have achieved optimal manufacruring efficiency.

Copyright © Calvin L Williams blog at calvinlwilliams.com [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.