Good afternoon operational improvement afficionados!
This week our managing director Eric Hiller published another piece about operational improvement and how to bring principles from Lean, Six Sigma, and VAVE into the discussion, specifically when engaging executives in an operational transformation.
Please see more here!
So, you had a supply chain, and you thought it was pretty “optimized.”
Yeah, you could improve it here and there, but you had wrung out 95%+ of the addressable waste.
To really make progress, you would need to make MAJOR changes (new suppliers, locations, etc.), but there just is always other stuff to do.
Then Corona happens!!!!
Your tidy and luxurious platform is now burning.
Now you have no choice but to DO SOMETHING different.
Cost was really important and you thought delivery and quality were assured.
Now delivery is a huge problem (maybe quality too.)
What do you do short term? What do you set up in the future to stop this from happening again?
Find out in Eric Hiller’s new article over at the aPriori blog (which Eric originally started in 2007, when it was “CostCents“) It has been a long time since Eric worked at aPriori or wrote for the blog, but he has some advice now.
That is the question our managing partner, Eric A. Hiller is asking, as a new father. Maybe it’s just the sleep deprivation, 
but Eric has analyzed the processes of caring for a newborn and thinks he has found a ways he (and you) can use Lean and Agile to make the chaotic process of fatherhood and motherhood a little more predictable and easy.
IndustryWeek apparently agrees, because they just published his article. Click here to read and see if you agree!
A couple of weeks ago, AJ Sweat posted his article entitled Guess What, Kids? You Don’t Really Want A Job In Manufacturing, which is AJ’s analysis of CNN’s Best Jobs in America. His lament is obvious – apparently manufacturing was not considered in this list, or it was, and it just was not desirable. This article drew me like a moth to a flame for two reasons. First, I love data! Maybe it makes me think of happy days, rushing to the U.S. News rankings as a college student to see how my school fared, but I am really susceptible to a list, even based on pseudo subjective data. Second, it was a about manufacturing,
CNN used the following criteria to judge the desirability of a job.
In AJ’s opinoin, only one job on the CNN list is related to manufacturing. I thought, “surely this cannot be true!” So, I’ve done my own analysis. Here is my criteria. First, I considered manufacturing fairly broadly. If you developed and made a physical product, be it cars, computers, or a cancer drug, you are part of “manufacturing” in my opinion. Second, I consider software development to be a form of design and manufacturing, even though it is not physical. I binned the 100 CNN ‘best’ jobs into four categories:
Here are my results:
Click image to ENLARGE the graph!
I am forced to agree with AJ, sadly. I can only find ONE direct manufacturing job, but I find more in the Product Value Chain than he did. Even adding these, we only have 19 jobs – less than 20% of the CNN Top 100 jobs list.
The should be extremely concerning to the success of America in the future, if it is indeed true that these are the jobs people will be seeking. According to Manufacturing Executive, the 17 million people who are in manufacturing companies in the US produce $1.7 trillion of GDP (11.7%). Manufacturing also funds two-thirds of private research. So 5.6% of the US population produces 11.7% of the output. The people in manufacturing are TWICE as productive as the average person, in terms of the GDP they produce for the US.
I’d like to leave you with Hiller’s three manufacturing maxims, that I hope to explore in further articles:
America needs to internalize these maxims. It needs to stop just talking about helping manufacturing in Presidential commissions and initiatives and start DOING something to realign the focus of America where it should be: design and manufacturing.
One thing that is interesting about Product Cost Management is that people have different thoughts as to what is included in the product cost. Is the product cost the raw material, labor, and direct labor? What about the capital tooling? What about logistics and shipping? Oh, and what about warranty cost or end of life disposal fees for which your firm is responsible?
The short answer is E. All of the above.
In a product and manufacturing firm, everything on the income statement is included in the product cost. However, the income statement does not easily present a direct association between a particular cost with a certain product. Hence, accounting came up the concept of “indirect,” “period,” or “burden” costs. This is accounting speak for, “We’re not really sure how to reliably split this bucket of cost and assign it to an individual product.” Later, academics and consultants made a lot of money, and caused great pain and suffering, with Activity Based Costing. This method was invented to try to reasonably amortize indirect costs in a logical way, so that people could call them direct costs. ABC was a good idea, but in most companies, it was badly implemented in an impractical way that made everyone lose interest in it.
So, what IS in Product Cost? That’s a tricky question that we may be talking about for a long time. However, I would like to address one particular cost that is a perennial burr in my bell bottoms.
Imagine you were selling your car and put a “For Sale” sign on it in the parking lot of your company. Over lunch one day, one of the engineers in your firm walks up to your desk and says he’d like to buy your car. You might say, “Great! I’ll make you a deal. It’s $5,000.” But the engineer looks at you in a confused manner and said, “Oh no, you see, I’m only responsible for the ‘variable’ costs of the car such as gas, insurance, those little pine tree air fresheners, etc. The capital cost of the car is not my problem. It comes out of ‘another budget,’ for which I am not responsible. Can I have the keys now?” You would not give him your car and might actually ask his supervisor to have the guy checked out for behaving in such an irrational way.
That’s a bizarre story, and no engineer that I know would say something like that… unless they are talking about Product Cost. I wish I had a dollar for every time an engineer or his manager told me that capital tooling “didn’t matter because that comes out of a different budget.” Capital Investment and Capital Tooling are real things that cost real money. However, most organizations treat them as if they are totally different than the variable product costs (e.g. raw material, labor, direct overhead, etc.). No, capital is not different, in the sense that the design team’s decisions will determine how much capital is needed, just as their decisions affect variable costs. However, at best, engineering teams will only consider capital as completely separate from the “Piece Part Price.” Many engineering departments do not consider capital in any serious manner at all.
This leads to perverse decision making. Why? Typically, investment in capital will reduce the variable cost of a part, and there are often multiple ways to make a part. For example, let’s say that you are Joey Bag O’Donuts design engineer, who has been given challenging cost targets for Piece Part Cost. You design a part and your purchasing guy comes back with quotes from 3 suppliers:
| Supplier | Piece Part Cost | Capital Tooling Cost |
| Louie’s Laser Library | $15.10 | $1,000 |
| Pete’s Press Emporium | $12.50 | $15,000 |
| Chuck’s Casting Shack | $10.50* | $13,000 |
Click to Enlarge!
* Redesign will be required to use Chuck as a supplier
Of course, capital is “considered” by Joey’s engineering team, but it’s hard to comprehend because it is considered separately from variable costs. Joey would likely choose Pete as a supplier because Pete is cheaper on Piece Part Cost. Joey won’t have to redesign as he would if Chuck was Joey’s supplier. Joey’s Cost Target is based on Piece Part Cost. Sure, his supervisor tells him to “watch the capital,” but the capital budget is this big amorphous pot of money that everyone shares, so Joey is not personally penalized for using it.
However, using a bit of eighth-grade math, we can graph the real cost to the company, including the capital amortized over the life the tool. We see that the right decision for maximum product profit depends on the volume of products we will sell before more capital needs to be spent to refurbish or replace the tool.
The attitue of most product development teams towards capital shows that they implicitly believe capital is LESS important than the Piece Part Cost. However, I would argue that the opposite is true for at least 3 reasons:
These are just three reasons why capital is an expensive cost that should be considered as part of product cost and considered together with piece part cost. There may be others, too, but at the end of the day remember:
Cars are not free and neither is the capital tooling for your product.
This advice may help keep you out of jail and/or the world of unprofitable products.
A friend of mine just sent me this article from the much venerated “The Economist” magazine. Just like the Harvard Business School, the Economist is also interested in manufacturing again. See their article here:
A third industrial revolution | The Economist
That is pretty encouraging, except that I think the reporters that are covering the subject may be a bit too uneducated on manufacturing, or sensationalistic, or optimistic. Consider The Economist’s comment about making a hammer on a 3D printer:
That is why the process is more properly described as additive manufacturing. An American firm, 3D Systems, used one of its 3D printers to print a hammer for your correspondent, complete with a natty wood-effect handle and a metallised head. This is what manufacturing will be like in the future.
Yes, maybe in the DISTANT future. They don’t bother to tell the reader (or maybe they are not aware) that a hammer has a forged head, and I am not aware of any rapid prototyping method that produces objects with the performance of forging. Then we have the problem that one wants the handle of the hammer to be of a different material, so that it is light weight, unlike the head. To be fair, the author does admit:
Additive manufacturing is not yet good enough to make a car or an iPhone, but it is already being used to make specialist parts for cars and customised covers for iPhones. Although it is still a relatively young technology, most people probably already own something that was made with the help of a 3D printer. It might be a pair of shoes, printed in solid form as a design prototype before being produced in bulk.
OK, I agree, 3D printers, an other rapid prototyping are very popular in product development.
Star Trek Replicator… or is it a 3D Printer?
It is just that the article makes it sound like we now have the technology in manufacturing that has made the beloved Star
Trek replicator (a device that on the show that could create food and other objects ex nihilo). Then we have this quote about engineering materials:
The materials being used to make things are changing as well. Carbon-fibre composites, for instance, are replacing steel and aluminium in products ranging from mountain bikes to airliners. And sometimes it will not be machines doing the making, but micro-organisms that have been genetically engineered for the task.
Well, yes, but as I look around my office, my house, and the neighborhood in general, I don’t see a lot of stuff made from these exotic materials. Why? Because THEY ARE REALLY EXPENSIVE! Their quote actually is correct, but they don’t explain that these are high end performance materials and from a Product Cost Management perspective should be avoided if at all possible.
The Economist does a much better job when reporting on the world’s financial situation than manufacturing, BUT I in no way mean to discourage The Economist. Would that they would write more about product development and manufacturing! And, I hope that they are right that we are entering a 3rd Industrial Revolution, especially for American Manufacturing. The author’s last sentence, hopefully, will be the truest:
The wheel is almost coming full circle, turning away from mass manufacturing and towards much more individualised production. And that in turn could bring some of the jobs back to rich countries that long ago lost them to the emerging world.
Amen, I hope so.
Eric
p.s. now that I know the author’s level of manufacturing knowledge, I will see if I can convince him to do an article on my adamantium bonded bones and claws… ok, that was a little mean. Just kidding, Economist — a valiant attempt to promote the new coolness of manufacturing.
I like American Manufacturing. I know that it is critical for strategic preparation for future wars in which we may unfortunately find ourselves. I believe that it is the single most important aspect of the US economy long term. Politicians talk a lot about about it; the media talks a lot about it; middle class America talks about it a lot.
But, you know who doesn’t talk about manufacturing a lot?… business school students and b-school professors. Yes, I know this is broad brush with which I am painting, but I have a lot of ground to cover. I spent two years walking the hallowed halls of Harvard Business School, trying to eschew my engineering roots and tap into the ‘real’ money. I thought that I was going to be a rock’em sock’em investment banker. I was a very attentive student and was fascinated by finance. But, at the end of the day, I could not escape my love of manufacturing, American Manufacturing, a field that adds real value to the world. (In the end, I left HBS to do something I never thought I would: start a company and then another, and the first was all about helping American Manufacturing).
However, I was in the minority. Most of my classmates were going into financial services or consulting. Manufacturing is just not as cool, sexy, or financially lucrative, on average, for an MBA. It may not even salve your soul like non-profits did for some of my HBS classmates who left to do that. For those of you who don’t know, the HBS pedagogical model uses all REQUIRED classes the first year of the two-year program. Former bankers are taking Finance 101 and engineers are sitting with those bankers in TOM – Technology and Operations Management. I admit to having had a bit of schadenfreude watching many of my consulting and finance classmates squirm in TOM, which is regarded by many as the hardest and most confusing class at HBS. But, alas, many of my financial services classmates endured TOM not really caring if they learned anything or got a “3.” It was the last time that they would have to deal with manufacturing in their lives… well, until they started telling CEO’s of public manufacturing companies how to run their businesses 🙂
But, I am excited now, because I just saw this article posted to one of the LinkedIn groups that I belong to:
Just How Important Is Manufacturing? – Willy C. Shih – HBS Faculty – Harvard Business Review
This HBS Prof is talking boldly about US Manufacturing and its importance. I’d like to see more of this. And, I’d like to see career paths for sharp young MBA’s be as lucrative in manufacturing and product companies as they are in consulting and financial services.
Is that possible? Am I just dreaming? I’d like to hear some comments.
