Mar 6 2016

Investing In The Future | Bodo Wiegand | Wiegand’s Watch

Bodo WiegandBodo Wiegand heads Germany’s Lean Management Institute. In his latest newsletter, on Wiegand’s Watch, he discusses the case of a company he recently visited that is rushing to invest €12.3M ($13.4M) in a new warehouse and new machines but “doesn’t have the resources” to improve current operations.

Here is the full translation of his article, followed by my comments:

“Sometimes I’m stunned. Last week I was at a company that plans to invest €12.3M in the near future, including €4.8M into brick-and-mortar to expansion the warehouse, and €7.5M in new machinery and equipment.

In my usual tour, it turned out – you guessed it – I found:

  • Stocks upon stocks
  • A typical lead time of 3 weeks – but 2 to 3 days in firefighting mode
  • An OEE ranging between 62% and 75%

My verdict: The investment of €4.8M in storage capacity is complete waste. The investment of €7.5M in machinery and equipment could be safely postponed by a year.

The plant manager was aware after our discussion that much more would be gained if the organization improved first, reducing lead times and increasing the OEE of machinery and equipment. His dilemma, however, was that he had no budget and no resources.

My suggestion, then he should cancel the warehouse expansion project with its payback period > 10 years and instead propose as a project: “I will train my people and work with them to optimize the processes, reduce inventories, increase the OEE and start continuous improvement,” with return on investment under one year.

‘Good idea,’ said the plant manager, ‘but staff training and process improvement don’t count here as investment projects. In addition, the training budget is owned by the Human Resource director and process improvements would have to be initiated by the director for organizational development/IT.’

This could make my head explode:

  1. About the bureaucratic turf wars,yes, Human Resources and Organizational Development/IT are important, but where is the value created?
    and
  2. Why are projects such as the introduction of Lean management not considered to be investments?

Executives, directors and owners: you can’t be serious! After one year, you would not recognize your shop. You would be dealing with motivated people who enjoy working with each other and generate sustained improvement ideas that, together would have achieved:

  • A lead time reduction  from three to one week,
  • A reduction in working capital by half,
  • An average OEE above 75%.

No, these are no fantasy figures. They have often been experienced in other companies,  and often proven – and this dilemma is not unique. In another company, the investments [in machinery] were approved without planning or allocating resources for implementation — not to mention people for process optimization and integration in the value stream. Because — as we all know — investments affect the whole value stream.

Why not? “Well, then the payback period would indeed exceed 3 years and the project would not be justified.”

Oh yeah? And what about the working hours of the management team? On the average 10 to 12 hours a day right now, but we can always pile on more work! Which brings us back to the biggest waste: the waste of human capital and of our highly trained specialists and managers who with such working hours and additional work hit a wall. Heart attacks and burnout are preprogrammed.

Another company made a worldwide corporate acquisition, investing tens of millions of Euros. It included a budget for integration. The needs covered by these costs were met as follows: adaptation of the legal framework, creation of a corporate identity, etc. … including new letterhead. All right — all important.

But the organization was left on its own to integrate the employees, create new processes and procedures, develop a common value system, agree on a common vocabulary.  One had 5S; the other, 6S. One had 10 types of waste; the other, 7.  And so on. And the integration takes years, if it succeeds at all – in the sense of no longer being us versus them.

So millions are squandered due to wrong priorities, while  processes and people development are neglected.

But stable processes and a highly skilled staff is the lifeblood of an enterprise, when they live the continuous improvement process daily and over time build a self-learning organization.

Executives, directors and owners – if you believe investments in machinery, equipment, IT and brick-and-mortar are more important than stable processes and motivated employees, if you believe that you can make your business more productive and competitive by investing without considering the processes and the people here, then you don’t really need to ask why not much has changed and you have not become genuinely competitive. despite many investments.

My urgent appeal to you:

  • Invest in stable processes.
  • Invest in sustainable change in the mindset of your leadership and your employees.
  • Invest therefore in your company’s future.

The goal – the self-learning organization with motivated employees, with stable processes and a consequent continuous improvement process – to create value without waste – is worthwhile and pays back quickly.”

Michel Baudin‘s comments: I have encountered similar situations to the ones Wiegand describes. Generally, when you decide to invest in a new production line or a new plant instead of improving the old one, the result is that you replicate all the flaws of the old in the new. A closer look usually reveals that  you can wrangle much, if not all of the capacity increase or quality enhancement you need from the existing plant by changes in layout,  targeted automation retrofits, improvements in the process programs that drive machines, and changes in the way people work. In fact, the opportunity to invest in new equipment is best given to teams that have done this, so that they can apply all the lessons learned along the way.

When you do work on improving manufacturing operations, you are organizing your physical and human resources to respond more accurately to actual demand, in terms of product mix and volume. It makes you unlikely to forget to answer the first question about an investment in a new line: the mix and volume of production it is supposed to handle. The answer should be provided by the management entity that commissions and supervises the project, usually called Steering Committee. Yet, on several occasions, I have had the opportunity to attend steering committee meetings on projects for which machines had already been ordered, where no such direction had been given to the project manager or chief engineer, and where the discussion revealed that there was no consensus among the members.

The procedures for investment approval are intended to protect the company against unwise purchasing decisions, but they sometimes have the opposite effect. A general rule is that you should first buy the minimum equipment configuration with which you can start production, and let the initial ramp-up experience reveal which of the available add-ons or options make sense. Doing this, however, requires budgeting for both the initial acquisition of bare-bones machines and, say, 6 months later, the addition of features.

What I have seen happen, however, is that it is easier for a project team to ask for #120M upfront than to ask for $100M now and another $2M six months after production startup. This causes project teams to overinvest in, for example, automatic storage and retrieval systems for tooling that turn out to be four time larger than necessary, as a result of tools not being used in the way that had been anticipated.

Having continuous improvement formally treated as an “investment” is not necessarily an advantage, because it means more financial scrutiny and slower decisions. Manufacturing managers are often clever in leveraging existing institutions like the training department. For example, they may not have the budget to bring in consultant to coach a team through the first setup time reduction (SMED) project in the company, but they get the training department to pay and bring in the same consultant to teach SMED to the same team as part of continuing education.

The training funds, however, come with strings attached. A course is given in a training center classroom, involves extensive lecturing, and results in certificates being awarded to participants. The mandated approach, however, is not an effective way to develop SMED skills. What works better is to spend at most two hours explaining the purpose and the method and immediately apply it to a reasonably simple yet important machine, so that the team can go through the entire process in weeks and the results make a difference in operations.

If continuous improvement as a whole or individual improvement projects are treated as investments, they must have quantified benefits to weigh against implementation costs, and this places the focus on the easily quantifiable benefits — that is, savings, rather than the real purpose of enhancing competitive strength, which is challenging to quantify at the outset.

I was also struck by Wiegand’s clients using only the payback period to evaluate investments. It is common but old-fashioned. Payback period matters, but you don’t make an investments just to recoup it; you also need to know how much it will bring you over its anticipated life cycle, and this is often measured in terms of internal rate of return (IRR in Excel).

Assume everything you spend to buy machines today and to keep them running for the next 10 years is a loan. Assume also that the additional income generated by these machines over the same period repays this loan. Then the IRR is this loan’s interest rate, and the investment is justified if its IRR exceeds the company’s cost of capital. Many companies set hurdle rates for both payback periods and IRR. For example, the machines must pay for themselves in three years, with an IRR of at least 15%.

In principle, you could perform them on any shop floor improvement project, but it doesn’t mean you should. MBAs are trained to do these calculations ,  but the leaders and participants in shop floor improvement activities are not. Classifying their projects as investments would force them to do it, and to do it convincingly, which would not the best use of their time.

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