Deming

price tag cooking your dog

Sep 17 2012

Deming’s Point 4 of 14 – End the practice of awarding business on the basis of a price tag…

(Picture from TYWKIWDBI)

The complete wording of Deming’s Point 4 is as follows:

“End the practice of awarding business on the basis of a price tag. Instead, minimize total cost. Move toward a single supplier for any one item, on a long-term relationship of loyalty and trust.”

Today, you will encounter no one involved with supply chain management who would argue against the idea of basing purchasing decisions on the total cost of having the item on hand when needed for production and developing collaborative relationships with suppliers. The idea of single-sourcing every item, on the other hand, makes many managers nervous, but, without such a committed relationship, you cannot have information exchange at the depth required for collaboration to pay off.

As of 2012, however, very few companies have followed through on this recommendation. What we have seen instead in the past 20 years instead is “We’ll skip Lean and go straight to China,” based exclusively on temporarily cheap labor, without due consideration to local infrastructure, quality and productivity issues, and logistics. Companies that are “reshoring” after being burned at this now have an opportunity to implement this most specific and least controversial of Deming’s 14 points.

It breaks down into the following specific recommendations on what is now called supply chain management:

  1. End the practice of awarding business on the basis of a price tag.
  2. Minimize total cost.
  3. Move toward a single supplier for any one item.
  4. Develop long-term relationships of loyalty and trust with suppliers.

Stop awarding business on the basis of a price tag

In this area,  companies don’t behave like individuals. Whether you buy food, clothing, household appliances, or the services of a plumber, you don’t systematically choose the lowest price. Like the astronaut on the launch pad, you do not want every part in the rocket to have been made by the lowest bidder. Even if you are hunting for bargains, you also consider quality, delivery, and the availability of support. You willingly pay more for appliances that are reputed for working well, lasting long, operating quietly, match the design of your house, and have spare parts and service readily available.

In principle, a company’s purchasing agents should think the same way. When they don’t, it is because they are evaluated on the prices they are able to negotiate and because they are not familiar with the actual use of the materials or equipment they buy. If you hired a third party to do your shopping, with instructions to find the lowest prices, you are unlikely to be happy with the results or even to same money over time.

Because they don’t use what they buy, purchasers rely on specs to decide whether a supplier’s product meets the company’s needs. As Deming points out, however, conformance to specs is never synonymous with fitness for use, no matter how carefully the specs are written. Specs only work as a one-way filter; if a product is out of spec, you know you can’t use it, but, if it is within specs, it does not guarantee that you can. Juran distinguished between true and substitute characteristics. The true characteristics are what you are really after, like the taste of a cake. Unfortunately, you cannot verify it without eating the cake, so you use substitute characteristics that you can measure, like the cake’s diameter or the sugar content of the ingredients. If they are out of specs, you know there is something wrong with the cake, but they can all be within spec and the cake still taste awful.

Relying on specs in purchasing is therefore taking necessary conditions and treating them as sufficient. But how do you avoid doing this? Deming does not say. I recommend the following:

  1. Avoid perverse incentives. Use metrics for purchasing that do not overemphasize the price.
  2. Implement Lean supply chain management. It is a broader subject than just buying based on price, but it provides a context for a more balanced approach to evaluating suppliers.
  3. Rotate professionals in and out of Purchasing. This means treating purchasing as a skill employees should have rather than a career. If you have people in Purchasing who have previously worked in Production or Engineering, they will have a better understanding of the issues.
  4. Give end users a voice in Purchasing. Purchasing should not have the authority to switch suppliers without the approval of those who consume the materials or use the equipment.

Minimize total cost

For manufacturing, it means considering everything it takes to have good materials within arm’s reach of the production operator for as long as the line is running on this product, as opposed to the price on a purchase order. For equipment, it means looking at the total cost of ownership (TCO), also a term that was introduced after Out of the Crisis came out.

The only issue Deming raises is that of quality, but it is not the only one, particularly when you consider switching from a  supplier located 10 miles from your plant to one that is 6,000 miles and 10 time zones away in an unfamiliar country. You have to consider transportation, longer lead times, communications and travel.

Furthermore, discussing cost and quality in the same breath leads naturally to thinking about what the literature calls “cost of quality.” The literature on quality defines this cost as the sum of the direct costs of failure, appraisal and repair, and omits the impact of quality on sales, as being too “controversial” and difficult to measure. This “cost of quality,” however, is the tip of the iceberg; it grossly underestimates the business consequences of quality problems, as shown, for example by the Firestone tread separation issue in 2000 or Toyota sticky accelerator pedals in 2010. A car maker’s reputation for quality is its crown jewels, and the answer on how much effort it should put into nurturing is is whatever it takes.

While transportation costs are relatively easy to calculate, the cost of expanding lead times from days to weeks or months is, in some cases, much larger than the cost of having inventory in transit. For example, toys sold in the US during each Christmas season are made in China the previous summer, but you cannot tell bestsellers from duds until late in the fall, by which time there is nothing you can do to adjust the supply.

To follow Deming’s recommendation here, you consider not the unit price of the item but all the outflows of funds generated by the decision to buy it for a given supplier for as long as you intend to do it, knowing that this may vary from a few months for fashion-related items to several decades for airplane parts. The question is not the price of one unit but, for example, what it takes to make, say, 1,000 usable units available on your production line every day for the next four years. And you have to write at least a best-case, worst-case, and most likely scenarios of how it may unfold in terms of volumes, quality and delivery performance, and  technical support of the supplier. Each scenario results in cash flow schedules that can be compared.

Such an analysis cannot be done without making assumptions about product life, demand, and supplier capabilities. It is more complex than picking the lowest bidder, but the stakes are high.

Move toward a single supplier for any one item

What happens when your single supplier fails? It happened to Toyota with the Aishin Seiki fire of February, 1997. The plant was Toyota’s single source of proportioning valves for Toyota in Japan. Toyota’s factories shut down within four hours of the fire, the supplier network was mobilized, production was restarted within a week, and was back to full volume in 6 weeks.  In the Japanese press, the fire was initially viewed as a failure of Toyota’s system; by the time it ended, it was a vindication of it.

If you buy thousands of items, even with a single source for each, you will have hundreds of suppliers. If you have a policy of having at least two sources for each item, you will have even more suppliers and more complicated relationships to manage. Deming emphasizes the impact on quality, but it touches in fact every aspect of supplier relations. Juggling multiple suppliers for each item is playing the field; having a single source, a monogamous relationship.

If, for each item, you have a single source for whom you are a major customer, your plan for dealing with emergencies like the Aisin Seiki fire is to rely of the strength of your supplier network to come up with an appropriate response. The Wall Street Journal article about the Aisin Seiki fire in May, 1997 described the response of Toyota suppliers as the manufacturing equivalent of an  Amish barn raising.

Sudden surges in demand are not an issue in car manufacturing, but they are in other industries, like semiconductor production equipment. If you are a machine shop making components for this industry, you may see demand doubling overnight simply because  one semiconductor company placed a big order for machines in a new wafer fab. You know that sudden changes in the economy may cause this order to be cancelled, and you cannot count of other orders filling up you slack capacity once this order is filled. In this case, rather than investing in additional equipment that is unlikely to be permanently needed, suppliers have been known to make second-sourcing agreements with competitors to provide surge capacity. One consequence of such arrangements is that the parts arriving at the customer plant may come from different suppliers. From the customer’s perspective, however, it is still a single-sourcing arrangement,  because the primary supplier remains responsible for quality and delivery.

Develop long-term relationships with suppliers

A six-year contract representing 30% of your sales to be a customer’s sole supplier of a component sets the stage for a different working relationship than a one-year contract representing 10% of your sales, in which you are one of a stable of suppliers among which the customer splits the demand. Exclusive, long-term relationships are clearly a required foundation for the collaboration that the entire literature on supply chain management agrees should take place between suppliers and customers, but generally doesn’t.

“Arms around” is better for both sides than “arm’s length” and adversarial. So why is it so rare, and what can we do to make it more common? The abundant literature on supply chain management fails to see what I think is the elephant in the room: unlike a plant, a supply chain is ruled by the interaction of multiple, independent economic agents. This is discussed in Chapter 19 of Lean Logistics (pp. 341-352). The summary is as follows:

In the lean supply chain, the traditionally adversarial, arm’s length relationship between supplier and customer makes way for a collaborative approach, centered on long-term single-sourcing agreements, and extensive exchanges of business information and technical know-how. This approach increases the total payoff of the relationship, but transitioning to it is difficult because it requires behavior changes on both sides.
Sustaining it over time also requires management to consistently forgo the short-term windfalls that can be reaped through a unilateral return to the adversarial approach. That supplier and customer should collaborate to increase the total payoff does not prevent each one from negotiating aggressively with the other on sharing this payoff.

Once you acknowledge that a collaborative relationship takes a long time to build and are easily destroyed by either side, you can manage it accordingly and give it the attention it requires.

By • Asenta selection, Deming • 6 • Tags: , , ,

Inspection checklist

Sep 12 2012

Deming’s Point 3 of 14 – Cease dependence on inspection to achieve quality…

Deming’s 3rd point is the first to mention quality, and it is specific, even if its implementation is sometimes a tall order. Its complete statement is as follows:

“Cease dependence on inspection to achieve quality. Eliminate the need for massive inspection by building quality into the product in the first place.”

The idea that quality should be built into the design of the products and into the processes to manufacture them has come to be generally accepted in the past 30 years, and implemented in many industries. You never hear anyone arguing against it. At the same time, final inspection and test has never completely disappeared, even in the car industry. Engines, for example, are all tested before moving on to assembly, even at the best manufacturers, and body paint is visually inspected by people.

In the details he gives about this point, Deming acknowledges that there are exceptions where no one knows how to build quality into the process. In particular, he mentions integrated circuits. It is still true in 2012, and the economic importance of this “exception” has grown in the past 30 years. There are also other, older technology products for which there is no alternative to sorting the output. Lead shot, for example, is produced by pouring molten lead into a sieve, collecting the solidified drops, sorting the ones that are sufficiently round based on their ability to roll down chutes, and recycling the others.

Oddly, Deming includes “calculations and other paperwork” in a bank among the activities for which mistakes are “inevitable but intolerable.” Today, an individual using on-line bill-pay to settle a utility bill expects that the exact amounts will be properly debited and credited without human intervention. If, on the other hand, you are occasionally transferring $300K from Russia to the US, you can expect humans to validate the transaction.

At least in Out of the Crisis, Deming does not distinguish between inspection and testing. Inspection is a manual process, subject to human error and to dilution of responsibility when a product is subject to multiple inspections, which is why he describes it as ineffective as a filter for defectives. At the end of their process, however,  integrated circuits are not inspected by humans but tested on automatic test equipment that, if properly calibrated, provides consistent results. The relevance of these results depends on the human process of programming the test equipment; the productivity of test operations, on the sequencing of the tests.

Because inspection and test is perceived as  “non-value added,” it has a bad odor in the Lean community, and is ignored in its literature. Today, however, it is something we have to do, and we might as well do it well. Deming discusses it in Chapter 15 of Out of the Crisis;  I, in Chapter 16 of Lean Assembly .

By • Deming • 6 • Tags: , ,

Philosophy -- Old versus New

Sep 10 2012

Deming’s point 2 of 14: Adopt the new philosophy…

This is the most cryptic of all of Deming’s points:

“Adopt the new philosophy. We are in a new economic age. Western management must awaken to the challenge, must learn their responsibilities, and take on leadership for change.”

This could have been said, with different meanings, at any time in the past 200 years. It could be said today, about a “new philosophy” that would not be the one Deming was referring to 30 years ago.  What was new in 1982 or even 1986 may be long in the tooth in 2012. Also,  is there such a thing as “Western management” as a common approach spanning the Americas and Western Europe? In the elaboration on this point, Deming asserts “We are in a new economic age, created by Japan.”

Deming’s 2nd point could be rephrased as “study and adopt Japanese management,” but it still would not be specific. It certainly made sense for car companies to learn the Toyota Production System, as they eventually more or less did, but Japan is 130 million people and more than 1 millions companies, engaging in all sorts of behaviors, not all of which are worthy of emulation. In addition, explicit references to another nation are counterproductive when you are trying to implement anything, as they instantly elicit the response that “it won’t work here.”

To make his point, Deming dives from the stratosphere of philosophy to the nitty-gritty of train schedules. Japanese trains, today as well as 30 years ago, run fast, frequently, and on time, which certainly enhances your traveling experience. As a train engineer told me in 1977,  “It’s a very interesting country, from a railroad point of view.” When I returned from Japan 18 months later, I brought him a copy of the latest schedule, which was sold at newsstands and looked like a small phone book. 34 years later, I crisscrossed Japan  for a week with tight connections and never missed one. It is radically different from using high-speed trains in Germany (ICE) or France (TGV). The Japanese high-speed trains, the Shinkansen, are no longer the fastest in the world, but what is most remarkable about them is that, if you stand close to the Tokyo-Osaka line, you see trains of 16 carriages roll by at 150 tp 200 mph every few minutes, as shown in Figure 1. By contrast,  TGVs from Paris to Lyon run about once an hour, and often late.

Figure 1. Schedule of Shinkansen departures from Tokyo to Osaka and beyond

And punctuality in public transportation in Japan is not limited to the Shinkansen: if you stand on a country road, with a schedule that calls for a bus to come by at 4:36PM, you see it coming round the bend at 4:35PM.

One good reason to point this out to American managers in the 1980s was that such a quality of service could not be explained by hard work, low wages, or protectionism. It required advanced technology and management, engagement of the work force, and attention to details. Furthermore, from 1964 to 1981, the Shinkansen was the only train of its kind in the world.

While the Shinkansen and its operations are a wonder to behold, it also has characteristics that have made it impossible to sell outside of Japan. It uses a wide gauge and cannot run at reduced speeds on regular tracks like the French TGV or the German ICE, as a result of which the Shinkansen network requires many more specially built bridges and tunnels.

Figure 2. Shinkansen tracks versus regular Japanese tracks

In fact, the only stretch on which traffic is intense enough to run profitably is the original Tokyo-Osaka line, and some lines are known to have been built because a powerful politician wanted his district served. Japan is a place where you find the Shinkansen and many other engineering marvels, but it is not immune to major errors in business planning and has its share of bridges to nowhere. It is not an ideal society, as Deming must have known, but a real, flawed one, comprised of 130 million fallible human beings.

In the US, fear of Japanese competition peaked in the late 1980s, and ebbed in the 1990s when the country entered a long recession that it has yet to overcome. In 2012, the focus of attention is China, not Japan. Not everything about Japan is worth following, and it was a mistake to believe so, but it is also a mistake to go back to ignoring it. In manufacturing, the most advanced concepts in both technology and management are still  found in the best Japanese factories, and the Japanese literature on the subject has no equivalent anywhere else.

But none of this tells us what the “new philosophy” is. By riding trains and visiting factories, you can observe practices, but not their underlying principles.  And you need these principles to develop corresponding practices in other contexts. There isn’t a single such philosophy for the whole of Japan. Instead, each successful organization has its own, which may or may not be explicitly stated, and if stated for internal use, is not necessarily shared with the world. In Out of the Crisis, the 14 points are the closest there is to the statement of a philosophy. Therefore this points essentially says that they the others should be adopted.

By • Deming • 15 • Tags: ,

Gabby Douglas - Constancy of purpose

Sep 7 2012

Deming’s point 1 of 14: Create constancy of purpose…

Deming’s full statement is as follows:

“Create constancy of purpose toward improvement of product and service, with the aim to become competitive, stay in business and to provide jobs.”

We can breaks this down into several components:

  1. You should always be improving what your customers are paying you for, whether goods or services.
  2. You do this in order to:
    • Compete, presumably against anyone worldwide.
    • Stay in business, presumably forever.
    • Provide jobs.

The most surprising piece is the mention of providing jobs as a goal. It is a goal for society at large, but a company creates jobs when it has to, and does not make it a goal. What Deming is really after, however, is not job creation but retention. As he elaborates on this point, he is saying that, instead of worrying exclusively about quarterly profits, companies should have a longer term strategy involving innovation, investments in research and education, and constant improvement in products or services – as well as internal processes – and that no employees should lose their jobs for contributing to improvements.

Most of his readers in the 1980s would have readily agreed on the need for a strategy, but would at best have paid lip service to the need to retain people. 30 years later, the management of most American companies is even less committed to its work force, and practices like rank-and-yank make firings routine, even in the absence of economic need. The few companies that have implemented the Human Resources part of Lean can claim to follow Deming on this point.

Although he does not say it in so many words, it is clear from what he says in other parts of the book, is that “making profits every quarter” is not an appropriate purpose, whatever constancy you pursue it with. Your purpose should be in terms of goods or services provided to a population of customers, with profits a by-product of doing this well.

How do you create constancy of purpose? As a necessary condition, it seems that a purpose would have to be articulated and communicated to all stakeholders, and serve as an overarching hoshin for the organization. This is what today’s Mission Statements are supposed to do.

Some of them don’t live up to this expectation. GM’s mission statement, for example, is as follows:

“G.M. is a multinational corporation engaged in socially responsible operations, worldwide. It is dedicated to provide products and services of such quality that our customers will receive superior value while our employees and business partners will share in our success and our stock-holders will receive a sustained superior return on their investment.”

From it, you would not guess that the company makes cars and trucks. The statement reads like keywords strung together. The only specific thing it says is that the company exists to make money for stock-holders. Ford’s is equally cagey:

“Ford Motor Company is focused on creating a strong business that builds great products that contribute to a better world.”

A cheese maker could say the same.

Schlumberger, on the other hand, describes itself as follows:

“The world’s leading oilfield services company supplying technology, information solutions and integrated project management that optimize reservoir performance for customers working in the oil and gas industry.”

Neither a cheese maker nor a car company could say that. From that one sentence, we know which market the company serves and what it provides. To managers inside the company, it provides a clear direction on what to pursue and what to stay away from.

This is a company founded in 1926 with over $39B in sales in 2011. 25 years ago, it could not have made such a clear statement of purpose, because it had diversified into unrelated areas: besides providing oilfield services, it was making household meters for electricity, water and gas, smart cards, and semiconductor chips. It has since then sold off all these businesses and refocused on the activity for which it had been founded.

Google’s mission statement is also clear and specific:

“Google’s mission is to organize the world‘s information and make it universally accessible and useful.”

Companies diversify to hedge against the instability or cyclicality of their original businesses. A consequence of diversification it that it shifts management’s focus away from products and services. Mission statements then can express no other constant purpose than making money at all times, which Deming brands a deadly disease in Chapter 3 of Out of the Crisis.

Managers believe they can combine unrelated businesses, because they think of management as a generic skill, portable from oilfield services to semiconductors, from sugary water to computers, or from dessert toppings to floor wax. There are individual success stories, like Carlos Ghosn going from tires to cars, or Alan Mulally from airplanes to cars, but it is  a different challenge for a company to take over another in a different business, and failures are common. If a company operates by Deming’s 1st point, it has a purpose that can be stated in a mission statement in terms of products and services. Conglomerates clearly don’t, but then, neither do Korean Chaebols or Japanese Keiretsus, and such structures still include some of the world’s best known companies, like GE, Hyundai, or Mitsubishi.

By • Deming • 5 • Tags: ,

Deming 14 points

Sep 4 2012

Rereading Deming’s 14 points

The richest discussion in this blog to date, on Deming versus Drucker,  is all about point 11.b. from the list of 14 points that is the best known legacy of Deming’s 1986 book  Out of the Crisis. But what are his actual 14 points, and who are they intended for? Let us start with Deming’s own summary, from p. 23 of the book:

  1. Create constancy of purpose toward improvement of product and service, with the aim to become competitive, stay in business and to provide jobs.
  2. Adopt the new philosophy. We are in a new economic age. Western management must awaken to the challenge, must learn their responsibilities, and take on leadership for change.
  3. Cease dependence on inspection to achieve quality. Eliminate the need for massive inspection by building quality into the product in the first place.
  4. End the practice of awarding business on the basis of a price tag. Instead, minimize total cost. Move towards a single supplier for any one item, on a long-term relationship of loyalty and trust.
  5. Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly decrease costs.
  6. Institute training on the job.
  7. Institute leadership (see Point 12 and Ch. 8 of Out of the Crisis). The aim of supervision should be to help people and machines and gadgets do a better job. Supervision of management is in need of overhaul, as well as supervision of production workers.
  8. Drive out fear, so that everyone may work effectively for the company. (See Ch. 3 of Out of the Crisis)
  9. Break down barriers between departments. People in research, design, sales, and production must work as a team, in order to foresee problems of production and usage that may be encountered with the product or service.
  10. Eliminate slogans, exhortations, and targets for the work force asking for zero defects and new levels of productivity. Such exhortations only create adversarial relationships, as the bulk of the causes of low quality and low productivity belong to the system and thus lie beyond the power of the work force.
  11. a. Eliminate work standards (quotas) on the factory floor. Substitute with leadership.
    b. Eliminate management by objective. Eliminate management by numbers and numerical goals. Instead substitute with leadership.
  12. a. Remove barriers that rob the hourly worker of his right to pride of workmanship. The responsibility of supervisors must be changed from sheer numbers to quality.
    b. Remove barriers that rob people in management and in engineering of their right to pride of workmanship. This means, inter alia, abolishment of the annual or merit rating and of management by objectives (See Ch. 3 of Out of the Crisis).
  13. Institute a vigorous program of education and self-improvement.
  14. Put everybody in the company to work to accomplish the transformation. The transformation is everybody’s job.

On the face of it, this is an odd mixture of actionable recommendations — like “a single supplier for any one item” — with generalities like “adopt the new philosophy,” and expressions like “a vigorous program” that don’t meet Deming’s own criteria for an operational definition (See Ch. 9 of Out of the Crisis). As a consequence, the summary is not sufficient to understand what Deming actually meant.

Deming elaborates on each point in the remainder of Ch. 2 but, contrary to what the reader might expect, the whole book is not organized around the 14 points. About 20 years after Deming, in  The Toyota Way, Liker also identified 14 principles, and then devoted a chapter to each, which gives the reader a sense of structure that is missing in Deming’s book.

On the other hand, what comes out of Deming’s book is a sense of urgency. He was in his eighties when he wrote it,  a celebrated figure in Japan but obscure in the US until 1980 when NBC aired its documentary If Japan Can… Why Can’t We?  In the early 1980s, industries like steel, cars, semiconductors, and consumer electronics in the US were facing formidable competition from Japan, but most American managers credited it to long working hours for low wages and unfair trade practices. The idea that there was anything to learn from Japan was a hard sell, and only a few, well-informed individuals like Deming knew that it was the case.

Deming obviously felt he had much to say to American management that was essential to future competitiveness, and little time to say it. He couldn’t afford to sugarcoat his message and didn’t have the leisure to organize it into a neat theory. His readers would just have to handle the truth and organize the parts themselves.

Deming is blunt and direct, and backs up his assertions with examples. He is often prophetic but, in hindsight from 2012, occasionally off the mark. He correctly predicted that Japan would achieve a standard of living on a par with the US and Western Europe, but he perceived the breakup of the AT&T monopoly as “wrecking our system of telephone communication” (p.152), which works pretty well for a wreck.

One criticism I have for all lists of 14 points, whether from Woodrow Wilson, Deming, or Liker, is that they are impossible to remember. They should have boiled their lists down to 7 or even 5 points. I will have more detailed comments on each point in forthcoming posts.

By • Deming • 16 • Tags: , ,

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