Management

Aug 17 2012

Decisions about Making Decisions |IndustryWeek

See on Scoop.it – lean manufacturing

Good points. On the issue of delegation, I apply the “sleep-at-night” test. You can delegate the authority to make a decision, but not the responsibility. Can you sleep at night knowing that you will be accountable for a decision that you let another person make? If you can’t, stay in the loop. Once you trust the person, get out of the way.

See on www.industryweek.com

By • Press clippings • 2 • Tags: ,

Microsoft's lost decade

Aug 14 2012

Metrics in Lean – Alternatives to Rank-and-Yank in Evaluating People

The July, 2012 edition of Vanity Fair had a cover story about Microsoft and the damage caused to the company by its stack ranking system, also known as rank-and-yank. This story caused a flurry of responses in the press, including an article in Forbes defending the practice. The idea is not just that employees should be evaluated individually and ranked, but that the bottom few performers should be mercilessly culled from the work force, thus bringing up the overall level, tightening the performance range, and motivating survivors for the next round. This assumes that the performance of employees can meaningfully be reduced to a single number, and that living in permanent fear of losing your livelihood is the best motivation for improvement.

According to another Forbes article, GE, the company that championed Rank-and-Yank in the 1980s, abandoned it in 2005. Another once celebrated showcase of this method is the notorious Enron, and now Microsoft is under fire because of it.  Yet, according to the same article, the practice is now widespread among large American corporations, hidden under a variety of names. But where is the evidence that it actually works in the long term?

Continue reading…

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The Outstanding Organization

Aug 13 2012

Karen Martin’s The Outstanding Organization

I posted the following as a four-star review on Amazon:

Karen Martin has been a consultant on performance improvement in office, service and knowledge work environment for almost 20 years, with prior experience in health care management. She knows the subject of outstanding organizations in this domain, and her recommendations on it are worth reading. I did not find myself agreeing with all her prescriptions, but my own experience is primarily in the different field of Manufacturing. Yet I picked up several ideas from her book that I intend to use, from the basic clarity-focus-discipline-engagement framework to details like the percentage complete and accurate (%C&A)  as a clerical equivalent of first-pass yield in Manufacturing, or  the idea of pairing people on tasks.

The book’s central idea is that the key to removing the friction and chaos found in the daily operations of most organization is to (1) pursue clarity in internal communications, (2) focus on a small number of topics to reduce the time members spend switching between projects and give teams a chance to finish what they start, (3) have the discipline to keep practicing what makes it function better, and (4) engage members so that they identify their own goals with those of the organization.

That these four characteristics are necessary for an organization to be outstanding is without question, and it is also clear that most business organizations lack them, but are they sufficient? We need to keep in mind that they are about the how and not the what. Tom de Marco had imagined a service called the Astro-Pony Tout Sheet, to predict the performance of race horses from their astrological signs. It is a clear objective, and you could assemble a focused team, disciplined and engaged in the task of providing this service. But it wouldn’t work no matter what they did.

On clarity, I agree with the author that calling problems “opportunities” just creates confusion. I think it is just a case of a metaphor taken farther than it was intended. If you say “problems are opportunities,” it is just short for ”problems give you the opportunity to grow professionally by solving them.”  It does not mean that you should substitute the word “opportunity” for every occurrence of the word “problem.”

On the other hand, I can’t follow the author when she equates solution with countermeasure. In manufacturing quality, for example, there is a sharp distinction between the two. If you discover that you have shipped a defective product, first you put in place a countermeasure to prevent further defectives from escaping, and then you identify the root cause. Removing the root cause solves the problem, and then you dismantle the countermeasure.

What she emphasizes the most on clarity is seeking and telling the unvarnished truth. In running an improvement program, it clearly beats trying to deceive the people you want to engage, but what about company secrets? I don’t think the author meant to suggest that all business strategies, product launch plans, and proprietary technology should be communicated freely and openly. Intel founder Andy Grove is famous for saying “Only the paranoid survive, ” and other successful companies,  like Apple, are also secretive. In very company, there are lines to be drawn between information best shared openly and secrets, and employees do not always have a clear idea of where it is or should be. This is a topic that I feel the author should have addressed.

I also have a few minor quibbles with statements that are not essential to the book. For example, there is no need to say when Frederick Taylor was active, but, if you do, you can’t say that it was “in the early days of the industrial revolution” (p. 8). Taylor worked around the turn of the 20th century, more than 100 years after the industrial revolution, as the Brits reminded us in the opening ceremony of the London Olympics.

Also, martial artists cringe at the description of Kata as “choreographed patterns of movement” (p. 132), even if Wikipedia defines the word that way. Katas are simulated fights against multiple opponents, and the study of a Kata involves Bunkai, in which other students enact the attacks against which it responds.

It is also an exaggeration to describe the practice of PDCA/PDSA as “creating a community of scientists.” Most actual scientists have never heard of PDCA or PDSA, and the methods they use are substantially richer.

This being said, I enjoyed the book, learned from it, and think it is a worthwhile contribution to the literature on Lean.

By • Book reviews • 4 • Tags: ,

Aug 1 2012

What about operators who do not want to be cross-trained?

Question from Bret Matthews on LinkedIn:

We have been talking about cross training our people in the different areas of our shop and the question we have yet to answer is:

What happens when a person that is great at one process fails to meet the expectation in another area?

Ideally, We would like to have a crew that could do any position needed.

Do we just accept that they could be better at some things than others?
What if they just choose to not meet the expectation because they don’t want to do that particular job?

You have two seemingly contradictory objectives:

  1. You want your work force to become multi-skilled.
  2. You want to show respect to your people, particularly if they have spent many years developing specialized skills. You don’t want to punish them for having done what the company used to expect.

This is how I would recommend managing the transition, and it involves  Human Resources:

  1. Create a new job category, that you may call “technical operators” or “superoperators” or “operator-technicians,” or any other name that conveys that they are an elite within the work force.
  2. Train the superoperators to be multiskilled and give them also extra training in areas like quality and problem-solving.
  3. Post the skills matrices on the team performance boards, and make each certification of an operator on a new skill a small ceremony at the daily team meeting.
  4. Establish a policy that all new hires will be recruited at a higher level of education, will receive special training, and will join this group.
  5. Setup a road map for existing operators to receive the appropriate training and join this group.
  6. Revise the wage system so that the superoperators earn slightly more than regular operators.

The idea is to allow the old categories to coexist with the new for the transition period, and eventually disappear. Most operators will come around when they see that the company is serious about cross-training and shows it in visible, concrete and tangible ways. For those who don’t, you need to find the best way to use the skills they do have. To the extent it’s not disruptive, they can stay in place, but they can also migrate to other functions in Maintenance, Quality, or even Training.

You should also keep in mind that cross-training is a never ending quest, because people who are fully trained on all the jobs in a shop are first in line to be promoted out of the shop and new people come in.

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Jul 31 2012

Kaizen and small things – A recent example

This picture shows a recent example of genuine Kaizen in a US factory. The workpiece in the vise is 28 ft long, and requires greasing in multiple locations. The operator on the left was tired of running back and forth to a fixed location to pick up the grease. The cart now contains everything he needs to apply grease anywhere on the work piece, and he wheels it back and forth as needed. To the right is the production supervisor for the area, who supports this and other similar projects.

How was it actually done? The production team from this area was given a budget of $500/operator to spend as they saw fit on supplies and devices for improvement projects at a Home Depot store. Their actual spend worked out to $113/operator, including the cart and bins you see on the picture and a magnetic sweeper.

It is a perfect illustration of the Kaizen concept. It is too small an improvement to warrant the attention of engineers or managers, yet it makes the work easier for the operator and makes him more productive. The only way to make sure such improvements are made is to enable and encourage the people who do the work so that they do it themselves. It is a valuable part of Lean, but it is not all of it. Higher-level issues must also be addressed, include make-versus-buy decisions and production line layout.

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Jul 30 2012

Manufacturing can thrive in countries with expensive labor

The news may lead you to believe that almost everything is manufactured in China, and that what little is left is made in Mexico, India, or Brazil. The numbers about the world economy, however, tell a different story. Most of the manufacturing in the world still takes place  in advanced economies, where labor is expensive and where manufacturing employs a diminishing share of the labor force.

What the data says

The Curious Cat Economics blog contains several enlightening charts about the state of manufacturing in the world. Figure 1, for example, reveals that, as of 2010, three of the four largest manufacturing economies — the US, Japan and Germany —  were high-wage countries, with China as the lone exception.

Figure 1. Top countries by manufacturing output

I was first puzzled by what was meant by “Output” on the y-axis. It is in fact manufacturing’s contribution to the Gross Domestic Product (GDP). GDP is not a perfect metric, but it is supposed to be the value added of the entire economy, or its Sales minus External Inputs, the external inputs being purchases of materials, energy, and outsourced services. In other words:

Value\: Added = Sales - \left ( Materials + Energy + Outsourced\: Services \right )

Out of this Value Added, companies have to pay for people, facilities and equipment, and taxes. This metric has the merit of being widely available, in part because it is used as the basis for a tax in many countries. It is meaningful, but not a perfect measure of activity, and much confusion is created by the many uses of the term “value added” to mean other things.

Using data from the US Bureau of Labor Statistics (BLS), Figure 2 shows how these countries rank in terms of labor costs, with the special case of China shown in Figure 3. Labor costs in Figure 3 include both wages and benefits; they are total costs to the employers.

Figure 2. Labor Costs by Countries in 2010

The only cheap labor country among the top four is China, and it is not shown in Figure 2 because the BLS does not have data on China  past 2008. Figure 3, however, shows wages in China rising rapidly, and they have continued to do so since 2008. According to The Economist’s Intelligence Unit, average labor costs in China in 2010 were $1.84/hr.

Figure 3. Labor Costs in China between 2003 and 2008

Furthermore, as you can see in Figure 4, also from the  Curious Cat Economics blog, manufacturing’s share of the GDP is holding steady in the USA, Japan, and Germany.

Figure 4. Manufacturing as a share of GDP

Manufacturing remains a major component of the advanced economies, but this is compatible with a decline in manufacturing employment.  As China built the largest manufacturing sector in the world up from nothing in 35 years, some activity has clearly migrated there from Europe, the US, Canada, and Japan,  but the shift is nowhere near as massive as it is perceived to be. What has created this perception is that, in the G7 countries, manufacturing employment has decreased much more than manufacturing’s share of GDP. The high labor costs are coupled with high productivity, and it takes fewer people to produce the same value added. In the US, manufacturing dropped from a high of 40% of the labor force  in 1960 to about 11% today. In Japan, Nippon Steel’s Yawata Steel Works in Kitakyushu produces as much steel today as it did 45 years ago, with a work force that has gone from about 40,000 in the 1960s to 3,000 today. An auto parts plant in China will be swarming with people; its counterpart in Japan will have one operator taking care of 20 machines.

To take a closer look, I retrieved the data in Figure 5 from a variety of sources. All the numbers about GDP are from the World Bank; most labor costs, from the US Bureau of Labor Statistics (BLS). The grand total is $2 trillion short of the total world GDP for 2011 due to the exclusion of countries that don’t provide data on Manufacturing. The labor costs for China and India respectively come from the British magazine The Economist and from an Indian e-zine. Although these numbers are from respected sources, we should not forget that the quality of economic statistics, while nowhere perfect, is much better in rich democracies than in poor or authoritarian regimes. The collection of complete, accurate data sets is expensive, and you need a free press to keep rulers from manipulating this sensitive data, in particular growth rates.

Figure 5. GDP, Manufacturing GDP and Labor Costs

China is at the top of this ranking, but followed closely by the US and mostly other members of the G7 group. The remaining countries in the table are leading emerging economies often referred to as “BRIC” for Brazil, Russia, India, and China. Figure 6 summarizes the manufacturing GDP data in Figure 5 by country group.

Figure 6. Manufacturing GDP by Country Group

The BRIC countries together represent 2.7 billion people; the G7, about 725 million. The BRIC country labor costs range from $1.71/hr in India to $10/hr in Brazil;  the G7, from $29/hr in the UK to $43/hr in Germany. Yet the BRIC countries account for substantially less of the world’s manufacturing GDP than the G7, and, among the BRIC, China by itself accounts for two thirds.

Within the Asian context, according to the IMF, China’s labor costs in 2010 were already 3rd in Asia, behind Malaysia and Thailand, as shown in Figure 7:

Figure 7. Labor Costs in Asia

The IMF expects China to rise to second place by 2015, as follows:

“However, it is expected that China’s next five year plan will see mechanisms put in place to double the country’s minimum wage by 2015. That will raise the Chinese figure to $3,000 plus welfare of 50 percent, assuming the latter payments remain the same. This provides a total minimum salary overhead of $4,500. In reality, most salaries will be far higher. That will make China’s average labor cost second only to Malaysia and significantly more expensive than any other Asian country.”

How industrial economies emerge

The industrial revolution in Europe and the US was not an event like the American and French revolutions but instead a development that took more than a century to unfold. The emerging economies of today do not have this leisure. They need to catch-up in a few decades. The first one to do it successfully was Japan, starting in the 1860s with the Meiji era. Late 20th century success stories include South-Korea, Taiwan, Hong Kong, Singapore, Malaysia, and finally China. These countries all followed different paths, but share the characteristic that they relied on cheap labor to get started and that, as their manufacturing sectors matured, their labor costs rose and ceased to be the primary motivation for locating factories on their soil.

The challenges facing manufacturing companies in every country evolve over time. During the cheap labor phase, they are handicapped by the work force’s lack of skills, which is usually compounded by a rickety infrastructure of transportation, energy and communications, the lack of local suppliers for materials and services, and a weak legal system. For foreign companies, you also have the additional challenge of training and managing a new work force in a different language, possibly across many time zones, and of shipping the output to the target market.

Labor remains cheap only if the country fails to develop as hoped, in which case, the above-mentioned challenges persist. If the country succeeds, they are resolved, but labor is no longer cheap, and manufacturers there must compete both with cheaper labor counterparts in newer economies and with expensive labor in older ones. Vietnam’s labor today costs one third of China’s while China’s is one fifth of Russia’s.

Systematically searching for the cheapest labor implies walking away every few years from investments, not only in plant and equipment but in the development of a skilled workforce, an organization adapted both to a local culture and to the corporate culture of a multinational, and a local supply chain. It can only pay in industries where none of these issues matter.

In most industries, building a factory is a commitment to the area, region, and country for decades, and you make that decision for a variety of reasons, labor cost being only one of many factors. You may believe in the country’s potential as a market for your goods, want a hedge against exchange rate fluctuations, and defuse protectionist tendencies. In the car industry, this is why Toyota built plants in the US and Volkswagen in China.

To survive and thrive in advanced economies, manufacturers focus on products where labor costs matter least. Following are a few of the factors that play a part:

  1. Lean has sufficiently increased productivity.
  2. Not only are people used effectively but the level of automation is high, as is the case with products ranging from cars to detergents.
  3. The products have a high value added, like luxury watches from Switzerland.
  4. There is a high technological barrier to entry in the industry.
  5. The products are customized, which makes geographical proximity to customers an advantage.
  6. …

No advantage, however, lasts forever. Labor costs go up, and technological barriers fall. The German camera industry was a leader until the late 1960s, with brands like Rollei, Leitz, Zeiss, or Edixa. It was relying on the knowledge accumulated by generations of engineers over a century in optics calculations. By the late 1960s, however, computers were powerful enough for Japanese competitors like Nikon, Canon, or Minolta to replicate these calculations with software and take over the market. 40 years later, German cameras are collectibles but the German optics industry has not disappeared. It has shifted to high-end professional equipment for such applications as photolithography, and is still present in such mass-markets as eyeglass lenses.

Conclusions

Unless you are at the bottom or at the top of the scale, you always have competitors with lower wages and with higher wages. The US is a low-wage competitor to Denmark but a high-wage competitor to Mexico, which itself is a high-wage competitor to China. Now Vietnam is emerging as a low-wage competitor to China. Against high-wages you compete on price; against low-wages, through superior quality and higher productivity.

In countries that develop successfully, wages rise and competing through cheap labor is only a temporary opportunity. In recent years, Chinese wages have been rising at a rate in excess of 13%. At this rate, in 9 years, wages in the Pearl River Delta will be $12/hour, or higher than in Korea in 2003. The decision to contract out the manufacturing of a toy for the next Christmas season can be based on current wages, but the decision to build a car assembly plant should not be, because it will remain in operation for decades, and the decision makers must anticipate what wages and the work force will be 10 or 15 years ahead.

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