Be Proactive

If you want to be successful at just about anything, whether it be marketing, supplier management, cost reduction, revenue improvement, or innovation, it helps to know the situation and understand the details. Let’s take supplier management for example. For many companies, materials are the largest expense. Yet many materials professionals issue purchase orders to the low cost supplier and fail to follow up to see if the materials actually arrive. Supplier management is loose at best.

Know What You Want

There are three vital areas to knowing the situation and the details in supplier management. First, you have to know what you want. This involves clear specifications, expectations for performance in quality, delivery and cost, and knowing the supplier’s capability. Even knowing who the top suppliers are is a challenge for some companies.

As part of my supply chain evaluations, I analyze the supplier base using a descending year to date payments report. During the final presentation I ask executives who their top five suppliers are and you would be surprised how often they don’t know. That is knowing the details.

Measure It

Measuring supplier performance is the second key. For top suppliers, performance should be measured monthly on the metrics of delivery on time, quality, cost reduction and other subjective factors such as how easy it is to clear up invoice issues. I have often found that not only do companies not know how their suppliers are performing, but often the suppliers themselves don’t know either.

Sharing Information

This brings me to the third point which is communication. Internally, communication is comprised of clear specifications, clear expectations, and clear feedback. Externally, suppliers need to not only get their performance report, but quarterly review sessions should be held with top suppliers to review performance, new opportunities, cost and lead-time reduction activities, etc. In addition, annual supplier meetings should inform suppliers of planned new products and other opportunities for them to grow their business serving your company.

To improve supplier performance and relationships, know the situation and dig into the details. What you find may surprise you and save the company a lot of money.

© Rick Pay 2011 – All Rights Reserved

Sending Chopsticks to China

Last week NPR reported on an unexpected US manufacturing success story: Georgia Chopsticks, a new company that produces chopsticks for – you guessed it – export to China. When you consider that one third of the world’s population uses chopsticks, it comes as no surprise that there is plenty of room in the market for new producers. Indeed, Georgia Chopsticks plans to ramp up production within the year from two million pairs per day to 10 million per day.

Why Move Production So Far Away From the Consumer?

From a supply chain perspective, we have to ask: why make chopsticks in the southern US, so far from the primary market? In this case the answer is threefold: raw materials, labor, and quality. Clearly China is capable of making chopsticks, but when Georgia Chopsticks’s owner looked for a place to set up his production facility, he found that the small town of Americus, Georgia offered plenty of trees of a type that yields good chopsticks, had a 12% unemployment rate, and while labor is more expensive than it would be in China, the quality is better.

Why It Works in this Case

In this instance, finding raw materials, labor and the potential to produce a high-quality product made it worthwhile to set up production far away from the customer. This is working out because chopsticks are not perishable, demand doesn’t fluctuate, and is it unlikely that chopstick design will change anytime soon. After all, they’ve been around for over three thousand years.

© 2011 – Rick Pay – All Rights Reserved

Authors: Paige McKinney, Rick Pay

Bringing Apparel Manufacturing Back From China

An article in Reuters from July 1st tells the story of women’s apparel company Karen Kane’s choice to shift 80% of its manufacturing from China to Southern California. Taking a total cost perspective on its manufacturing operations, the company realized that they could cut costs by re-shoring their factories. They will also take advantage of these additional benefits:

  • Higher quality – quality at Karen Kane’s Chinese facilities had been slipping in recent years, a phenomenon that many manufacturers cite as a factor in their decision to re-shore
  • Reliable shipping times – with the factories in the US, they are within driving distance of the stores that carry their products
  • Faster response time for new products– in the fashion industry, styles, and therefore production requirements, change every few weeks, so production facilities need to be ready to shift quickly from one product to the next

An article last month in CNNMoney tells similar re-shoring stories about industries as varied as appliance manufacturing, customer service call centers, and bowling pins. However, not everyone agrees that this trend will continue, or that recent developments even constitute a trend.  Alan Tonelson, a research fellow for the U.S. Business and Industry Council, says, “I worry that there’s a very big deal being made out of a few anecdotal instances. I think it’s a lot of wishful thinking.”

If you can believe what you read and hear, it seems that more than a few anecdotal instances are accumulating. Time will tell.

© Rick Pay, 2011 – All rights reserved

Authors: Rick Pay, Paige McKinney

Your Capacity Is Larger than You Think

Many Operations executives spend a great deal of time trying to figure out what the capacity of their operations is. I suggest it is always much more than you think. I found this out through an experience at my prior company.

I was VP, Operations, and one day the VP, Sales came into my office and told me that our biggest competitor was experiencing a major product failure. If we could almost double our output for 120 days, we could scoop up a number of major accounts, shutting our competitor out of a key segment of the market. His question was, “Can we do it?” I said “of course,” and then when he left, I thought, wow, how are we going to do that?

We named this challenge “Project 45.” We had to go from 25,000 units per month to 45,000 units for three months, then ramp back down to 25,000. We thought that our capacity was in the neighborhood of 25,000 units. We did three key things that helped achieve our target.

  • First, we went to the employees and explained what we needed to do. I had gone to the CEO and CFO and got them to agree that we would pay a bonus to the employees of a percentage of the added gross profit above 25,000 units. We would also need a lot of overtime and would have employees from other parts of the company help on the production lines.
  • Second, we created a measurement system much like the United Way thermometer to track our progress and make it visible to everyone.
  • Third, we went to our key suppliers and explained what we needed and the great opportunity for them if they could quickly ramp up while maintaining quality and on time delivery.

The project was a resounding success. We actually had suppliers work Thanksgiving Day for us. We hit 64,000 units the last month and we won a number of major accounts, effectively crippling our completion. While we knew that 64,000 units was not our true capacity (it was a one-time flex), we knew our capacity was much higher than 25,000 and the employees believed in their ability to produce beyond expectations.

The best part was when the project ended just before Christmas, I got to put on a Santa Claus hat and pass out bonus checks to the employees equal to a month’s pay. It made for a very Merry Christmas for all of us!

© 2011 – Rick Pay – All Rights Reserved

The Three Types of Labor Resources

As the recession begins to wane and business picks up, companies are looking at how to most effectively manage their labor. Some are cautious about hiring as they aren’t sure things are really going to stay better, and some now know they can conduct business with fewer employees because of the productivity they gained during the downturn. What strategy is best? How can staffing flexibility be built in?

There are three types of labor resources that can be used; regular employees, temporary employees and overtime. Regular employees are actually cheaper in the long run and usually provide the best quality. Overtime is the most flexible in the short run, but can cause burn-out which can lead to poor quality and low morale. Temporary employees can be a very effective solution with proper management of sources, effective training, and progressive management of the temps.

For more information, visit my web site for a summary of a seminar I conducted on this topic.

© 2010 – Rick Pay – All Rights Reserved

Is Labor a Fixed or Variable Cost?

If you talk to your local cost accountant, they will tell you that labor costs (along with materials and supplies) are recorded as variable costs.  In reality, they should be treated as fixed costs.  Why is that?  Because, in the short run, it is not easy to turn this asset into costs that can vary with revenue which is the definition of a variable cost.  It is very difficult to lay off people in a low revenue month and then rehire them in a high revenue month.  If you try to do that, hiring costs, training costs and cost of quality all increase usually to the degree that they more than offset keeping the people through the downturn.

Many companies will try to furlough people or send them home early in an attempt to turn this fixed cost into a variable cost.  While this works in the short run, people will get tired of the lower income and unpredictable work schedule and eventually will look for a new job.  This again raises the cost of hiring, training, etc.

The only true variable labor cost is the use of temps and overtime.  If your company is in a volatile market, it is best to plan for a level of temps and overtime to create a variable environment.

© 2010 – Rick Pay – All Rights Reserved

How Do You Start a Lean Journey? Paint the Lunchroom!

When many companies begin a Lean journey, they wrestle with where to start. Some will begin with training, trying to help employees understand the basics of Lean. Others start with 5S (work place organization) because it is fairly easy to do and demonstrates visible results. Still others will establish new policies such as no lay-offs (due to the Lean process).

I suggest you start by painting the lunchroom! What has this got to do with Lean? Actually, several things – first, it shows you are really serious about changing the environment of the company to one of quality. Second it shows you really care about the environment in which the employees work. How can you expect them to go the extra mile to produce Lean processes and then allow them to eat in a dump? Painting the lunchroom says 1) we want quality, 2) we support you and care about your work place, 3) we are serious about culture change. You could also get new microwave ovens and a refrigerator! If your lunchroom is already in good shape, find something else that will make a statement to the employees.

The first critical step for a Lean Journey is to convince yourself and the employees that things are going to be different; that the culture is going to change. A great way to demonstrate that is to paint the lunchroom!

Does Quality Need A Department?

A senior sales and marketing manager was very concerned that his company had eliminated the Quality Department. There had been a personnel issue and the Quality Manager left the company. As a result, the company decided to have the Quality team report through Manufacturing Engineering. The sales manager was concerned that this would jeopardize the company’s ISO certification and possibly the quality of outgoing products.

Does the company need to have a Quality Department? Does it need to report to the President to be “independent”? The answer is no.

ISO, Shingo, and the other quality certifying standards do not require a quality department or even separate quality personnel. What they do require is that you have a quality policy, a system for quality and that it works. Working means that there is a means to measure quality of products, usually specified in drawings or processes, that people are trained in the quality system, and that it produces the expected result.

I have seen many companies with very effective quality systems that do not have Quality Departments. One could argue that the department is an unnecessary bureaucracy that is in itself a waste. Quality is everyone’s job. Just say what you do and do what you say.

© 2010 – Rick Pay – All Rights Reserved