Reform Your Business When Business Is Good Michelini

Last year I sent out a Growth Accelerator newsletter about why it’s essential to keep growing your business, especially when things are going well:

I find it very interesting how many executives want to wait to meet, start projects, hire key people and start change initiatives, because they’re making a profit and “Things are fine.” Why should they put effort into improvement when nothing’s wrong right now? Here’s why:

1) Succumbing to the status quo (even if it’s good) can be dangerous.

2) Their competitors are getting better everyday.

Toyota, the icon of Lean and continuous improvement, is always striving to get better. In an article “The Contradictions That Drive Toyota’s Success” (Harvard Business Review, June, 2008) senior executives said, “Never be satisfied.” The chairperson of Toyota said, “There has got to be a better way, and we need to reform business when business is good.”

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©2018 Rick Pay – All rights reserved.

Choose One: Strategic Drivers in Manufacturing

Strategy is the framework that helps guide the choices company executives make as they move toward their vision. These choices often guide critical decisions relating to capital, capacity, vertical integration, resources, IT and the other components of operations strategy.

The Five Frames

In manufacturing companies, there are five potential strategic frames, and while many companies want them all, only one (with a potential secondary) should be chosen to drive the company. They are:

  • Cost
  • Quality
  • Delivery/service
  • Innovation
  • Agility

Low Cost

Many manufacturers try to become the low cost producer and either sell cheap or force their competitors out of business. Lean initiatives are often driven by cost reduction, and at times purchasing will try to beat up their suppliers to lower costs. Low cost strategy frames drove many of the off-shoring initiatives of the 1990s and early 2000s.

High Quality

Making the best of the best can be a very effective strategy, especially for markets driven by prestige or highly technical products. BMW, Mercedes, Lexus and other high-end car makers developed high quality strategies and used them to approach a higher-priced market.


Speed to market is also a key driver in manufacturing. Short delivery cycles, quick manufacturing techniques and high levels of service can drive competitiveness. Amazon, Dell and Federal Express all built highly successful companies using this driver.


Companies that can roll out new innovative products can drive competition crazy. The primary example of this is Apple.


The ability to quickly customize products can also drive competitors crazy. Toyota says it can deliver any car, customized to your liking (from their assortments of accessories) in twelve days or less.

For strategy to be useful, it has to provide the clarity and guidance that people need for decision making. The five frames can prioritize activities in a way that’s more influential than the rest of your business. Picking more than one (or two) confuses the issue and often results in lack of implementation, which is why strategy fails.

© 2017 – Rick Pay – All Rights Reserved

Partnerships Can Earn Billions

If you’re not developing partnerships with suppliers, you could be leaving money on the table…a lot of money. A recent article in Industry Week cited a survey of 435 top automotive suppliers, which found that the Big 3 (Ford, GM, FCA) and Nissan had weak supplier relations, costing them over $2 billion in sales in 2014. Those relationships were based on pressure to cut costs using adversarial approaches. Suppliers feared retaliation if they didn’t comply.

The survey suggested that the fault lay with the buyers. Top management wanted to improve relationships, but they couldn’t because GM, for example, has over 600 buyers. Give me a break. Doesn’t management control or influence the people who work for them, and isn’t management driving the effort to cut costs? While they may not be directly ordering their buyers to beat up suppliers, corporate culture and short- to mid-term focus on meeting Wall Street expectations are driving the buyers’ behavior.

Toyota and Honda, on the other hand, had good supplier relationships and achieved many of their cost targets through “respect for the individual,” a basic tenet of the Toyota Production System.

Supplier partnerships are based on trust, respect and the goal of reducing the total cost of ownership, which goes well beyond part price. I know of one manufacturer that wanted to be their supplier’s most profitable account, while the supplier gave the company world class pricing. The company achieved 23% profit before tax and inventory turns north of 17 due to profitable partnerships.

© 2015 – Rick Pay – All Rights Reserved

Managing Volatile Demand (and Increasing Profit)

One of the big issues in inventory management is volatility: the variation in demand for a part or product. But volatile demand is more than just variable demand. It includes rapid and unpredictable demand, the worst kind. Most purchasing departments respond to volatility by bringing in more inventory to buffer the fluctuations. This not only consumes cash, it hurts profitability and increases risk.

There are three ways to manage volatile demand. The first is by partnering with customers to improve predictability through more accurate forecasts, smoother value chains and auto replenishment systems such as Kanban.

The second is to review the revenue flow from volatile items to see if the profit they generate is worth the risk and cash flow they bring. Simply put: if they don’t produce value, eliminate them.

The third is to manage demand the way Toyota and other companies do. Determine what’s available to the market place, decide how to allocate it, and that is what you ship. Demand management is actually a very effective means to manage volatility and improve profitability. The potential lost sales from underestimating demand is usually outweighed by the profit increase that demand management generates.

Are you managing demand effectively? Do you have excess inventory because of efforts to guard against volatility? Contact me to discuss volatility solutions for your business.

© 2015 – Rick Pay – All Rights Reserved



Flexibility and Speed, Even for the Leanest

Recently Toyota added the first outsider, Mark Hogan, to its board of directors. Mr. Hogan is also the second foreigner on the board. Of particular note is that he hopes to help Toyota move more quickly and flexibly in the marketplace.

One of the trademarks of this über-Lean company is that they are very deliberate and methodical in their decision-making. This tends to hold them back, particularly in international markets. Getting closer to the customer and being nimble in product and process design leads to more competitive performance around the world.

I found it particularly interesting that Mr. Hogan is a former GM executive. Both GM and Ford have long histories (mostly prior to 1970) of developing extreme flexibility and speed into their operations, as can be seen by studying what they did in World War II to rapidly ramp up production of war materials.

Being able to respond quickly to the changing market and supply chain is well worth the risk of using an outsider. Speed and flexibility are two critical elements of innovative operations and supply chain management as well. Just being cost effective is no longer sufficient.

© 2013 – Rick Pay – All Rights Reserved

Beyond Part Price: The Big Picture and Total Cost of Ownership

Depending on how strong a company’s CFO is and how much pressure there is to reach financial marks, most companies are heavily purchase-price oriented.  Taking a total cost of ownership (TCO) perspective is crucial to achieving a value-adding relationship with suppliers. In many cases, the place you save the most money is not part cost.

The concept of TCO goes back at least to the mid-80s, so why aren’t more companies taking a TCO perspective, especially when they are considering moving production offshore or using overseas suppliers? If you look solely at part price, buying from China made a lot of sense 10 years ago. Now, many companies are taking a TCO view and choosing to move production back to the US (and even Chinese companies are setting up factories in the southeastern US).

An interesting example is a Toyota factory in Kentucky that requires nearly all suppliers to be within 150 miles of the plant. They may be able to find a lower part price from a far-away supplier, but by having suppliers nearby they save on transportation, they get the product faster and can get just in time deliveries. This saves money overall, even if the part price is higher.

© 2012 – Rick Pay – All Rights Reserved

Speed and Collaboration are Keys to Success

As long as 2500 years ago, Sun Tsu wrote in The Art of War that speed is a crucial component of victory. In the 1980s and 90s the concept of concurrent engineering suggested that standardized parts and working closely with suppliers made for lower cost designs that could be brought to market more quickly.

A recent article in the Wall Street Journal describes how Toyota continues to improve it’s designs. It does this in an effort to speed decision-making, cut costs and appeal to car buyers worldwide. Toyota has found that they can cut costs while improving design to make their products even more attractive to the market.

In your efforts to be competitive consider speed, use of standardized parts, collaboration with suppliers and decision making at the level where work is produced to be vital for success.

© 2012 – Rick Pay – All Rights Reserved

High Value Procurement: Beyond Part Price

The five stage model for procurement shows a progression from low value on the left to high value on the right:

At the far left you see the “available” stage. At this stage one is simply ensuring that a company or department has what it needs to keep production flowing and provide product to customers. Stage two is purchase price variance buying, or PPV. Part price is the primary driver at this stage.

At stage three we begin to take a total cost of ownership, or TCO, perspective. TCO encompasses all costs associated with the acquisition, use, support and disposal of a product.

Stage four is the value supplier stage: this exists when the purchasing organization uses their supply base as leverage to reduce total cost by, for example, implementing supplier partnerships, including suppliers in the design phase or setting up auto replenishment systems. All of these steps can reduce overall cost of the product, even if the part price is a bit higher.

At stage five you begin to truly manage your demand in order to allow for better buying, reducing overall cost and improving profit margins. Very few companies are at this stage. Toyota is the foremost example of a company that has reached this stage. For more on design for supply chain management, please see my post from November 2011.

© 2012 – Rick Pay – All Rights Reserved

How Managing Customer Demand Can Reduce Materials Cost Volatility

There are a number of ways to reduce materials costs or at least make them more predictable in volatile times. A method that world class companies use is managing customer demand. It seems counterintuitive to be able to manage demand, but companies like Toyota do it all the time.

Managing demand is the process of matching your capacity, output and lead-times with the customer’s needs. It is essentially an available-to-promise approach to providing product/services to the customer. By providing that, you smooth the flow, which is essential to cost reduction.

From Sales Force to Demand Management Force

The first people who must be convinced that this is possible are your own sales force. They may be so accustomed to responding to customer’s needs that they don’t bother to inquire about alternative solutions.

In my prior position, we sold lock-boxes to auto dealers to keep the keys for the car on the car. This way the auto salesperson didn’t have to leave the customer to get the keys for a test drive. We knew our capacity was 800 units per day, so to smooth demand we set up a schedule bucket system to provide the sales people (mostly telemarketers) with detailed demand/capacity status. They knew minute by minute how much of today’s and tomorrow’s buckets were available. Once full, that bucket was no longer available and the ship date would move out appropriately. What we found is the customer didn’t care (within reason) how long it took, so long as they knew when they would get it. Our lead times were typically 3 – 4 days.

Using this bucketed demand smoothing system had several benefits:

1)     The customer could rely on when they would get their product

2)    We could smooth our production and significantly reduce production costs

3)    We provided steady demand to our suppliers and significantly reducing their costs. It was a win/win/win in every way.

© 2012 – Rick Pay – All Rights Reserved

Considerations for Going Off-shore

When companies consider moving production off-shore, there are many factors to take into account. Here are just a few:

  1. Core competency. If what you’re doing is a core competency in your country, don’t take it offshore. Boeing made the mistake of off-shoring 80% of their 787 Dreamliner to factories in the Far East. While they were investigating the move, one of their engineers spoke out against it, citing inadequate vetting of suppliers and no plan to protect Boeing’s core competencies. A senior manager disagreed, and it has cost Boeing $12-18 billion to recover from their decision to move production of just the tail section offshore.
  2. Access to technology. Right now you can’t buy a pearlescent black Toyota because the factory that makes that particular paint is within the area of the Fukushima nuclear plant in Japan. The microchip industry has also lost access to the technology it requires – there are two plants in the entire world that make the coating for silicon wafers, both of which were affected by the tsunami in Japan.
  3. Clock speed. Clock speed is the speed at which a product becomes obsolete, so laptop computers, for example, have a very high clock speed. Fire hydrants have a low clock speed. If your product goes obsolete quickly, you’ll need engineers and supply chain professionals at your suppliers’ location to continuously check products coming off the line. Dell, who has been successful off-shoring, has a significant supply chain management team on the ground in Taiwan to keep track of things. It takes significant resources to support that effort.
  4. Variability of demand. Older, more established products are better candidates for off-shoring because you can more accurately predict demand. Making the effort to move off-shore for a new product may be risky if the demand fluctuates or drops within two years.
© Rick Pay, 2011 – All rights reserved