Not adding value is the same as taking it away.
This is a driving point to the lean methodology. You can’t stand still or you will get passed by someone who is improving and adding value for the customers.
Leaders and managers may not be directly involved in adding value to the product or service, but that does not mean they aren’t responsible for driving value creation. Leaders add value by engaging employees in ways that will help them continue to add value for the customer.
People and companies can’t afford to be stuck in neutral.
My wife saw a post by a shop owner on Etsy this week that just drove us both absolutely crazy. The shop owner posted how you should determine your wholesale and retail pricing.
The first step was to determine your costs. What are your costs of materials? Even what is the cost of your time? While I agree with that logic, the cost of my time can be very subjective, but it makes sense. There was a exhaustive list of what to include in determining the cost of a product. A very large portion of it we agreed with.
After this is when it got interesting.
According to the shop owner, your wholesale pricing should be double your costs. Your retail pricing should be double your wholesale pricing.
The shop owner was very firm that this is the only way to price.
Based on this logic, you are entitled to a 75% profit margin when selling it in retail and a 50% margin when you are selling wholesale.
So why are people going out of business?
Because, this is not correct at all. The price is set by the consumer. If the consumer, sees value in your product at that price then they will pay for it. If they don’t, they won’t.
As a shop owner, it is your responsibility to control your costs to help control your profit. If your costs are low and the market is willing to pay a very high price then you will get a large profit margin, but if the opposite is true then you may lose money.
If everyone deserved a 75% profit margin then no one would be going out of business. Just because you are in business does not mean you deserve a profit. If you want a profit…earn it. Know your market. Set the price appropriately and then control your costs.
This is the heart of entrepreneurship.
“Paying people to produce excess product cost more than paying people to do nothing.”
This is a quote I like to use when trying to change people’s mindsets around the 7 wastes. It is human nature for people to want to look busy or “do something” when they are at work. Especially, in today because our minds start to think, “If I’m not doing anything, they will think I’m not needed and cut my job.” The managers and supervisors feed this mindset by pushing people to produce more and “keep the machines running” in a manufacturing world.
We need to switch this mindset and let it be known it is alright to be doing nothing if there is nothing to produce.
Overproduction (producing more than is needed or producing too early) is the waste that can create the other 6 wastes which in turn adds product costs.
It may be hard to see someone standing and waiting, but if a person is waiting and not working when there is no production needed they are not adding any more cost to the product. They aren’t building up inventory of components that may not be used or later are found to be defective or become defective from sitting around waiting to be used.
Also, when a person is standing around waiting it highlights the imbalance in the work flow and can lead to problem solving around creating a better flow further reducing costs.
We should try to eliminate the waste of waiting, but we should do it the right way. By highlighting the imbalance in the work and then create a better process that eliminates the waiting time.
In the end, waiting is less expensive then over producing product you don’t need.
Hostess is filing for bankruptcy and going out of business. There will be no more Twinkies. I know this news is over a week old now. I am behind.
My first thought when hearing the news was, “No Twinkies! No Cupcakes! No Ding Dongs! Ahhhhhhhhhh!” I absolutely love all of those. My daughter was distraught because the mini-donuts are a staple for our family as we travel on vacation.
I will miss those snacks. I’m sure someone will buy the rights to the recipes and the brand names. All will be good probably sometime next year.
My second thought was, “That company must have been horribly mismanaged!”
The Hostess brand of snacks were consistently much more expensive in the grocery store than comparable snacks. Yet, people bought them up…me included. Every time I went to the cash register to pay for some Twinkies I thought, “Wow! They have got to be making a ton of money.” Then to find out they aren’t. What a shame!
With the brand recognition and the price they charged, how could you not make money. I was going to dig into it a little bit but before I could I read Anatomy of a Twinkie by Bill Waddell over on Evolving Excellence. It was a great post and answered a lot of questions.
From the post:
- 57% of their costs: Administrative, Overhead, Selling, Distribution, Depreciation, Other
- 28% of their costs: Ingredients, Packaging
- 15% of their costs: Factory Labor
I think that answers all the questions about mismanagement. It is a shame. Cut out the waste and leave what only adds value for the consumer and I bet they would have made a ton of money. I bet whoever buys the recipes will be more efficient and make a great profit from Hostess’ demise.
That’s right an accessory to theft of jobs in the U.S. Companies make too many excuses as to why manufacturing is cheaper in China.
- High labor wages
- Medical costs
- Retirement benefits
And the list could go on and on forever.
These are nothing but excuses for not taking the time to look at the total cost of a value stream, including:
- Cost of quality
- Higher inventory levels
- And more that I have not mentioned
We need to stop making excuses and better understand the true cost issues that are occurring. Then put in place countermeasures to lower the overall total costs.
There is no need to discuss how to hold companies like FoxConn accountable for all the mistreating of employees if companies are manufacturing in the U.S. instead of China. The mirror should be turned on ourselves. We should be asking how do we produce close to our customer and have the best total cost possible.
Excuses are easy. Let’s start solving for true lower total costs and stop being an accessory to theft.
Recently, I had an experience where I thought I had everything thought through and designed. I even ran my idea by a friend of mine that I trust. Everything was a green light to go.
I designing a soap cutter. My wife buys raw soap materials in 12 in x 12 in x 7 in blocks. The soap has to be cut down to small chunks so it can be melted and poured in to molds. Currently, it takes me an hour and a half to cut a block into the desired size chunks. It is not fun but it has to be done.
In the name of continuous improvement, I wanted to design a cheap way to cut the soap quickly and more easily. I also wanted to design and test in stages so if the design was not working it was not costing more and more money.
The first step was to get the tool to cut the block into 1 in. strips with one cut. I made a wood frame and then threaded steel wire through the frame. The idea would be to push the frame down through the block using the wire to cut the soap. The picture to the side is of the tool.
Building went well except the wire broke so I only threaded it three quarters of the way through pulling the wire tight. I went to give it a try and needless to say, I only cut maybe an 1/8 of an inch through the soap. The wire was being stretched and even standing on the darn thing, I did not have enough force to push it through the block of soap.
It was almost a complete failure. I didn’t get through the soap but I learned quite a bit. For one, I am glad that I was building the device in stages. I had planned to cross thread the wire which would have taken another hour do to form something that didn’t work. The last stage was to add a mechanical way use the device. Now I know I have to move the mechanically driven portion up in the timeline in order to get enough force to drive the wire through the soap. I also figured out I will have to weave the wire to make it stronger when I add the crossing the wire. Think of stringing a tennis racket.
This is just a small home project but by breaking the design up and not spending a lot of time building it to complete specification, my feedback loop was quick and added learning to designing the device quicker and at a much lower cost. I spent less than $5 on the first version and about 3 hrs including my trip to Lowe’s (what’s a project without a trip to Lowe’s). If I would have built the entire think as I picture it in the end, it probably would cost around $100 and taken me a good 25 hrs plus to build. I would have been severely discouraged if that didn’t work and who knows if I would have tried again, because i wouldn’t want to make that invest twice. Now I shrugged off the failure, took the lessons learned and will apply them to a second version.
When designing a product or device, take quick less costly iterations and test and make but do it with a long term vision in mind. Streaming TV is a good example. It started with DVDs on the computer. Then slow choppy video over the internet that got faster and smoother and then to HD. Then boxes where designed to connect to your TV to receive an internet signal and view video on your TV. Now TVs are built with internet connection built in and apps to watch video from Netflix, Hulu, Crackle, etc… Next will be selecting a menu of things you want to watch and subscribing to it and watching live over the internet eliminating Cable TV. Pick NBC and FOX and pay $10/month and the shows stream to your TV.
What failures have you learned from?
A couple of weeks ago there was an article in the Hartford Business Journal talking about more offshore outsourcing that was returning to the U.S. The article sums up why companies are returning the best:
The argument goes: when total cost is considered, production is cheaper locally; there is less concern about quality and intellectual property theft when dealing with a domestic company; and with new lean practices, more streamlined production lowers domestic costs.
“Company after company has learned by keeping things closer together, that leads to a stronger overall value chain,” said John Shook, chairman and CEO of the Lean Enterprise Institute, based in Cambridge, Mass. “I see a lot of companies bringing things back.”
This is a hard lesson for companies to learn. As mad as I would like to get over companies making the choice to chase cheap labor, I have to remind myself they were playing with the rules as they understood them. Ten plus years ago, value stream accounting was not known. The only system most people knew was the standard costing system. This view did not take into account the quality and lead time aspects of chasing cheap labor.
Value Stream accounting is now more widely known, thanks to efforts like the Lean Accounting Summit. If companies continue to chase the cheap labor costs, I really don’t have any sympathy for them. The article lists other reasons Arcor sees offshoring as not a good idea:
Arcor has advantages over offshore companies when competing for local work, Francoeur said. Particularly when a client is developing a new product, there’s a lot of back and forth between Arcor and the customer, which would be slowed significantly if the client had to wait days for a project to be shipped from an offshore company.
New products tend to be more sensitive to copying and intellectual property concerns, and clients trust local companies more when dealing with sensitive information, Francoeur said.
With more and more companies learning total cost is better the more local you are to your market, no matter where in the world you are located, hopefully, it will be come the norm to stay local. We have to continue to talk about total costs and keep pushing the topic with leaders in our companies. We can use the companies that left and came back as examples and eventually we will get there
One industry that lean is starting to penetrate is the health care industry. After experiencing a story of a relative last week, it made me sick to hear how insurance companies don’t help the situation of increasing cost.
The person is on a medication that is extremely hard to get approved for by the insurance companies. Approval from the insurance companies is a must because most people can’t afford the medication without it.
A few years back the person was approved for the medication after a 4 month process. When they started the medication the expectation was they would be on it for at least 15 years or so. It basically is part of their life at that point.
Fast forward to present day. The person has responded incredibly well to the medication. In fact, they responded so well, there is thought that the person may not have to take it anymore, but the doctors can’t take the patient off of the medication because if they do and the patient does need the medication the doctors will not be able to get the patient approved a second time. At least it has never happened yet.
Because of the pain and inflexibility of the insurance companies, the patient and the doctors are in a tight spot. Do they keep the patient on the medication even though they may not need it or do they go a few months without the medication but still filling the prescriptions and holding on to the medication so the patient doesn’t loss eligibility?
Either way, it is money out of the patient’s pocket that could be saved. Plus, additional cost to the insurance company of a VERY expensive medication. In either of these cases, more costs will be added causing insurance premiums, medications, the whole health care system to increase.
This just isn’t right. The system has made it nearly impossible to do the right thing and extremely easy to do the wrong thing. As a country, we have a long way to go to fix some deep rooted issues with our health care system, which I believe is still one of the best in the world.
Joe Wilson has worked in a variety of continuous improvement, problem solving and engineering roles in manufacturing and distribution functions in the automotive, electronics, and food/grocery industries. He was responsible for site leadership of Lean implementation during the launch and ramp up of becoming a supplier to Toyota and was able to work directly with their personnel and the Toyota Supplier Support Center. His training background includes courses in Lean/TPS through TSSC and the University of Kentucky’s Lean Systems program. He is a Six Sigma Black Belt and a Shainin Red X Journeyman in addition to training in Kepner-Tregoe problem solving techniques. Joe also has a BS degree in Engineering Management from the University of Missouri-Rolla.
As a tookit, Lean is about establishing methods to define and solve problems in your business.
As a business philosophy, Lean is about providing your customers the best possible value for their money (Quality, Cost, Delivery) while maximizing the company’s profitability (or viability for a NFP) for the short and long term.
As a mindset, Lean is about constantly striving to (or believing that) you can be better at everything that you are doing than you are right now.
What do you say? Am I oversimplifying this or leaving something out? Is this straightforward enough to make people want to learn more or at least not reject it out of hand?
I am a Purdue University graduate and a Big Ten die hard stuck in the middle of Big 12 country. My saving grace is the Big Ten Network. Last week I was watching the Purdue University 30 minute show called “University Showcase”. This is where I saw the clip below about the students creating a low cost transportation solution for underdeveloped countries.
The part that I found the most interesting was listening to college students talk about creating the vehicle from local materials in order to keep the cost down. They mentioned producing the vehicle locally with local materials keeps the cost under $1,500.
The team makes the case for local production versus off-shoring. I hope they remember this as they graduate and head out into the corporate world.