Recently, Bill Waddell published a great blog post highlighting the benefits of reducing changeover time. The post was about reducing the manufacturing cycle which is the time it takes to produce every product. Bill used an actual story from a client of his.
To be sure there were other inputs to the improvement – a simple demand pull method and more statistically valid methods of determining the inventory needed to cover the cycle, but set-up reduction was at the heart of it, and the improvements there translated into significantly less inventory, better on time delivery and lower costs.
Hearing stories like the one Bill wrote about just reaffirms the importance of reducing changeover time. It is something that companies take for granted. Most companies don’t see it as critical to achieving the business needs and goals.
Bill gives two great examples of where changeovers have been deemed to critical or their business would die.
I recently saw a cruise ship go through the change-over process and it is really quite similar. Dock and disembark some 3,000 passengers and their luggage and take on 3,000 new ones, restock tons of food and supplies, perform necessary maintenance to the ship, then sail again all in the course of a few hours. They have all sorts of specially designed devices and a very well trained crew of folks to do it … but they have to. That turnaround is the key to their success. In that regard they are a lot like the NASCAR or Indy cars – change-over fast or die.
Manufacturing companies don’t take this view. My question is “Why not?”
If results like the company Bill talks about receives such incredible benefit that help them stay viable and profitable, why aren’t more companies doing it? What other evidence is needed?
Does your company consider quick changeover critical to it’s success?
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.
It amazes me how companies will setup an accounting system this is designed to drive bad decisions.
Recently, I have been working with a client on improving an internal process to the team. During the direct observation with the order writer something very interesting surfaced.
The order writer can write orders to be processed one of two ways. The order writer said that method A costs $400 and only takes 1.5 hours to write the order. While method B costs $30 and takes 2 days to write the order.
I asked where the costs came from because the orders are processed by another internal group. The order writer said it is the cost of systems and labor time for that group and they charge back the order writing team the cost of each order.
The internal order processing group is managed as a Profit and Loss center. They are treated like a company.
Sadly, I have seen this accounting set up quite a bit. Even the support groups like IT, HR, etc… are setup as P&L centers.
This drives decisions to be made that are not in the best interest of the company.
In this case, the order writer is considered value added because they are changing the order to get product to customers. They help generate revenue. Half of order processing is non-value added (entering all the information they get from the order writers) while half is value added (executing the order).
Because the business gets charged back over 10 times more the cost per order for the more automated order, the value added order writers are asked to take 2 days write an order which then adds actual hard dollar cost because it takes more order writers to get the orders written and submitted.
What is wrong with being a support center, knowing it and accounting for it? Why does everything have to be a P&L center to “prove” it’s value?
The places who treat support areas like support areas and don’t worry about P&L centers for everything don’t typically make decisions like the one above. They understand how a supporting area adds value and don’t feel the need to quantify it in a P&L statement.
Have you encountered this in your work?
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?
But if he puts service and quality first, the money will take care of itself.
Producing a first-class product that fills a real need is a much stronger motivation for success than getting rich.
— J.C. Hall
This is a quote from J.C. Hall, founder of Hallmark Cards. J.C. showed up to Kansas City with a shoebox full of postcards in 1910. He had a desire to help people connect with one another. That is still the case today. Hallmark Cards is now run by his grandsons, Don Hall, Jr. and Dave Hall. The Halls still believe in service and quality first and connecting people in an emotional way everyday.
The quote from J.C., in my opinion, shows the heart of lean. Do what is right. Build a quality product that people want and give great service. The money will come. It is a by-product of doing what is right. This is what I take from Toyota when they talk about do whats right and fix the process. The profit will come.
A good example of fixating on making money is most venture capitalist. It is only about the money. They don’t care about the people or the process.
I hope more companies are seeing the value of service and quality in the new economic climate. Right now is the time that a company can distinguish itself through superior service and quality.
Full Disclosure: I work for Hallmark Cards. It is a great company and the Halls are phenomenal people. This quote hits home more because of me working for Hallmark, but I find relevant for any business.