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By Jim Womack of Lean Enterprise Institute shown at the Frontiers of Lean Summit 2005 on 31st October 2005 run by the Lean Enterprise Academy


  • 1. Solve My Problem When I Want James P. Womack President, Lean Enterprise Institute Frontiers of Lean Summit October 31, 2005

2. When Do We Want Products? Do we make decisions instantaneously, with no warning? Or Do most of us plan ahead? For fast-moving consumer goods passing through retail channels, most of us do little planning. For big ticket items motor vehicles, computing systems, homes most of us plan ahead. 3. The Predominant Stance of Providers Most providers assume that we dont plan. Deals are constantly offered to consumers to make an instant decision. Deals, like rebates on cars, are usually driven by the internal needs of the provider to move excessive inventory or keep assets busy rather than expressed customer demand. Much of provision is still classic push. 4. Recent Business Models Assume that decisions are instantaneous and that customers want instant delivery. They therefore try to provide instant response: Dells make-to-order system. 3-day car initiatives at motor vehicle manufacturers. 5. Instant Response Model # 1 Dells make-to-order system (in theory): Proposes to build precisely the computer, printer, server, etc., the customer wants and deliver almost immediately. Requires suppliers to be located adjacent to Dell assembly sites in each region (Ireland, USA, Malaysia, Brazil, China). 6. Instant Response Model # 1 Dells make-to-order system (in practice): Fairly stable demand from big corporate buyers. Highly variable demand -- for total products and option mix within product lines -- from smaller businesses and individuals. Limited flex in total assembly capacity. Suppliers mostly located in East Asia. Large inventories in 3rd party warehouse near regional assembly sites. Long or expensive replenishment. Delivery time typically more than a week. Substantial steering of customers to buy what Dell can make. 7. Instant Response Model # 2 3-day Car Initiatives at Every OEM (in theory): Shorten order entry time (from many days to minutes). Hold production schedules open until the last minute. Create more responsive suppliers of parts. Build cars to precise customer order and deliver to the customer within a few days. 8. Instant Response Model # 2 3-day Car Initiatives (in practice): Order entry times can be dramatically shortened. Line balance requirements make it hard to create the schedule at the last minute, particularly on multi- product lines. Parts supply where a final assembly process attaches 1000 parts and most parts come in wide variety is extremely difficult. Impossible to do with no advance notice. After several years, 3-day car initiatives are still paper exercises. Finished-unit inventories unchanged! 9. Are Dell and Auto Makers Frauds? No! They are simply trying to do the impossible: Instantly respond to all customers with custom products in gyrating markets with an extraordinary range of choices. The key question: Is instant response even what customers want? Is there a better alternative? 10. The Lean Solution Reverse the temporal bias of consumption: Some of us want to get exactly what we want right now. Some of us probably a lot more of us want to get exactly what we want but are willing to wait, particularly if we get a lower price. That is, many of us do plan ahead and would be willing to share our thoughts with a provider in return for sharing the cost savings with the provider. 11. Auto Buy/Lease Example Some simple physical facts: Production systems can deal with small amounts of get-it-for-me-now demand, provided slots for last minute demand are planned. Making these products will always cost more because of the need to expedite parts. Making all other products to precise customer order and getting them to the customer slowly will cost the provider less than using current methods. In particular, leveling demand (heijunka) buy volume and mix will permit the whole production process to run smoothly at lower cost. 12. Auto Buy/Lease Example Customers are offered two choices: Specify the exact vehicle wanted, for delivery in the future, with the price falling the further ahead the customer is willing to plan. Specify the exact vehicle wanted, for delivery practically instantly (although 3 days may still be difficult), with the price considerably higher than for the same vehicle ordered in the future. Dealers have no inventory except a few demonstrators and loaner vehicles for those unable to wait even a few days (perhaps after an accident.) 13. The Lean Solution Results: Total cost of provision is lower: reduced production costs, reduced inventory costs, reduced logistics costs. Total cost for consumers is also lower: Get-it-for-me-now customers (whose cost of waiting is high) get exactly what they want quickly at about the cost of todays products . Plan ahead customers (whose cost of waiting is low) get exactly what they want when they actually want it at costs (and prices) below the cost of todays products. A win-win for consumers and providers! 14. Lean Location Logic James P. Womack President, Lean Enterprise Institute Frontiers of Lean Summit October 31, 2005 15. Objective of Lean Thinking Solve each customers problem by: Compressing the value stream to conduct every step in design, production & service process at the same point! Locating this point immediately adjacent to the customer! Maximizes responsiveness. Minimizes total costs: product cost plus inventory, out-of- stocks, defects, etc. Easy to do in a world with: Comparable factor costs (especially labor) everywhere. No scale economies. 16. In Our Current World Modest trade barriers in goods and services. Remarkable gradient in labor cost for all types of labor: Touch Technical Managerial Substantial scale economies in many activities. Tight regional concentrations of supply of some critical items (e.g., shoe materials and electronic components in East Asia.) Lean thinkers must solve consumer problems while accommodating these realities. 17. Providers Need Lean Math Calculate the cost of designing, manufacturing, and servicing a product for a given customer at current locations. Competitive? Stay where you are! Not competitive? Apply lean thinking to current operations! Still not competitive? Apply lean location logic. 18. Lean Location Logic For manufacture of a given product for a given customer: Calculate factory costs at candidate locations. Typically these will be: In the country of sale. In the probable lowest-wage point in the region of sale. In the probable lowest-wage point anywhere in the world. Add slow freight costs for reaching the customer. (Together these might be called mass production math) 19. Lean Location Logic Then, for each location, add: The cost of supplied items to the production point. The cost of inventories needed to maintain a given level of service to the end customer. The cost of lost sales due to out-of-stocks. The cost of premium freight to avoid out-of-stocks. The cost of remaindering (of over-stocks.) The cost of quality. The management cost of complex value streams in locations remote from the customer. 20. Lean Location Logic Then, for each candidate production location for a given customer, add the cost of: Currency risk. Country risk. Company risk (especially when outsourcing to a sole source that might fail or integrate forward.) Note: Just because these are difficult to calculate does not mean they are zero! 21. Lean Location For new, technologically demanding products (processes): Locate all production steps as close together as possible near the engineering center designing the product. For make-to-order products for got-to-have-it-now customers: Locate all production steps as close together as possible in the market of sale. For make-slowly-to-order and make-to-stock products with mature production processes: Locate all production steps as close together as possible at the lowest wage point within the region of sale. (E.g., Eastern Europe/Turkey for Western Europe; Mexico for the USA; China or Vietnam for East Asia.) 22. Shoe Example in Todays World Configuration of action wear category (e.g., Nike, Reebok, New Balance): Style is the competitive focus. Four selling seasons per year. Half of SKUs are new each selling season. Shoe manufacture is still quite labor intensive. Almost all production for European and North American markets outsourced to contract manufacturers. Small number of giant contractors (Taiwanese and Korean owned) make most shoes in China, Vietnam, Indonesia, and Thailand to capture low labor costs. Supply base for materials, molds, etc. highly concentrated in Taiwan, Korea, and China. 23. Shoe Example in Todays World Consequences for solving the customers problem: Retailers order 150 days ahead of planned selling date. No re-orders possible for most items during selling season. Large inventories at five points (shoe assembler, on the boat, shoe companys distribution warehouse, retailers distribution warehouse, retail store.) 80% chance customer will find the desired style in the right size. 40% of shoes ordered from contractors are deeply discounted or remaindered. 24. Shoe Example in a Lean World Configuration of action-wear category: Same wage gradient, shipping costs, trade barriers, etc. Re-location of production and distribution activities: Retailer uses scanner (customer) as order entry point. Smaller distribution centers supply each store frequently in small amounts. Shoe company distribution center eliminated. Shoe production moved to lowest labor-cost point within region of sale. Small overnight deliveries in trucks substituted for large infrequent deliveries in boats. 25. Shoe Example in Lean World Consequences for solving customers problem: Lead time falls from 150 to 10 days. Shelf availability (right size in right style) goes from 80 to 90%. Remaindering falls from 40 to 5%. Customer