“Solve My Problem When I Want”

James P. WomackPresident, Lean Enterprise Institute

Frontiers of Lean Summit October 31, 2005

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.

The Predominant Stance of Providers

Most providers assume that we don’t 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”.

Recent Business Models

Assume that decisions are instantaneous and that customers want instant delivery.

They therefore try to provide instant response:

Dell’s make-to-order system.

3-day car initiatives at motor vehicle manufacturers.

Instant Response Model # 1

Dell’s 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).

Instant Response Model # 1Dell’s 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.

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.

Instant Response Model # 23-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!

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?

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.

Auto Buy/Lease ExampleSome 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.

Auto Buy/Lease ExampleCustomers 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.)

The Lean SolutionResults:• 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 today’s products .

• “Plan ahead” customers (whose cost of waiting is low) get exactly what they want when they actually want itat costs (and prices) below the cost of today’s products.

• A win-win for consumers and providers!

Lean Location LogicJames P. WomackPresident, Lean Enterprise Institute

Frontiers of Lean Summit October 31, 2005

Objective of Lean ThinkingSolve each customer’s 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.

In Our Current World• Modest trade barriers in goods and services.• Remarkable gradient in labor cost for all types of

labor:TouchTechnicalManagerial

• 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.

Providers Need Lean MathCalculate 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.

Lean Location LogicFor 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”)

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.

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 calculatedoes not mean they are zero!

Lean LocationFor 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.)

Shoe Example in Today’s WorldConfiguration 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.

Shoe Example in Today’s WorldConsequences for solving the customer’s 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 company’s distribution warehouse, retailer’s 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.

Shoe Example in a Lean WorldConfiguration 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.

Shoe Example in Lean WorldConsequences for solving customer’s 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%.• Customers can get home deliveries by ground freight quickly if

retail outlet doesn’t have right style/size.Consequences for solving provider’s problem:• Inventory costs slashed dramatically.• Lost sales and remaindering slashed substantially.• Increase in margins of shoes companies by 8-10 percentage

points?A win-win for customers and providers!

Why Aren’t We Living in Lean World?Decisions about location made in era of mass production

slow the transition to lean consumption:

• Supply base for shoe manufacturer is overwhelmingly in Korea and Taiwan (higher technology items) and China (lower technology items.)

• Moving final assembly to other points without moving supply base as well doesn’t solve the problem. (Might even slow response times further.)

• Who will be the first lean provider in the shoe industry?

• Perhaps lean thinking will start with make-to-order shoes?