Month: July 2011

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New Forum Area: Outside the Factory

Zoe owns Grassroots Books in Reno, NV and is exploring how to make these concepts work in a small retail operation. They are just getting started, but are finding lots of opportunities.

When talking to her last night, she mentioned she would like to network with other people who are trying to apply these concepts in non-traditional arenas.

In response, I created a new forum on The Lean Thinker’s Community. It is called “Outside the Factory” and is intended as a gathering place for practitioners and others who want to discuss how to apply TPS in non-manufacturing environments.

I would love to see some synergy develop there, and intend to fully participate as well. Stop in and say “Hello.”

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3P Works

I am in another 3P type of event this week.
One of the cool things is how the act of physical simulation, even a crude one, drives out ideas and insights.

Limitations are challenged, possibilities are expanded.

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Outsourcing Competence

Continuing on a supply-chain theme from Doing Outsourcing Right and Don’t Lose How To Make Things, I found this Reuters article carried on MSNBC interesting.

Surging China costs forces some U.S. manufacturing companies back home

 

Like a lot of popular press articles, the title and even the lead kind of miss the point. They are focusing on simplistic factors such as costs and whether or not the high automation type solutions are going to create more jobs or not.

This isn’t to say that costs aren’t important. Of course they are. And the article correctly points out (as we have said here as well) that many times the full costs of outsourcing are not understood.

As for the automation – though I can’t speak for the solutions cited in the article, what I often see is overboard with high-tech / high-maintenance solutions. That is a subject for another day when we really start digging into “right sized automation” and 3P.

With all of that, what caught my eye was the last three paragraphs, and in my mind, they are the true lead here:

"If you’re going to go into the high-tech electronics business here in the States, most likely a big portion of your high-tech electronic components are going to be sourced from China," said Cort Jacoby, a principal in the supply-chain group at Archstone Consulting, a unit of the Hackett Group Inc . "Then the question becomes, what is the true value-add that’s going to take place in the United States?"

Beyond that, a company that has outsourced most or all of its manufacturing may find that it no longer has a pool of engineers, plant managers or other workers with the experience to resume production.

"There was always this notion that if you controlled the design and the brand, you could park your production somewhere else," said GE’s Campbell. "I’m not sure that’s completely true anymore. Because what happens over time is you lose competency."

[Emphasis added]

The key point is that you can always outsource what you do today, but what remains is what are you going to do tomorrow?

Today’s markets and technology change so fast that unless you are SO good at supply chain management, AND retain the knowledge so you know how to manage production – like Apple – you end up outsourcing your entire future for a short-term cost “savings” that might not even show up.

Bottom line: You can’t outsource basic business competence. What are you striving to be best in the world at doing? If you don’t know, you are in trouble.

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Doing Outsourcing Right

In a previous post, “Don’t Lose How To Make Things,” I discussed some of the perils of outsourcing either your production or your production technology.

Yet there are many successful companies that manage to do just that. One of the most successful is Apple.

We all know Apple as a cutting-edge innovator. Their products have created, and destroyed, entire industries and changed social paradigms.

What is behind that cutting-edge innovation, though, is one of the best (if not the best) supply chain management systems on Earth. Lets look at a couple of key characteristics of how they do this, and you can compare them to the more common mindsets about outsourcing.

First, Apple understands intimately how an iPhone works and how to make one. While they may outsource actual production, they do not outsource their core knowledge. They know their product and their process.

But what really got my attention (and inspired me to write this) was a fascinating anonymous response to a question about a logical strategic investment for Apple.

The comment describes how Apple uses their resources and supply chain knowledge to stay on top of the cutting edge and maintain competitive advantage.

When new component technologies (touchscreens, chips, LED displays) first come out, they are very expensive to produce, and building a factory that can produce them in mass quantities is even more expensive. Oftentimes, the upfront capital expenditure can be so huge and the margins are small enough (and shrink over time as the component is rapidly commoditized) that the companies who would build these factories cannot raise sufficient investment capital to cover the costs.

What Apple does is use its cash hoard to pay for the construction cost (or a significant fraction of it) of the factory in exchange for exclusive rights to the output production of the factory for a set period of time (maybe 6 – 36 months), and then for a discounted rate afterwards.

He goes on to describe how Apple first has exclusive access to the latest technology, then as it becomes commoditized, maintains cost advantage as they are searching for the next paradigm shift.

What I think this does is allow Apple to use their supply chain savvy to change things up faster than their competitors can respond.

Apple is not just crushing its rivals through superiority in design, Steve Jobs’s deep experience in hardware mass production (early Apple, NeXT) has been brought to bear in creating an unrivaled exclusive supply chain of advanced technology literally years ahead of anyone else on the planet. If it feels like new Apple products appear futuristic, it is because Apple really is sending back technology from the future.

Here is the bottom line: If you want to outsource, that is actually OK. But only if you are using that as an opportunity to continuously improve your process of supply chain management while striving to become the best in the world.

If it is a short term ROI problem, rather than working hard to develop a key strategic advantage, well, good luck with that.