A Short Supply of Long Thinking – Part 2
Category: Rebuilding the Supply Chain • Oct 21, 2020
Dr. James P. Womack, Ph.D. is the father of the lean movement and founder of the Lean Enterprise Institute. His seminal 1990 work The Machine That Changed the World made lean production known worldwide.
In 2013, he produced Gemba Walks, a compilation of 72 essays inspired by 30 years of global travel. In an essay titled, “Move Your Operations to China? Do Some Lean Math First,” Dr. Womack argues that most organizations haven’t done the work required to understand their true costs of production, much less location decisions.
Given the resurgence of the reshoring movement as a response to current supply chain disruptions, IMTS reached out to Dr. Womack—“just Jim” to his friends—to capture his thoughts.
IMTS: What led you to develop the concept of lean math?
Jim: I pay a lot of attention to geopolitical issues when thinking about total cost analysis.
As a bit of background, in 1971, I went to work for the Nixon administration. I wasn’t a political appointee. I was just a University of Chicago college grad looking for a first job. After Americans dropped the gold standard on August 15, 1971, there was a dramatic revaluation of currencies. The yen had been at 360 to a dollar since WWII, and within about a year, it was at 120 to a dollar.
I completed my Ph.D. in political science at MIT in 1982, studying how the governments of Germany, Japan, and the U.S. did, or did not, work with industry to create a successful automotive industry. I saw that trade imbalances beyond a given level—such as the surge in Japanese imports to the U.S. in the late 1970s—are unsustainable as a political proposition and result in reactions like Reagan’s Voluntary Restraint Agreement on Japanese auto imports in 1981.
For decades, I’ve travelled to the Lean Institute’s affiliate in China annually and visited numerous manufacturing companies on my many trips there. I developed a good sense over a long period of time about the competency of these companies.
In 2003, I saw the trade imbalances building up and realized that this was creating a volatile situation prone to dramatic, sudden shifts. So I started thinking about “lean math” that takes geopolitical issues into account.
IMTS: And despite all these obvious imbalances, manufacturers failed to perform their due diligence when it comes to sourcing?
Jim: They pretended to check that box on their sourcing evaluations and rated the risk near zero. I started putting together lean math as a better way to think about cost analysis. Since the 2000s, American companies have been exposing themselves for short-term, quarterly gain. Cost cutters outsourced everything they could and congratulated themselves on making the quarterly number. The vice presidents of finance made their numbers and got a big bonus for variance reductions. There was a large band of lazy, guilty parties.
People like Harry Moser of the Reshoring Initiative were also thinking about the sourcing problem (see story on calculating the Total Cost of Ownership), but I added the concept of lean math because most of the people who wanted to move production to China didn’t understand lean in the first place.
They were abysmal at manufacturing. They didn’t invest in their people. They had low productivity, high inventories, uneven quality, and thought moving to China would solve their problems. Lean math proposes that they instead perform an analysis before moving anywhere that looks at what their cost, lead time, quality, and customer satisfaction could be if they embraced the Toyota design, production, and supplier management methods.
IMTS: So, if they really became a lean business, they wouldn’t need to move production to lower labor costs?
Jim: In many cases, this was true, but hardly any companies did the analysis, and fewer acted on it. We had a tremendous wave of CEOs saying to their purchasing group, “I want you to outsource 20% [or whatever number they pulled out of their hat] of our buy to China, and do it in 18 months.” They should have looked at their current production, design, and purchasing processes and identified gaps to close so that they didn’t need to offshore.
It’s great shame for the country that managers didn’t do that. We’re so used to talking about failures of politicians and the media, but I think in this country there’s been a tremendous failure of management willing to take the long view. Few stepped back and did serious gap analysis. Instead, they lunged for short term gains. We headed down the wrong track, and that’s how we arrived at our present situation with limited manufacturing capabilities and ability to respond to disruptions caused by trade and economic forces.
IMTS: GE Appliances ultimately became a good reshoring case study, didn’t it?
Jim: It is a classic. First Jack Welch and then Jeff Immelt thought that to be competitive, they had to outsource manufacturing and product development as well, so they contracted production to suppliers in Mexico and China and contracted design to firms in Korea. Then, when Immelt tried to sell the business around 2010, he discovered that nobody wanted to buy it because GE didn’t have a real product development or production system. All they had were strong market channels.
Immelt then decided to recapitalize the business and bring it back to Appliance Park, in Louisville, Kentucky. That move foundered in the early going because product development was completely out of sync with customer demand, and they used the same bad production methods as before they offshored. Honestly, it was hopeless.
IMTS: What finally turned the company around?
Jim: They finally took advice from retired Toyota people on how to run an appliance factory that’s as good as a Toyota plant. And they took advice from other folks about how to run a product and process development process as good as Toyota. Also, they sold the company to Haier Group, a Chinese company, that got them out of the make-the-month mentality at GE and that ironically supported their plans to move product development and production for the U.S. market back to the U.S. because they could see it would be more profitable.
GE Appliances’ current state is very interesting. They completely renewed the product range, dramatically improved the development system, the factories and their supply chain. With most production on this side of the ocean, they’ve been able to do the right thing for customers during the pandemic.
IMTS: The lessons from Toyota go beyond the production floor, don’t they?
Jim: The product development system is the key. You need products that customers really love and need to design quality and low cost into the products. I wish the rest of the country would pay attention.
IMTS: What’s the challenge to adopting lean product development?
Jim: Engineers everywhere jump to solutions rather than trying to figure out the real customer need. Engineers of any sort in any industry immediately go to a design solution, and their subsequent product development is about proving that they chose the right solution.
IMTS: Why is the Toyota method better?
Jim: It spends more time upfront to make absolutely sure you’re not just listening to yourself but listening to the customer, and there’s a proper method for that, too. It requires doing concurrent development. Instead of picking one design solution and going all in, it asks companies to explore multiple options and do rapid prototyping for comparative testing. Often, the best solution is some amalgam of options.
Then you have to get the processes right. Americans all thought that Toyota had high quality and efficiency because they did lots of kaizen after production starts. But Toyota actually became a high quality, efficient business by addressing these issues upfront in the development process. They call it lean product and process development, and the two are always discussed in concert. This requires discipline and good leaders, and those are in short supply.
IMTS: So what we really need is a new generation of business leaders?
Jim: Well, it wouldn’t hurt, but that takes a lot of time. My mother always said, “The only way we make progress is through fires and funerals.” That may be true in general, but I’d like to progress faster. So, for the good of this country, we need our existing managers to step back, think about alternatives, and try some experiments. One of the key things about lean thinking is that it’s based on continual experiments. It’s not tablets of “thou shalts” coming down from the mountain.
IMTS: Not too many leaders have the willingness to embrace the failures that come with experimentation.
Jim: This is a country that thinks the measure of a smart person is that they very quickly get the answer right the first time. How many people have told you that they’re a quick study? I say to them, “You know, I used to be a quick study, but now I’m a really slow study, and I get a lot better results. When I was young and clever, I quite often got to the wrong destination very quickly.” Maybe I can start a trend?
IMTS: If Jim Womack gets to control the budget and make policy, what does he do?
Jim: Let’s talk about what I wouldn’t do. I wouldn’t immediately jump to reshoring manufacturing activities. That feels good as a mandate in the short term, but we are bound to end up doing things the same crummy way we did before. And we might be doubling down on industries that are disappearing—do we want to focus on reshoring die casting in a world on the verge of 3D printing? We need time to think about production and product development systems. What we need as a country is a long-term vision, the willingness to stick with it, and the fortitude to move ahead systematically.
IMTS: The solution is a lot more complicated than reshoring, automating, and digital solutions?
Jim: You need a management system and a workforce that can actually get the best out of your manufacturing technology. We have a fascination with Industry 4.0 and removing touch labor, but many firms are jumping to technology that they cannot manage without a lot of expensive support from the technology provider.
To reap the benefit of new technology, you need to be ready to implement and manage it. Most companies should think about the next step they can actually handle, not the next great leap.
IMTS: What are your thoughts on government incentives, such as adjusting the tax code?
Jim: Ideally, we’d make tax incentives on a capital investment attractive but contingent upon investing wisely. But that’s pretty certain to be an exercise in frustration. What we really need to do for the good of the country can’t be written into the tax code. We need to take a step back, take a deep breath, look at our situation in the long term, and say, “Now, how can we do the right thing?”
I’ll say one thing more and get off of my soapbox. I’ll cite an example very different from GE Appliances. It’s a mom-and-pop manufacturing company with three domestic locations and a unique product that commands about 80% of the world market. Think of it as American analog to a lot of family companies in Germany. Yet this company’s cost structure was so high—with lots of rework, inventory and warranty costs – that it was only able to pay its touch labor $12.50 an hour.
I gathered all the workers at one facility and asked how many had a second job. Of the 25 guys there, every single hand went up, because at $12.50 an hour, how do you make a living? And then—this is the most amazing thing—the production manager for the shop floor also raised his hand. He delivered drugs for a pharmacy at night. The company had no trouble finding workers, but it had basically created full-employment poverty and 50% annual employee churn as workers went down the road for an extra $.50 per hour. That’s very expensive for a business.
I advised the young fellow running the company that it was the job of management to make his employees productive enough so he could afford to pay them decently. He saw the light and embraced a wide range of lean techniques in production, product development, and management. Instead of thinking about how he can hold the line on wages, he now thinks of ways his workers can create more value and shares the gains. He is now making more money while paying higher wages with very little churn.
IMTS: Do we need to re-evaluate wage expectations for the jobs we plan to reshore?
Jim: OEMs need to think about technology and be honest about whether their people are just costs or if they are assets. From the Toyota viewpoint, there’s no discussion: your people are assets. You’re going to upskill them and continually improve their ability to create value through their whole time with you, so you can afford to pay higher wages. That’s long-term thinking, and it’s worked pretty well for them. Unfortunately, collaborating and sharing isn’t inherent in American business.
IMTS: The world knows you as the father of lean, but how do you view yourself?
Jim: Not as a father. I’ve never invented anything. I’m just an author and educator telling other people’s stories. I’m trying to sell a few simple ideas, starting with lean, of course, but I try to put them in the current context. I ask questions such as, “Shouldn’t people in this country be talking to each other about what the collective we—rather than the isolated me—needs to do to find a successful path forward?”
We’re not doing so hot right now, and it’s a shame. We are not anywhere near achieving what we could. Everybody is basically furious and shouting at everybody else, and that just doesn’t lead anywhere. I try to do what I can to start conversations on better paths, like lean math rather than mindless off-shoring, and I’m happy that some people still want to talk with an old guy like me.