The Foundations of a Sustainable Business

The ABCs of Structured Maintenance, a recent post to this blog, emphasized the importance of maintenance as a foundation for viable manufacturing operations. The following updated version of Cultivating Disciplined Operations, a post from October 2015, expands on the necessity for structure and discipline. — C.H.


Cultivating Disciplined Operations

In order for an organization to function effectively in a competitive world, a culture of disciplined operations is necessary. This does not mean the imposed discipline of a military boot camp. Rather, it means a voluntary coordination of efforts among all involved. As an ideal, consider a symphony orchestra, where a group of highly skilled musicians coordinate their personal talents to a mutually understood and desired end. Yes, a conductor does arrange the music and does direct the tempo. But it is the blended performances of the musicians that work the magic.

Cultivate Text Box“Cultivating” is the right word here. A voluntary coordination of efforts comes about through a culture of mutual respect, directed toward a mutually desired end. It is that culture that needs to be cultivated. Here, “mutual respect” means a sincere regard for the interests and aspirations of everyone involved, diverse though those interests and aspirations may be. “Mutually desired end” refers to a condition in which everyone involved can prosper indefinitely.

An initial assessment of how closely a given organization’s culture approaches one of mutual respect, directed toward a mutually desired end is pretty easy. Employee turnover rates, absentee rates, equipment downtime rates and OSHA recordable safety incidents can readily be compared with relevant norms. Apply Pareto’s rule: if your organization isn’t comfortably in the top 20% for each of these, your competitive posture is at risk. [1] Even if your numbers are all in the top 20% — or even the top 1% — remember that everything and everyone can always improve. Including your competitors, today and tomorrow.

Here are some areas that require constant cultivation:

>> Safety: In manufacturing, a top notch safety program is essential. The benefits of a pain free working environment are immediately clear to everyone. Cultivation of safe operating practices is fundamental to the cultivation of mutual respect. [2]

>> Maintenance: Equipment and facilities need be designed for operability as well as for throughput. Poor working conditions and dysfunctional equipment are antithetical to the cultivation of mutual respect.

>> Training: It is not reasonable to ask anyone to participate in manufacturing operations absent a clear understanding of what that individual is to do and how to do it safely and effectively. My personal preference is that written work instructions be used as a basis for training materials. Trainers should be trained in how to train others. Understanding should be confirmed by demonstration.

>> ISO 9001: The ISO 9001 Standard for Quality Management Systems provides a systematic framework for disciplined operations. It is worth studying, even in part. Implementing systems compliant with the ISO 9001 Standard is a substantial undertaking. However, the cultivation of disciplined operations that occurs while doing so is a substantial reward for everyone and a substantial step toward an organization that can prosper indefinitely. [3]


Chuck in FranceThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

 

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.


[1] For more on Pareto and operating performance, see Operational Excellence – The Performance Curve, this blog, http://jerasustainabledevelopment.com/2012/05/24/operational-excellence-the-performance-curve/

[2] For more on safety and its importance, see On Safety and Sustainability, this blog, http://jerasustainabledevelopment.com/2013/10/24/on-safety-and-sustainability/

[3] For more on the ISO 9001 Standard and its application, see What’s Wrong With ISO?, this blog,  http://jerasustainabledevelopment.com/2012/07/05/whats-wrong-with-iso/  and Keeping Up With ISO, this blog, http://jerasustainabledevelopment.com/2014/08/28/keeping-up-with-iso/

The ABCs of Structured Maintenance

Order In – Order Out, Order In – Order Out, Order In – Order Out… is the life breath of a manufacturing business. And the effective maintenance of the equipment, processes and systems that convert Orders In to Orders Out are foundational to the success of that business. This post is an update to a post from five years ago that focuses on the critical importance of structure in keeping maintenance effective. – C.H.


Structured Maintenance (From 1/12/2012)

Sustainability goes far beyond concern for the environment. Adam Werbach* says that “being a sustainable business means thriving in perpetuity”. To thrive in perpetuity requires constant attention to the present and the future on the factory floor, within the business as an organization, within the industry in which the business operates, within global economic and social realities, and within the natural world we all rely on.

For manufacturers, that begins with efficient production and timely delivery of high quality products — all the time. And that requires production equipment that reliably performs as intended. It is the function of the maintenance program to assure that the equipment performs reliably. As extreme examples, think about what “reliably performs” means to passengers in jet aircraft or to sailors in nuclear submarines, not to mention astronauts. The sign on the shop wall that said “If It Ain’t Broke, Don’t Fix It” was retired some time ago.

To be clear on terms, that which is to be maintained, I refer to as a “maintained item”, or, more simply, “item”. An item may be a machine (such as a lathe), a system (e.g. electrical power distribution) or anything else that you may want to declare as a unit for the purposes of maintenance and performance records keeping.

ABC BlocksIt is convenient and useful to divide maintained items into three classes:

Class A Items – The failure of a Class A item can shut down or significantly impair production, or create a serious safety condition, in the entire facility. Most Class A items are utilities or similar services, such as a main power transformer, a boiler, materials conveying system or critical ventilation unit.

Each of these critical items needs both a plan to keep it performing reliably and a plan for its rapid repair or replacement, in case it does fail. The “keep it performing” plan might include a scheduled inspect / clean / service routine, pre-emptive parts replacement based on service hours or proactive parts replacement based on throughput or on monitored machine condition (for example, vibrations analysis).

The corresponding rapid repair / replacement plan might involve in-line spare capacity, critical spare parts inventory, rental equipment (for example, an air compressor) and/or fast response third party service (examples: digital control systems or boilers). Since parts for critical items are often quite expensive, spare parts inventory costs must be weighed appropriately during the planning process.

For critical items, Failure Mode and Effects Analysis (FMEA) may be of significant use in formulating both plans. FMEA is a technique for evaluating the probable occurrence of various failure modes and the likely effects of such failures. FMEA is widely used in the automotive, aerospace and other industries for product and process design and improvement. It works well for critical item maintenance planning too. If you aren’t familiar with FMEA, start with a free power point presentation from Purdue University at www.stat.purdue.edu/~kuczek/stat513/IT 381_Chap_7.ppt. There is a lot more on FMEA on the web. Don’t confuse FMEA with FEMA, the federal agency that is supposed to respond to natural disasters.

Class B Items – Class B includes most primary production equipment, failure of which can shut down or significantly impair operation of a single production line, or create a localized safety concern.

The “keep it performing” plan for each of these less critical items might, as with Class A items, include a scheduled inspect / clean / service routine, pre-emptive parts replacement based on service hours or proactive parts replacement based on throughput or on monitored machine condition.

Appropriate repair / replacement plans might include common spare parts, reconditioned parts (e.g. gear boxes or rewound motors), prearranged “order as needed” parts from reliable suppliers or specialized third – party service calls (preferably with pre-arranged vendors).

Class C Items – Repairs or replacement of Class C items, taken individually or in small groups, are less urgent. Scheduled inspect / clean /service routines are often appropriate. For some high wear parts or for items that require other items to be down while maintenance to be performed, scheduled preventative maintenance may be the best route. Run to failure is an acceptable strategy for some Class C items.

The real point to this post is that effective and cost efficient equipment maintenance requires item–by–item planning, to keep the equipment performing reliably and to correct failures when they do occur. Grouping items by criticality helps make maintenance planning easier.

There is a lot more to maintenance planning than any one post can even hope to cover – look for more on maintenance in future posts.

Chuck at ReneThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.

* Werbach, Adam, Strategy for Sustainability, Harvard Business Press, Boston (2009), page 9.

Another Look at Continuous Improvement

Dreamstime - Crystal BallEverybody knows that the reality of globalized manufacturing is a continuous spiral of faster, better, cheaper. Regardless of how good your processes, practices and products are, it is essential to keep improving. On Continuous Improvement, a post from November 2015, takes a pragmatic look at continuous improvement, with some thoughts on how that might actually be accomplished. Another look at On Continuous Improvement is always timely. — C.H.


On Continuous Improvement (from November 2015)

Remaining Competitive

Everybody understands the need to be truly competitive in this globalized economy. What’s more, since everybody knows, everybody is trying to improve – so the bar is continually being raised. The 5th of Dr. Edwards Deming’s famous 14 points is characteristically blunt: [1]

“Improve constantly and forever the system of production and service.”

In practice, there are two ongoing modes of improvement. The first mode consists of numerous incremental improvements to existing products, processes and practices. The second mode involves fewer, larger improvements such as new products, new equipment, or R&D advancements. This essay focuses on the first ongoing mode of improvements.

What to Improve Continuously?

Rereading Deming’s 5th point clearly answers the “what to improve” question: “the system of production and service”. The “system of production and service” means the entire assemblage of manufacturing and processes, procedures and practices, along with their interactions and inter-dependencies, through with your organization functions. It is necessary to appreciate that Deming’s use of the term “system” is not an accident.  A “system”, as Deming intends that term, is assembled in order to serve a specific purpose (Deming prefers the term “aim”, rather than “purpose”).

Deming says that the aim (purpose) of a business is to “stay in business, create more and more jobs”. To me, that means a sustainable business that can continue to grow indefinitely.

To be more specific, it is necessary to constantly improve our products, our manufacturing processes, procedures and practices; as well as our business processes, practices and procedures. Further, it is necessary to do so in a manner that advances the overall aim of the system. Improvement in one component of the system at the expense of another component is counterproductive. Usually, most improvement efforts focus on diminishing variation and waste.

How to Improve Continuously?

Deming tells us that wanting to improve is not sufficient. It is necessary to have a method for doing so. Fortunately, there are several methods that are widely used by manufacturers, each with many books, publications, courses and consultants ready to assist. Generally speaking, my personal preferences are Lean Manufacturing (especially for reducing wastes), Shewhart Cycles with control charts (for reducing variation) and Theory of Constraints (for prioritizing improvement efforts).

Lean Manufacturing

Competitiveness starts with the systematic elimination of waste in all of its many forms. “Waste in all of its many forms” includes losses due to hazardous working conditions, unsafe work practices, emissions to the environment, inefficient use of energy, and on and on. Lean Manufacturing provides a proven, readily available means to do that.

Lean Mfg Text Box

Just about everybody in manufacturing has heard about Lean Manufacturing, or about the stunning success of the Toyota manufacturing system, which serves as Lean’s global model. The fact is that Lean Manufacturing is good sense, systematically applied. Lean doesn’t require computers, robots or big capital outlays. It does require access to the know-how, a willingness to apply that know-how, and a person experienced with Lean implementations to lead the effort.

Shewhart Cycles

Dr. Deming was a statistician. Early in his career, Deming met Walter Shewhart, a pioneer in statistical quality management. He learned of Shewhart’s work with control charts and PDCA improvement cycles. Control charts provide a ready method to plot process outputs and, importantly, to distinguish variation due to the process itself (common causes) from variation due to other causes (special causes).

Variation can be reduced by identifying and eliminating special causes. Shewhart Cycles, more commonly called PDCA Cycles, provide a way to do that. Shewhart Cycles consist of four steps:

Deming PDCA CycleStep 1: The first step is to study a process, to decide what change might improve it. Organize an appropriate team. Do not proceed without a plan.

Step 2: Carry out the tests or make the change, preferably on a small scale.

Step 3: Observe the effects.

Step 4: What did we learn? Repeat the test if necessary. Look for side effects.

Theory of Constraints (TOC) [2]

TOC regards a manufacturing facility as a system consisting of interacting and interdependent processes. Those processes are not all equally important to increasing throughput. A few, usually one, process limits — constrains — the system. TOC focuses on identifying the limiting process and addressing that limitation. “Addressing that limitation” means increasing the capacity of that process, such that it no longer bottlenecks the facility. In addition, TOC uses a buffer before the constrained resource and a raw materials release system to prevent overproduction at non-constrained resources.

Once a constraint is addressed and throughput increases, another constraint will be revealed — otherwise, throughput would be unbounded. So, TOC is an ongoing process of identifying and addressing constraints. As production capacity increases, the constraint to increasing revenues eventually moves from the factory to the market or to some business practice or policy.

Concisely, Theory of Constraints provides a convenient way to prioritize opportunities for improvement so as to improve the aim of the system.

Chuck - Red Rocks3Thoughtful comments and experience reports are always appreciated.

…  Chuck Harrington

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.

Image: PDCA Cycle ID 46845201 © Raducomes | Dreamstime.com


[1] Understanding continuous improvement starts with Dr. Deming. For those not familiar with Deming’s work, I suggest Mary Walton’s The Deming Management Method, Perigee Books (1986)

[2] To learn more about the Theory of Constraints, see Appreciating the Theory of Constraints, this blog, http://jerasustainabledevelopment.com/2015/06/27/appreciating-the-theory-of-constraints/

Producing the Tesla Model 3

Everybody knows that Elon Musk has a “problem” – how to ramp up production sufficiently to fill the nearly 400,000 orders for Tesla’s new Model 3 in a timely manner. The production rate increases required are comparable to Henry Ford’s “problem” –ramping up Ford Model T production a century ago.

One post from May 2016 compared Musk’s “problem” with Ford’s “problem”. A subsequent post elaborated on plans for Model 3 production. They are both reprised below, to provide some prospective when the hype builds up around the start of actual Model 3 production, expected in the third quarter of this year (2017).


Henry and Elon (From 1 May 2016)

I’m writing this post just one month after Tesla Motors’ Model 3 electric automobile was introduced and made available for advance orders. As you may have heard, in the first week following that introduction, Tesla received more than 325,000 orders, with $1,000 deposits – reportedly a record for any product, ever! Now, a full month from launch, the order book reportedly totals around 400,000.

The question now is “can Tesla produce enough cars to fill those orders before the folks in the queue get tired of waiting and demand their fully refundable deposit back?” Sounds like a fair question, especially considering: (a) that Tesla produced only about 52,000 cars in all of 2015, (b) that Tesla will want to continue to produce their existing Model S and Model X cars, presumably in increasing volumes, and (c) that lots of additional Model 3 orders will keep rolling in. As a practical guess, let’s rephrase the question this way: “can Tesla deliver a cumulative 400,000 Model 3 automobiles by the middle of 2019 without retarding growth of their other product offerings?”

Henry Ford’s Model T

Let’s start to answer the Model 3 production question by considering Henry’s Model T of a century ago. Ford introduced the Model T as a practical and affordable automobile for everyman in late 1908 and started deliveries in the 1909 – 1910 model year. Here are the production figures:

Ford Model T Production Figures

1910 Ford Model TStarting at zero, it took Ford about four and a half years to produce the first 400,000 Model T Fords. Unlike Tesla, Ford did not start with 400,000 orders in hand. Henry Ford had no idea, from the start, how many he would be able to sell: “everyman” had not even dreamed of owning an automobile in 1908. So, Ford didn’t know how much manufacturing capacity he would need, nor did he know how raw materials would be sourced in sufficient and timely quantities.

For Ford, it was necessary to vertically integrate from iron ore deposits to metals castings all the way through finished vehicles in order to assure adequate supplies of all of the components necessary to keep production going. Tesla has integrated vertically to build a “gigafactory” sufficient to mass produce batteries in the quantities that Model 3 production will require. The “gigafactory” is already in operation, although far from full capacity.

Compared to Ford and his Model T, Tesla has a century of manufacturing technology to draw on, along with the infrastructure that supports an industry that can produce about 15 million vehicles annually. With 400,000 orders in hand (and the $400,000,000 from the deposits), Musk and Tesla are certainly in a much better position to find financing for the facilities and capital goods necessary to produce the Model 3 than Ford was in 1908.

Building and operating a 21st century automobile factory that can produce 400,000 automobiles by the middle of 2019 is a big job. The manufacturing technology is impressive, but it’s not rocket science. By the way, Elon Musk is a rocket scientist – he is the Chief Technical Officer of SpaceX, maker of 21st century rockets.

Will the Tesla Model 3 deliver fast enough? Bet on it!


7 May 2016 – Additional Comments

On 4 May 2016, Elon Musk and Tesla’s management team held a conference call for business analysts and the financial community. Model 3 production planning was a primary area of discussion. Here are a few points that build on last week’s post:

Production Rate: Musk announced that Tesla intends to reach the 500,000 cars per year rate in 2018, instead of 2020 as previously indicated. I take that to mean total production of all three models, not Model 3 alone. The blue line on the graph labeled Model T Production indicates that Ford significantly exceeded the half million cars per year production rate in the 1914 – 1915 model year. The production rate in 1910 – 1911 was 53,192. So, within four years Ford increased production by more than ten times. Now, Tesla says they will do almost exactly the same thing – from about 52,000 in 2015 to about 500,000 in 2018 – in three years rather than four.

Operating Leverage: In a discussion on costs, Elon Musk mentioned that “our operating leverage means fixed cost relative to variable cost is going to improve dramatically”. How much is “dramatically”? The red line on the graph labeled “Model T Production” indicates the per vehicle selling price. For the 1910 – 1911 model year, Ford charged customers $780 for a Model T. The price was reduced to $550 for the 1914 – 1915 model year. That 29.5% price reduction was made possible through Ford’s increase in operating leverage.

Ford was selling the Model T into an entirely new market. Each time he reduced the price, he created an entirely new customer segment. Ford used price to keep his production rates increasing and the improvement in operating leverage funded the price reductions – with some left over for Ford and his Company.

 “Hell-bent on becoming the best manufacturer on earth”: Musk pointed out:

“Thus far, I think we’ve done a good job on design and technology of our products. The Model S and Model X are generally regarded by critical judges as technologically the most advanced cars in the world. We’ve done well in that respect. The key thing we need to achieve in the future is to also become the leader in manufacturing.”

Excellence in manufacturing operations results in high product quality levels and high throughput rates – hence strong operating leverage. It worked for Ford a century ago. It is working for Tesla today.


Everybody in manufacturing should read (or re-read) Henry Ford’s autobiography. The parallels between what Ford said and did with what Musk is saying and doing are truly remarkable. Of course, it goes without saying that a century does make a difference and a Tesla Model 3 isn’t a Ford Model T. Learn from Ford anyhow.

By the way, last week Elon Musk’s SpaceX recovered (landed) a rocket on a barge at sea, at night. SpaceX designed and manufactured that rocket. SpaceX will reuse the rocket, reduce the price for future satellite launches, and increase their throughput and their operating leverage. Musk and his crowd do know how to do things well.

Chuck & Joan in ParisThoughtful comments are always welcome.

…  Chuck Harrington

(Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.

Model T Photo: Creative Commons via Wikipedia

 

Whither Sustainability?

Sustainability

Sustainability, as that term applies to manufacturing, owes its origin to Limits to Growth, [1] which was published in 1972. Limits to Growth describes a systems 3P Graphicanalysis of trends in the earth’s population, industrialization, pollution, food production and resource depletion, with projections into the future. In essence, Limits to Growth emphasized that humanity’s increasing demands for economic development are overwhelming the natural world, and that industry is the primary agent for doing so. So begins the quest for sustainable economic growth and for the technology and practices that enables economic development without destroying the natural world upon which all of us rely.

Mission Zero

In 1994, some customers were asking Interface Corporation, a manufacturer of carpet tiles, about Interface’s vision regarding the environment. Ray Anderson, founder and CEO of Interface Corporation, recognized that the usual response – that Interface was in full compliance with all applicable environmental laws – just wasn’t good enough. His response was to redirect his billion dollar company toward a goal of zero environmental impact.

“I wanted Interface, a company so oil intensive that you could think of it as an extension of the petrochemical industry, to be the first enterprise in history to be truly sustainable – to shut down its smokestacks, close off its effluent pipes, to do no harm to the environment, and to take nothing from the earth not easily renewed by the earth.” [2]

Moreover, Ray Anderson proposed to accomplish this by the year 2020, and to make a profit while doing so. Consequently, Interface established a system of yearly milestone objectives toward Anderson’s vision. Today, 20 – odd years later, Interface remains roughly on course.

Climate Take Back

However, the recent global financial crisis severely impacted the construction industry, Interface’s primary market. In 2011, Ray Anderson passed away. As a result of hard economic times and the loss of their visionary leader and founder, Interface lost some of their some of its edge. The direction continued, but the audaciousness faded.

Now, Interface is renewing its initiative by redefining what Sustainability means in industry. Interface’s new mission — Climate Take Back – builds on and goes beyond Mission Zero’s “do no harm” initiatives: Climate Take Back is proactive. Climate Take Back includes four bold commitments:

>> To bring carbon home and reverse climate change – That is, to remove carbon compounds already present in the atmosphere.

>> To create supply chains that benefit all life – That is, to insist on proactivity from entire supply chains.

>> To make factories that are like forests – That is, to create manufacturing processes and entire factories that mimic nature.

>> To transform dispersed materials into products and goodness – That is, to recover and reuse widely dispersed refuse materials on a global scale.

On 6 June 2016, Joel Makower of GreenBiz published an insightful article on Interface’s new initiatives. It is well worth reading for anyone interested in both manufacturing and sustainability, and well worth careful study for those who want to make a difference.

Here is the link:

https://www.greenbiz.com/article/inside-interfaces-bold-new-mission-achieve-climate-take-back

For Smaller Manufacturers

Interface has long been a champion of, and roll model for, Sustainability in manufacturing. The switch from “do no harm” to “make the world a better place” significantly raises the bar. Beyond that, Interface’s actions and corresponding results dramatically demonstrate the power of visionary leadership.

Chuck - Red RocksThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington

(Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.


[1] Donella (“Dana”) Meadows, et al, Limits to Growth, Signet Books (1972)

[2] To learn more about Ray Anderson and Interface, Ray’s book is a good read:

Ray C. Anderson, Confessions of a Radical Industrialist, St. Martins Press (2009)

Bandwidth Revisited

Just about everybody in business has heard the term “bandwidth”. But not so many can explain what “bandwidth” means when used in reference to business activities. I wrote The Importance of Expanding Bandwidth to organize my own thoughts at the time. For me, it serves that purpose again – to organize my thinking for part of a book I’m writing on operational excellence for smaller manufacturers.  The Importance of Expanding Bandwidth is revisited here so that you need not wait until the book is ready.  C.H.


The Importance of Expanding Bandwidth – From 13 February 2014

The Business of “Bandwidth”

“Bandwidth” is a communications term that refers to the rate at which information can be conveyed through a given channel. It’s roughly analogous to a pipe – the larger the diameter of the pipe, the more fluid it can carry. [i] Business borrows the term “bandwidth” to refer to flows of information into, within and out of the firm.

The internet sparked a change from a condition where access to timely information was limited to a condition where enormous quantities of information threaten to overwhelm us. The challenge for managers is more than how to gather more information. Rather, the challenge is how to order that information in such a way that it can be assimilated and made useful. This poses two situations: (1) choosing which content streams to admit into awareness, and (2) providing sufficient context for each content stream to make it truly understandable, hence actionable.

To make the term “context” clear, consider, for example, a Metropolitan Opera performance, presented as an AM radio broadcast, a stereo FM broadcast, and a high definition, enhanced sound quality color television broadcast. In each case the content may be the same. The increased aural and visual context, however, results in a much richer, more meaningful signal.

“Bandwidth” and Management

When the term “bandwidth” is applied to management, it raises several concerns:

>> How to assure access to all relevant information streams that might affect the business in today’s globalized economy?

Pragmatically speaking, a business needs to establish many “listening posts” that follow information sources, extract relevant bits and forward it to management in an organized fashion. The scope of “listening” is indeed daunting. The list extends from familiars like customer information, market information and information on new regulations to include the entire scope of 21st century business – a scope that this blog rather arbitrarily classifies as Globalization, Sustainability, Technology and Demographics & Trends.

>> How to decide which signals (information streams) should be admitted to management’s attention?

Establishing “listening posts” and defining the scope of each is management’s responsibility.

>> How to decide how much context is necessary for each signal?

One approach is to “headline” information items, then link to related information, so that management can expand the context of each “headline” as the manager deems appropriate. Exception reporting offers another, usually complimentary approach.

“Bandwidth” in Manufacturing

Applying “bandwidth” specifically to the factory, “bandwidth” can be thought of as the capability of a manufacturing facility to produce. Capability to produce involves the availability of productive resources, including equipment, technology, talent and money. Those resources can be deployed only to the extent that they are available at any given time. The effective available “bandwidth” can be improved through prudent management practices. For example, the productive capability of equipment can be improved through appropriate maintenance. Talent can be fostered through training and mentoring. Time and money can be extended through reduction of wastes.

Absent sufficient “bandwidth”, a manufacturing organization cannot adapt to abnormal circumstances, nor can it readily accommodate change. A lack of sufficient “bandwidth” helps explain why many improvement initiatives don’t succeed. “Bandwidth” also helps explain the usefulness of focusing on a small number of manufacturing activities. [ii] It is almost always necessary to increase “bandwidth” in order to move to the left on the Performance Curve. [iii] On the other hand, excessive management emphasis on cutting costs often has the unintended effect of impairing “bandwidth”, hence the organization’s intrinsic ability to compete.


Chuck - Red RocksThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.


[i] See: http://www.businessdictionary.com/definition/bandwidth.html#ixzz3RGjdlg5i

[ii] See the Harvard Business Review’s classic article: Skinner, Wickham, “The Focused Factory”, HBR May–June 1974

[iii] For more on the Performance Curve, see Operational Excellence – The Performance Curve, this blog: http://jerasustainabledevelopment.com/2012/05/24/operational-excellence-the-performance-curve/

More on Henry Ford and Elon Musk

Last week’s post, Henry and Elon, discussed Elon Musk’s “problem” – ramping up production sufficiently to fill the 400,000 orders for Tesla’s new Model 3 in a timely manner. The production rate increases were compared to Henry Ford’s success at ramping up Ford Model T production a century ago. The situation Musk faces is remarkably similar to Ford’s, never mind the hundred years.

Last week, Tesla’s management held a conference call for business analysts and the financial community. The Model 3 production schedule was discussed at some length. Some points from that conference call follow the text from last week’s post – repeated below, (in case you missed it).


Henry and Elon

From 1 May 2016

I’m writing this post just one month after Tesla Motors’ Model 3 electric automobile was introduced and made available for advance orders. As you may have heard, in the first week following that introduction, Tesla received more than 325,000 orders, with $1,000 deposits – reportedly a record for any product, ever! Now, a full month from launch, the order book reportedly totals around 400,000.

The question now is “can Tesla produce enough cars to fill those orders before the folks in the queue get tired of waiting and demand their fully refundable deposit back?” Sounds like a fair question, especially considering: (a) that Tesla produced only about 52,000 cars in all of 2015, (b) that Tesla will want to continue to produce their existing Model S and Model X cars, presumably in increasing volumes, and (c) that lots of additional Model 3 orders will keep rolling in. As a practical guess, let’s rephrase the question this way: “can Tesla deliver a cumulative 400,000 Model 3 automobiles by the middle of 2019 without retarding growth of their other product offerings?”

Henry Ford’s Model T

Let’s start to answer the Model 3 production question by considering Henry’s Model T of a century ago. Ford introduced the Model T as a practical and affordable automobile for everyman in late 1908 and started deliveries in the 1909 – 1910 model year. Here are the production figures:

Ford Model T Production Figures

1910 Ford Model TStarting at zero, it took Ford about four and a half years to produce the first 400,000 Model T Fords. Unlike Tesla, Ford did not start with 400,000 orders in hand. Henry Ford had no idea, from the start, how many he would be able to sell: “everyman” had not even dreamed of owning an automobile in 1908. So, Ford didn’t know how much manufacturing capacity he would need, nor did he know how raw materials would be sourced in sufficient and timely quantities.

For Ford, it was necessary to vertically integrate from iron ore deposits to metals castings all the way through finished vehicles in order to assure adequate supplies of all of the components necessary to keep production going. Tesla has integrated vertically to build a “gigafactory” sufficient to mass produce batteries in the quantities that Model 3 production will require. The “gigafactory” is already in operation, although far from full capacity.

Compared to Ford and his Model T, Tesla has a century of manufacturing technology to draw on, along with the infrastructure that supports an industry that can produce about 15 million vehicles annually. With 400,000 orders in hand (and the $400,000,000 from the deposits), Musk and Tesla are certainly in a much better position to find financing for the facilities and capital goods necessary to produce the Model 3 than Ford was in 1908.

Building and operating a 21st century automobile factory that can produce 400,000 automobiles by the middle of 2019 is a big job. The manufacturing technology is impressive, but it’s not rocket science. By the way, Elon Musk is a rocket scientist – he is the Chief Technical Officer of SpaceX, maker of 21st century rockets.

Will the Tesla Model 3 deliver fast enough? Bet on it.


Additional Comments – 7 May 2016

On 4 May, Elon Musk and Tesla’s management team held a conference call for business analysts and the financial community. Model 3 production planning was a primary area of discussion. Here are a few points that build on last week’s post:

>> Production Rate: Musk announced that Tesla intends to reach the 500,000 cars per year rate in 2018, instead of 2020 as previously indicated. I take that to mean total production of all three models, not Model 3 alone. The blue line on the graph labeled “Model T Production” indicates that Ford significantly exceeded the half million cars per year production rate in the 1916 – 1917 model year. The production rate in 1910 – 1911 was 53,192. So, within five years Ford increased production by more than ten times. Now, Tesla says they will do something similar – from about 52,000 in 2015 to about 500,000 in 2018 – in three years rather than Ford’s five. Also notice that the second 500,000 vehicle production rate increase took only about three years (until 1919 – 1920), even though production of military goods for the First World War (1917 – 1918, for Americans) significantly delayed the ramp-up.

Model T Production and Price

>> Operating Leverage: In a discussion on costs, Elon Musk mentioned that “our operating leverage means fixed cost relative to variable cost is going to improve dramatically”. How much is “dramatically”? The red line on the graph labeled “Model T Production” indicates the per vehicle selling price. For the 1910 – 1911 model year, Ford charged customers $780 for a Model T. The price was reduced to $440 for the 1916 – 1917 model year. That 43.6% price reduction was made possible through Ford’s increase in operating leverage.

Ford was selling the Model T into an entirely new market. Each time he reduced the price, he created an entirely new customer segment. Ford used price to keep his production rates increasing. Improvement in operating leverage funded the price reductions – with some left over for Henry Ford and his Company.

>> “Hell-bent on becoming the best manufacturer on earth”: Musk pointed out that that:

“Thus far, I think we’ve done a good job on design and technology of our products. The Model S and Model X are generally regarded by critical judges as technologically the most advanced cars in the world. We’ve done well in that respect. The key thing we need to achieve in the future is to also become the leader in manufacturing.”

Excellence in manufacturing operations results in high product quality levels and high throughput rates – hence strong operating leverage. It worked for Ford a century ago. It is working for Tesla today,


Everybody in manufacturing should read (or re-read) Henry Ford’s autobiography. The parallels between what Ford said and did with what Musk is saying and doing are truly remarkable. Of course, it goes without saying that a century does make a difference and that a Tesla Model 3 isn’t a Ford Model T. But, the real point here is that what has been done must be possible, and Tesla’s task looks a whole lot like something that has been accomplished — a century ago.

By the way, last week rocket scientist Elon Musk’s SpaceX recovered (landed) a rocket on a barge at sea, at night. SpaceX designed and manufactured that rocket. SpaceX will reuse the rocket, reduce the price for future satellite launches, and increase their throughput and their operating leverage. Musk and his crowd do know how to do things well.

Chuck - SedonaThoughtful comments are always welcome.

…  Chuck Harrington

(Chuck@JeraSustainableDevelopment.com)

P.S: Contact me when your organization is serious about thriving in the 21st century … CH

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.

Image credits: 1910 Ford Model T photo – creative commons via Wikipedia

Henry and Elon

I’m writing this post just one month after Tesla Motors’ Model 3 electric automobile was introduced and made available for advance orders. As you may have heard, in the first week following that introduction, Tesla received more than 325,000 orders, with $1,000 deposits – reportedly a record for any product, ever! Now, a full month from launch, the order book reportedly totals around 400,000.

The question now is “can Tesla produce enough cars to fill those orders before the folks in the queue get tired of waiting and demand their fully refundable deposit back?” Sounds like a fair question, especially considering: (a) that Tesla produced only about 52,000 cars in all of 2015, (b) that Tesla will want to continue to produce their existing Model S and Model X cars, presumably in increasing volumes, and (c) that lots of additional Model 3 orders will keep rolling in. As a practical guess, let’s rephrase the question this way: “can Tesla deliver a cumulative 400,000 Model 3 automobiles by the middle of 2019 without retarding growth of their other product offerings?”

Henry Ford’s Model T

Let’s start to answer the Model 3 production question by considering Henry’s Model T of a century ago. Ford introduced the Model T as a practical and affordable automobile for everyman in late 1908 and started deliveries in the 1909 – 1910 model year. Here are the production figures:

Model Year 1909 – 1910 1910 – 1911 1911 – 1912 1912 – 1913 1913 – 1914
Production 18,664 34,528 78,440 168,220 248,307
Cumulative

Production

18,664 53,192 131,632 299,852 548,159

1910 Ford Model TStarting at zero, it took Ford about four and a half years to produce the first 400,000 Model T Fords. Unlike Tesla, Ford did not start with 400,000 orders in hand. Henry Ford had no idea, from the start, how many he would be able to sell: “everyman” had not even dreamed of owning an automobile in 1908. So, Ford didn’t know how much manufacturing capacity he would need, nor did he know how raw materials would be sourced in sufficient and timely quantities.

For Ford, it was necessary to vertically integrate from iron ore deposits to metals castings all the way through finished vehicles in order to assure adequate supplies of all of the components necessary to keep production going. Tesla has integrated vertically to build a “gigafactory” sufficient to mass produce batteries in the quantities that Model 3 production will require. The “gigafactory” is already in operation, although far from full capacity.

Compared to Ford and his Model T, Tesla has a century of manufacturing technology to draw on, along with the infrastructure that supports an industry that can produce about 15 million vehicles annually. With 400,000 orders in hand (and the $400,000,000 from the deposits), Musk and Tesla are certainly in a much better position to find financing for the facilities and capital goods necessary to produce the Model 3 than Ford was in 1908.

Building and operating a 21st century automobile factory that can produce 400,000 automobiles by the middle of 2019 is a big job. The manufacturing technology is impressive, but it’s not rocket science. By the way, Elon Musk is a rocket scientist – he is the Chief Technical Officer of SpaceX, maker of 21st century rockets.

Will the Tesla Model 3 deliver fast enough? Bet on it.

Chuck ReadingThoughtful comments are always welcome.

…  Chuck Harrington

(Chuck@JeraSustainableDevelopment.com)

P.S: Contact me when your organization is serious about thriving in the 21st century … CH

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.

Image of 1910 Model T Ford is from creative commons via Wikipedia

Figures on Ford Model T production are from My Life and Work, an autobiography of Henry Ford.

Preempting a Turnaround – Or Worse

Storm Warnings

A Cautious New Year, the first post to this blog in 2016, was posted over the New Year weekend. When 2016 opened for business after that weekend, the stock market began to drop. Now, two months into 2016, the need for caution appears to be accelerating. Here in the U.S., economic indicators suggesting possible recession are becoming stronger and more frequent. Globally, economic slowdown appears to be the general rule. Recession is a cyclic phenomenon, where a return to “normal” can be expected. This global slowdown, however, may well be a serious indication of fundamental changes in the global economy.

It is not this blog’s purpose to wallow in doom and gloom. However, when credible reasons for economic caution are present, a pragmatist takes appropriate actions. Which actions are appropriate, however, are unique to each business unit and circumstance.

When adverse economic conditions do exist, “appropriate actions” become increasing difficult to actually execute, as many will recall from 2008 and the years following. Better to heed the warning signs and to act preemptively. That means plan now.

To turn a manufacturing business around is always tough. But the mechanics of a turnaround do provide a useful source for preemptive planning. The Painful Art of the Turnaround, a set of three earlier posts to this blog, will help identify the “appropriate actions” for today’s national and global economic and business situation. Part 1: Confronting Reality is reprised below. Part 2 and Part 3, with updates and comments, will follow over the coming weeks. — C.H.


The Painful Art of the Turnaround – Part 1: Confronting Reality

From July 11, 2013

This post is the first of three on turning around a smaller manufacturing business unit. For present purposes, the term “turnaround” may apply when a business unit is either generating financial losses, or is displaying a persisting trend of deteriorating financial performance. “Persisting trend” means a trend that can be distinguished from cyclic downturns, such as recession or fluctuations in the price of petroleum.

Turnaround is arguably the most demanding of management tasks.

A Tough Situation

The opening years of the 21st century have been difficult for manufacturers, especially those in developed countries. In the U.S. alone, something like 50,000 manufacturing facilities have closed — net of new factories opened — since this century began. The table labeled “Size Distribution of Factories” [1] indicates that the carnage is spread across factories of all sizes. Measured by the number of factories closed, smaller factories led the way. In percentage terms, the bigger they were, the harder they fell. Since smaller firms often supply, and buy from, larger firms, there is no good news for anyone. And that’s just the more recent portion of a factory closings trend that dates back about three decades.

Size Distribution of FactoriesThe global realities that have produced this melt-down aren’t likely to go away. The resulting turmoil could affect the stability of any firm. Since the unexpected can occur at any firm, all managers need be aware of what is involved in turning a business around.

Confronting Reality

Once a persisting pattern of deteriorating operational and financial performance becomes clear, its potential consequences will be recognized by many. Others, especially managers, may well be in denial. A crisis in organizational confidence isn’t unlikely. It is necessary to take specific actions to maintain — or regain — the viability of the business.

>> A turnaround leader must be designated. This may be the existing senior manager, or it may be somebody else [2]. In either case, the turnaround leader must have full authority, subject only to the board chairperson (or other designated representative of the ownership). The turnaround leader will need both business acumen and strong leadership skills. The ownership’s expectations of the turnaround leader need be clearly and explicitly spelled out up front. There is nothing honorary about the role of turnaround leader — it is nitty-gritty, hands-on, often painful and more than full time.

>> The turnaround leader will need access to — and must be willing to listen to — input from a cadre of experienced people, especially those with previous turnaround experience.

>> The firm’s cash position must be calculated and projected forward at least weekly, if not more often. The turnaround leader must always know when the firm will run out of cash. The cash projection sets the deadline for returning the business to a net cash positive position.

>> The turnaround leader’s initial task is to prohibit any cash expenditure without the leader’s explicit approval. Then the leader needs to find additional access to cash. Perhaps the ownership will provide more cash. Perhaps credit lines are available. Accounts receivable need be worked. Expenses need be deferred. Profitability by product must be re-examined. Terms with suppliers may be renegotiated. The list goes on. A substantial (and painful) retrenchment may well be necessary.

>> Once the firm’s future cash prospects are reasonably clear, the turnaround leader needs to ask the ownership to decide on a course of action: (a) improve the prospects of the business in order to operate the firm indefinitely; (b) prepare the business to be sold or merged into another business; or (c) prepare the business for liquidation.

Make a New Plan, Stan

Boone Pickens tells this about his dad: He said, “Son, a fool with a plan can beat a genius with no plan. Your mother and I are concerned because you might be a fool with no plan.” [3]

Assuming that the ownership decides to operate the business, they will likely do so contingent on a sound plan for renaissance. I use the term “renaissance” because returning the firm to its former state isn’t enough. After turnaround, the firm must be in a position to compete successfully within today’s (and tomorrow’s) rapidly changing global business realities. That is, positioned to thrive in perpetuity.[4]

The plan for renaissance starts with a fresh business model (value proposition + a system for delivering the proposed value to targeted customers) [5]. A transition map follows. The transition map outlines the actions necessary to move the organization from its current state to a condition where the new business model is actually functioning. The transition may proceed through several stages of restructuring, stabilization and revival. The interests of all stakeholders (owners, creditors, customers, employees, suppliers and more) must be recognized.

The transition map is used to generate specific action plans [6], each with responsibilities, timeline, and cash costs limits defined. A no-nonsense reporting routine is established and executed rigorously. A sustained sequence of vigorous actions with corresponding evidences of progress will go far to reduce fear and improve the morale of all involved.

Caveat: All business situations are different. Although most successful turnaround plans have much in common, there is no one-size-fits-all turnaround plan.


Chuck & Joan in ParisThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

P.S: Contact me when your organization is serious about prospering in the globalized 21st century … CH

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.


[1] The chart labeled “Size Distribution of Factories” is from Job Creation in the Manufacturing Revival, a Congressional Research Report for Congress, 19 June 2013, available at: http://www.fas.org/sgp/crs/misc/R41898.pdf

[2] In general, it is preferable to appoint an outside person, who needs not contend with matters of blame. For larger firms, where ownership and management are usually separated, this is almost always the case. In smaller firms, the ownership often is the management. The owner – manager often has personally endorsed many of the firm’s obligations. That makes a tough call. However, is unlikely that the firm will have more than one opportunity to turn around the business, short of bankruptcy.

[3] From Boone Pickens’ blog, The Daily Pickens, 8 July 2013.  http://www.pickensplan.com/news/2013/07/08/dallasnews-opinion-america%E2%80%99s-energy-picture-is-brighter-but-we-still-need-a-plan/

[4] Adam Werbach defines a sustainable business as one that is positioned to thrive in perpetuity. From Adam’s book, Strategy for Sustainability, Harvard Business Press, Boston (2009), page 9.

[5] For more on business models, see Business Model Innovation, this blog: http://blog.jerasustainabledevelopment.com/2013/03/27/business-model-innovation/

[6] Sandy Steinman’s new book, The Small Business Turnaround Guide, Morgan James Publishing, New York (2013), presents very practical insights as well as information on specific actions.

 

 

On Value and Profitability

Van Gogh and the Nature of “Value”

Vincent van GoghWhat does Vincent van Gogh have to do with manufacturing? He makes a critical point about “value”. During his lifetime, he produced about 900 paintings, any one of which would fetch millions at auction today. While van Gogh lived, he was able to sell exactly one of those 900 paintings – and surely not for millions of anything. [1]

The point here is that “value” is a subjective term. An item has no “value” until two parties agree to make an exchange. And that “value” may change dramatically from time to time, place to place or circumstance to circumstance. The “value” of an item is not intrinsic to that item, nor does it have anything to do with its cost, unless buyer and seller (or their proxies) so agree.

Profits, of course, are the lifeblood of any business. But “profit” is a calculated term, and “value” is part of that calculation. So, profits, as important as they are, have something of a subjective nature. Managers need to be aware of – and take advantage of — that subjective nature. Creating and Capturing Value, an essay from a year and a half ago, provides a good place to start.


Creating and Capturing Value – from 26 July 2014

Profit from Slywotzky

Adrian Slywotzky is one of my favorite business writers. Why? Because he writes about profitability. Almost no one else does. He explains how profitability does — and doesn’t — happen. To beg the obvious, a business must consistently be sufficiently profitable in order to continue to exist, let alone to thrive in perpetuity. Profitability, unlike taxes, doesn’t just happen. It needs to be understood and cultivated.

No-Profit Zones

Consider the value stream of a manufactured product, from the origins of raw materials through a sequence of value adding steps, culminating in delivery to an end user. Each of those value-adding steps can be viewed as an individual business that receives inputs from upstream, adds cost and (hopefully) value, then passes the product-in-process downstream. At each step, the incremental and the rolled-up cost can be calculated. The value, however, is determined by market forces, including supply, demand and competitive offerings.

Value Chain DiagramSo, for some steps (again, thinking of each step as an individual business), the market’s assessment of the value added may substantially exceed the incremental cost. For others, the situation may be very different. For some steps, the market may allow a generous profit. Other steps may well be no-profit zones, or even negative-profit zones.[2]

Take the automobile industry, for example. Automobile manufacturers buy in large quantities from suppliers that are, in most cases, considerably smaller than themselves. Automobile manufacturers buy very well, so profit opportunities for suppliers are limited, at best. Automobile manufacturers enjoy great economies of scale, so conversion of parts and materials to finished automobiles is quite efficient. Still, for each manufacturer, a few models generate most of the profits — others may be outright losers. Consider that Volkswagen’s Audi division generates half of the profits, while, at Ford, pick-up truck sales drive the profits. For automobile dealers, sales of new vehicles generate very little profit. Sales of used vehicles, maintenance and financing generate the profits.

Slywotzky points out that situations where suppliers all offer comparable products (in the customers’ opinion) and compete for business primarily on the basis of price are likely to be (or soon become) no-profit zones. This is especially true when “no profit” is taken to mean a level of profitability that is insufficient to justify the resources employed.

In short, the value created across a value stream is not necessarily captured where or by whom it is created.

Capturing Value

The Art of ProfitabilityWarren Buffett, along with most competent securities analysts, doesn’t simply extrapolate from historical data. Rather, he seeks an understanding of how a business makes a profit and, more importantly, of why those profits should continue into the future. Sustainable profitability requires a mechanism by which sufficient value is reliably captured. No kidding… a mechanism. Slywotzky describes twenty three of them, although there are likely many more. Better yet, one of Slywotzky’s books amounts to an engaging self-study short course in recognizing and applying those twenty three mechanisms.[3]

For Smaller Manufacturers

Slywotzky teaches that value capture is at least as important as value creation, and that value capture, hence profitability, results from business design. This applies to businesses of all sizes and descriptions. For smaller manufacturing firms, however, there are some additional considerations.

>> Smaller firms must, of necessity, focus. Larger firms may enjoy the luxury of some degree of diversification.

>> Manufacturing firms, big or small, are generally fixed asset intensive. Task-specific fixed assets limit agility.

>> Slywotzky’s books were published before the full impact of both globalization and the Great Recession on manufacturing became apparent.

None of this changes the need to design your business to capture value. However, the global business environment changes increasingly rapidly now. When that happens, even the best value capture mechanism may become moot, perhaps suddenly. So, your present value capture mechanism is important, but so is your next.

This means every manufacturer needs a method for maintaining a zoomed out view of entire business world and its relentless changes. It also implies new forms of cooperation among manufacturers, in view of globalized business realities. Start with your trade organization and re-examine its functions for the 21st century.

Chuck - FranceThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

P.S: Contact me when your organization is serious about pursuing Sustainability … CH

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome. New blog posts are published weekly.


[1] Facts about van Gogh are from The Redhead Riter,  http://www.theredheadriter.com/2011/06/vincent-van-gogh-30-interesting-facts/

[2] For more on profit zones and no-profit zones, see:  Adrian Slywotzky and David Morrison, The Profit Zone, Three Rivers Press (1997, 2002)

[3] Adrian Slywotzky, The Art of Profitability, Warner Business Books (2002)