World Class Suppliers Need World Class Customers

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As part of their effort to slash the cost of auto parts by 30% over the next three years, Toyota met with its suppliers last week to enlist their help in the process. Based on their reputation for dealing with suppliers, I'm guessing that Toyota will approach the process in a much different manner than most companies, and the process will be very successful.

Instead of squeezing suppliers by beating down prices and lengthening payment terms, companies like Toyota work with suppliers to find improvements in designs and processes that lead to real and sustainable cost reductions. When approached in this manner, the supplier and customer benefit from the process and the savings result in strengthening, rather than weakening, the supplier.

Two Glaring (and Common) Examples

I once worked with a Fortune 500 company that issued a policy for its divisions to lengthen payment terms to all suppliers. Based on the formula, the new policy could result in payment to a supplier being delayed by up to 90 days after receipt of the product or service.

Procurement professionals at a particular division for the company (Division A) implemented the policy and were praised (and rewarded) by the corporate office. One of Division A's suppliers was another division of the company (Division B). As a result of the change in policy, Division B cut off shipments of a critical component to Division A because it paid its invoices too slowly. Because of this, Division A's shipments fell because it couldn't get the component elsewhere; costs increased (due to production stoppages); and profits dropped because of its inability to ship and invoice its customers. Division B's profits also fell because it stopped shipping to Division A.

And another . . .

In another example, a friend of mine owns a company that supplies parts to the Detroit automakers. During a visit to one of the automaker's factories, he noticed a problem in the production line with the assembly of a particular model. As part of the process, the car was flipped to enable installation of a particular subassembly. Problems occurred because the subassembly could not be completed until the car was turned back upright, and it frequently fell apart before it could be secured.

On his own accord, my friend developed an inexpensive grommet that could be placed on the subassembly to properly secure the parts as the car was flipped upright. After the final assembly was bolted together, the grommet could be easily cut away, thereby completely eliminating the problem.

the customer adopted the idea and changed the process to utilize the grommet. Even though the grommet was a very low cost part, the automaker's procurement department - in an effort to further reduce the cost - decided to purchase the grommet from a competitor instead of from the company owned by the person who developed the part. In a situation where a supplier - without direction from the customer - took the initiative to solve a problem that caused delays, extra costs, and headaches for the customer, the customer displayed a lack of respect for the supplier by awarding the business to another company. Needless to say, my friend was not motivated to solve future problems for the customer.

Stop the Madness

The above examples are unfortunately fairly typical of western business. If we are to come out of the recession strong and ready to compete, we have got to learn that the relationship with a supplier is based on more than price and payment terms. A company cannot win if its suppliers lose. Besides the obvious, who wants to do business with a loser anyway?

Leaders Are Developed; Not Hired

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I see that Bank of America (BoA) finally decided on a replacement for CEO Ken Lewis. The board blamed the lengthy process on the compensation restrictions that pay czar Kenneth Feinberg has placed on financial institutions.

I disagree. I place the blame on the board and, more generally, on American business in general.

Companies should rarely, if ever, have to conduct an executive search. The most basic responsibility of a company's board of directors is to protect the interests of shareholders. This cannot be accomplished without continuity in leadership which requires succession planning and leadership to development at the highest levels of the company.

In my practice, I encourage organizations to always have the successors identified for each senior position within the company. Although most agree with the need for succession planning, it is too often given too low of a priority to make it happen.

There are a number of advantages to the organization of developing leaders from the inside, however, that should give it enough importance to make it a priority, including the following:

• Reduced Recruiting Costs: Besides the price of retaining a recruiter to fill an executive-level position, there are internal costs associated with interviewing and screening potential candidates, as well as the costs incurred while the new leader learns about the company's processes, customers, systems, and culture;
  
  
• Keeping Talent: When people see that leaders are promoted from within the organization rather than hired from the outside, they feel more valued and better about their own future with the company. This tends to increase loyalty and decrease turnover. Also, those with leadership ability can be identified early and groomed into management positions in a way that fits the company's culture and leadership style;
  
  
• Reduced Compensation Costs: Promoting from within tends to keep compensation costs down because you are not competing with other companies for the same candidate. Besides the increased compensation that comes from competition, hiring a leader away from another organization can include contract buyout costs, as well as payments for bonuses, stock options, etc. that the new hire is losing by leaving his or her current position;
  
  
• Continuity in Direction & Approach: One of the most damaging aspects of hiring a leader from the outside occurs when the new hire has a different leadership style than his or her predecessor or takes the company in a different direction. People become confused and fear increases, further increasing costs to the organization;
  
  
• Reduced Risk of Success: No matter how careful the search process is conducted, there is a certain level of risk associated with a new hire. Promoting from inside the company reduces that risk because the person's ability, personality, character, and leadership style is already known.

The obvious downside of developing leaders from inside the company is losing someone after investing to develop his or her leadership skills. Although the lack of focus on leadership development in western business makes this a valid concern, it is not enough of a reason to ignore such an important aspect of an organization's future.

Repairing a Faulty Lean Process

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When I am asked to help a company with a lean implementation, it is often because the initiative has failed in some way to meet expectations. In many cases, I find that the problem is related to the company attempting to implement lean at an expert level rather than starting slowly and letting the process evolve and develop over time.

As a follow up to an earlier post on why lean fails, I will present here some of the most basic and easily correctable problems that I have seen with companies that have asked for help with their lean processes. It is important to note that correcting a "lean gone bad" situation is possible and not necessarily difficult. It usually requires stopping the process for reflection and making adjustments to put the initiative back on track to be successful.

Don't Try To Be Toyota

There has been a lot written about Toyota and how lean has contributed to their success over the last several decades. There are books, seminars, and conferences detailing exactly how Toyota uses lean, including the tools and steps they deploy (and even the words they use) to identify and eliminate waste.

Toyota is the master of lean. They invented it and have been using (and perfecting) it for the last 60 years. An attempt to copy how they use it without going through the process to learn and develop the system is akin to reading a book on skiing and heading for the black runs on your first trip to the slopes. It is dangerous and most likely will end in disappointment (or worse).

The Basics

When an organization asks for help to get lean back on track quickly, I often recommend the following basic actions:

1. Focus on Small Improvements Stop doing kaizen events and focus instead on small improvements. Kaizen events (covering multiple consecutive days) require a lot of focus, pre-work, and a very experienced facilitator to carry out; while small improvements can be implemented with very little training and experience.
   
   Also, a kaizen event often requires interrupting the operation for a period of time while the improvements are being implemented. There is a much higher chance of losing the support of the person responsible for the operation if a shutdown is needed.
   
   Small improvements also allow people to learn how to apply the tools as improvements are made with a much smaller risk of failure.
   
   Giving team members time on a regular basis (e.g., 30-60 minutes per week) to work on improvement activities can lead to some great results, and enable the lean process to evolve and develop effectively.
   
   
2. Use the People Closest to the Process Western business has somehow been led to believe that lean is not possible without hiring six-sigma black belts to facilitate the improvements. Although the six-sigma methodology includes some very sophisticated statistical tools, they are not necessary to make improvements early in the process. Especially at first, it is very likely that there are significant improvements are possible with the use of only a few basic tools.
   
   The best lean implementations I have witnessed have had those closest to the process heavily involved in the process. Projects are led by the team leader or a team member who has naturally grown into the facilitator position. I do not believe that the process works nearly as well when projects involve people who are not part of the team.
   
   
3. Continually Train & Develop Once the commitment is made to implement lean, people throughout the company need to be trained and developed on a continual basis, as opposed to a single, multiple-day class at the outset of the process. Workers need training in the process improvement tools; supervisors and managers need training in leadership (specifically what it means to lead in a lean environment); and executives need to be trained in the barriers to lean and what they can do to make the process successful. It is more effective when this is done over time so people can relate what they learn to the changing environment.

The above steps do not always cure all of the problems with an unsuccessful lean implementation, but I have found that they often have a positive enough impact to get the process back on track fairly quickly.

Thoughts on Job Creation

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The White House held a jobs summit earlier this week to discuss ideas to lower unemployment in the U.S. Several ideas were presented and discussed during the meeting - some that made sense and others that, in my opinion, will do little more than add to the deficit.

The big problem with the bulk of the proposals is how to pay for them. The deficit is out of control and literally growing every minute. And most agree that we can't afford to continue to pump money into programs that don't provide immediate results (as we have enough of those already).

Another issue with the current situation is that, until the jobless rate drops, the government needs to continue to fund unemployment and health care benefits for those who have been out of work for an extended period of time.

It's unfortunate that this problem was not addressed two years ago when the recession began. As the financial system crumbled, it was obvious that a recession was coming that it had the potential of being very long and severe. On the macro level, the increased unemployment rate reduced the amount of taxes collected on the state and national level, as well as resulting in a decrease in consumer spending - leading to further layoffs (and even lower tax collections). The death spiral that resulted has continued and worsened to the point where we now cannot afford to do much of anything to get things moving again. Although I agree that it is necessary, unemployment benefits do nothing to increase spending or economic activity.

Over a year ago, I wrote that we needed to focus on job creation and that any stimulus money should go to those companies that do not layoff workers. Unfortunately, we not only gave money to companies that implemented layoffs, it appeared that is was a prerequisite to receiving assistance. Rewarding companies that keep people working could have encouraged businesses to look for alternate ways to cut costs. This could have kept more people working - and spending - thereby reducing the effects of the slowdown.

There are a number of well-known companies that did not layoff workers during the recession. These organizations implemented a variety of actions to keep people working; including unpaid holidays, reduced workdays, focused improvement activity, and dividend cuts. Our economy would have been much better served by providing stimulus money to these companies rather than throwing it into programs that, at best, created temporary employment for a small sector of the workforce.

I would love to see congress and the administration implement an economic, rather than a political, approach to job creation. We will get through this crisis much more quickly if we work for what's best for the country than continuing to focus on what's best for the political parties or individual congressional districts.

Big Changes at GM?

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With the departure of Fritz Henderson, GM's board is talking as if they are taking the opportunity to kick the changes at the company into high gear. Making changes at an organization as large and complex as GM is not going to be easy. It can be done, though, with a well-focused and aggressive plan.

In my opinion, the plan to get GM on track needs to include the following:

• Forget about being the number one producer of automobiles. This kind of focus can take the company away from its purpose of making cars that people want to buy. I believe that Toyota temporarily lost its focus in its drive to be number one and it got them into trouble. Make great cars and the numbers will take care of themselves.

• Improve the - real and perceived - quality of products offered. This is done by working on processes and products; not advertising.

• Improve relations with dealers and the UAW. The company cannot get better without everyone working together. The level of trust between management, workers, and dealers has been poor for many years, and it's up to GM management to take the responsibility to get it fixed.

• Increase innovation. The company needs to begin taking chances and develop more innovative designs and features into its cars. It's time for GM to stand out because of its products instead of its problems.

The biggest barrier the company has to address is its own culture. In general, the longer a company exists and the bigger it becomes, the more risk averse the culture becomes. It is a great time, though, for GM to refocus and reinvent itself, and I'll be watching with interest as the saga continues to unfold.