Jim is looking for help on outsourcing tester design.  We took a look at the mechanical side and we should have no problem on the design and development.  He needs electrical help too.  Our team’s strength is our deep bench.  One call later, we have the former head of test development for a $5 billion electronics company offering to help.  Two calls later we have a national team that can design and build world class testers.

Katie called needing 27 prototypes in 24 hours and 35,000 parts in 2 weeks.  No problem; we’ve been here before.  Super-Gary is stepping up again with a ready-made sample.  Mike is shuttling samples back and forth.  Steve will wring every non-value added second from production so we hit the delivery date. Greg will rebalance the lines for the umpteenth time this week so everything flows.  We run this ramp-up/ramp-down drill like the Patriots run passing drills.

Oh, BTW, Delmy, Sean and Jo-Ann all want their jobs pulled in.  We simply couldn’t do it without our dedicated teams of suppliers including CAT, CSI, All Metals, Yarde and American.  CAT is switching colors this morning to powder 2 server racks that were built yesterday and will ship tomorrow.  Yes, that’s server racks built to order in 3 days. CSI is switching colors mid-run so Al can deliver a new color to a new customer of his.  Oh, did I mention that All Metals is delivering 46 tons of steel this week?!

Life is too short to not make every day exceptional. We hire the best and reward them handsomely when we win. We train to build teamwork and get better every day.  We aggressively search out customers that bring out the best in us.  And when things come together, we create a little magic that makes a difference in our customer’s lives that has us want to do it again and again. This is what I call great teamwork.

I used the think that lean and inventory didn’t fit in the same sentence (or in the same factory).  Over time, I have learned that flow is a central to lean operations.  This requires managing up-stream activities to ensure a steady flow of work down-stream.  Kerrie-Ann’s request for a 100 pc order with 10 pc releases is her way to control the flow from our factory to her assembly floor. Kan-Ban releases are triggered by floor demand vs. MRP systems typically use forecasts to trigger releases.

Ideally, when a worker at Kerrie-Ann’s shop pulls a part, the system should signal our company to build that replacement part.  Sometimes the signaling system is slow, so some buffer stock is added.  Sometime the manufacturer has lead times, so buffer stock is added.  And, sometimes customer demand peaks, so buffer stock is added.  In this example, it looks like Kerrie-Ann has a buffer stock of 10 parts.  Or does she?

This is why I always ask about TAKT.  TAKT is “lean-speak” for the pace of customer demand.  Our standard lead time is 4 weeks.  If customer demand is 2 units a week, then when we get a pull signal from Kerrie-Ann’s floor (a.k.a. a Kan-Ban release), we can build 10 parts and deliver them just when their inventory is down to 2 parts.  But if there are spikes in demand or breakdowns in part quality, that’s when the Kan-Ban really is tested.

We are able to offer Kerrie-Ann a very competitive price because she is offering us a 100 pc order with Kan-Ban releases.  Because it is Kan-Ban, her side of the partnership is to level production so we avoid expedite expenses.  Our side of the partnership is to level our production using her order and many other orders so that she will get her 10 parts in 4 weeks no matter what.  If she can’t level production or if we can’t adjust our production enough, her final units can’t ship.  This is when buffer stocks need to be considered – they’re like insurance to ensure smooth flow.  Buffer stocks are only added in long lead or highly variable lead time situations and over time they need to be reduced/eliminated.  The carrying cost of the buffer stock is weighed against the inefficiency costs of a stalled production line.

If Kerrie-Ann’s TAKT during peak demand  is 5 units a week and we have Kan-Ban orders for 10 parts with 4 week lead times, she will run out.  Overtime costs can be as much as 30% depending on how fast and how much warning we have.  In this case, the 1 ½% to 3% carrying cost of the buffer stock  is much less expensive than the overtime costs.  If suppliers carry the cost of buffer stock, we overcompensate because we are further from understanding customer demand.  Buffer stock on a customer’s floor is the best visual system around for focusing everyone on leveling demand as soon as possible.

When the effort is taken to level out production and the floor is running smoothly, the Kan-Ban process can be a very effective tool for cost reduction.  Information and material is flowing smoothly without issue.  Effective Kan-Ban processes have tremendous impact  - we’ve seen purchasing functions (and POs and quotes) reduced to a stock room clerk sending replenishment orders when buffer stock levels hit minimums.

The vast majority of the buyers we work with send out RFQs, manage Quotes, place POs and then manage the delivery date (i.e., pull-in, push-out, hold for ECO, etc.).  Some customers, like Rob, source the sheet metal to us, take receipt and then they coordinate with a finishing supplier with a separate RFQ-Quote-PO-Delivery.  A quick way to help is for ETM to coordinate directly with the finisher to reduce Rob’s workload by 50% with a single RFQ, Quote, PO & Manage.  We would use the same finisher as Rob and have the same (or better) pricing from the finisher.  In Rob’s case, we would also eliminate a second receiving, inspection, shipping and billing process.  Here’s how the labor costs might compare:

For busy companies like Rob’s, the savings are secondary compared to the additional capacity in purchasing, shipping/receiving and accounting.  There are actually more “savings” by avoiding the staffing and training costs of adding new people.  In reality though, this approach makes better sense as a time/capacity savings than a cost savings.  Why?  When we take on the added service of coordinating with a finisher, we have costs like Rob’s as well.  In effect, Rob’s costs are transferred to us.  We try to save on our labor rates (since the scope is more narrowly defined than Rob’s) and on finishing costs (by combining multiple orders from different customers for volume discounts and/or freight savings).  This allows us to make a small profit to re-invest back into the business.

There is an additional savings of time and costs that deserves mentioning.  Today’s customer demands are more variable than ever which typically translates to more pull-in and push outs to avoid inventory.  A lean shop like ours builds only to demand (to avoid costly finished goods inventory).  Our lean approach also continually improves each step in our operations.  As a result, most often a customer change order can be accepted without any expense.  No expense means no added procurement time to negotiate WIP or inventory costs.  Everybody wins!

Our next step will be to help reduce Rob’s time from 20 hours to 2 hours.  We know how to do this if his boss is flexible in their sourcing strategy.  The basics include a 2 hour meeting to review parts or sub-assemblies to be sourced, on-the-spot quoting, a blanket PO that includes all the agreed assemblies and credit card billing as soon as receiving accepts the shipment.  The key here is to agree on common families of parts so quoting is easy and production “touch time” is minimized.  This has the added effect of reducing build time which in turn reduces lead time and improves Rob’s responsiveness to customer demand.  Everybody wins MORE!

I still have a lot to learn, but I’ve been around long enough to trust a good salesman.  It turns out that Christian is like most Presidents I’ve met – smart, ambitious and hands-on.  Maybe Mike thought that wrestling the design away from Christian would be more work than just having Christian complete the design.  Maybe he didn’t trust us to design the system as much as he trusted Christian.  If Christian’s sales are $1M/yr, that calculates that his time is worth about $500/hr.  Even if it took our engineer twice as long as Christian, it would cost him $2,000 versus the $10,000 in revenue he could generate.  In reality, we have found that our engineer is more effective than the smart, ambitious, hands-on Presidents not because he is better, but he is more thorough and he knows sheet metal design very, very well (read more about Gary here).

This situation doesn’t just happen to the growing new company.  Tom is helping a large company rationalize their supplier base, so they sent out a sample quote package.  After reviewing the package, we discovered there were several inconsistencies in some of the older drawings.  Typically these would be reviewed and revised by the customer and redistributed in the quote package for all.  With resources stretched thin, we were asked to quote “as is”.  This is not unusual for us; we typically add 5-10% into the price to allow for drawing clean-up after we are awarded the business.  What was unusual, was that we were being asked to hold the price for an extended period of time.  This hurts the customer in 2 different ways.

The customer loses because our 5-10% drawing fix buffer may make us uncompetitive to the incumbent who has already fixed their internal drawing.  As a result, the customer fails in their rationalization strategy.  Secondly, there is the strong possibility that our lean manufacturing approach (or the drawing inconsistencies) will provide a lower price compared to the incumbent.  We win the business, fix the drawing issues, and the 5-10% buffer remains with ETM under the extended period.  Here, the customer loses the opportunity to capture additional savings, which was the main purpose of the quoting exercise.  Just like the first example above, we could have taken over the drawing clean-up for the customer as a one-time cost so all the suppliers would have received accurate drawings and fair comparisons would be made.

In the end, we are all faced with decisions like these.  We try to focus on what the customer needs, not what we have to sell.  If we can help solve their issue, we make that offer.  If not, we try to connect them to someone who can.  We are less concerned about how it “should” be done or who “should” do the work.  We are much more interested in getting it done as soon and as cost effectively as possible.  Hopefully you do too.

Our biggest challenge in adding in-house powder coating capabilities is figuring out how to be environmentally responsible.  Not only do we have our own people to be concerned with, but we also have our community and our environment to consider.  We take that seriously.  The great news is that many of our customers have already made the switch from wet paint to powder coating and powder coating is much more environmentally friendly. 

Pre-treating the parts (a.k.a. cleaning) is a challenge, but there have been significant improvements in that area as well.  Our first approach would probably be to continue to send the parts out for cleaning at a local plating house and powder coat in-house.  The next step would be to build our own cleaning tanks, with proper spill barriers and effective recycling programs, so that we can save even more time and money.

The second major challenge is cost, or rather the return on investment.  In the end, we need to make sure that every investment will benefit our customers’ lead times and costs.  Our customers use just a few colors and our size is limited to 6ft x 3 ft x 3ft, so we can save costs compared to a typical paint shop that needs to offer a broad array of paint colors and massive equipment to handle any size part.  Still, to run our own in-house paint department, we estimate the costs to be as follows:

• Equipment (paint booth, conveyor, oven, etc.) is about $120,000
• Overhead (space, utilities, insurances, etc.) is about $30,000/yr
• Labor (wages, health care, taxes, etc.) is about $60,000/yr
• Supplies (powder, nozzles, racking, etc.) is about $10,000/yr

This means the annual costs would be approximately $117,000/yr or $9,800/mo.  Last year we sourced about $75,000 in paint/powder coatings (or $6,250/mo.)  We would need another $3,550/mo in powder coating.  This means that if out-sourced powder coating is about 1.7% of “powder coated” revenue, we would need another $209,000/mo. of revenue in powder coated parts – just to break even.  But break even isn’t bad if we can service our customers faster.

We think with in-house powder coating, we can take our standard painting lead time of 5 days and move that to 2 days.  Quick turns would go from 2 days to overnight.  To some customers, like Todd, this makes a big difference in his flexibility and responsiveness to his customers.  In fact Todd is working on shifting more business to help us reach the $209,000/mo. goal.  As we continue to grow with our customers, their powder coating needs will increase beyond the goal and we’ll be able to save even more money for customer like Todd and Peter.

When I left corporate America over 5 years ago, part of what I wanted to get away from were the political winds that seemed to change direction every time a quarter ended.  A little wiser now, I see it is all about owners/investors/lenders looking for a good return on their investment.  After all, isn’t the economy recovering?  Didn’t the stock market reach a 13 year high this past quarter?  

The trouble is that the economy is not recovering for all of us equally well.  Elliott was aggressively pursuing an outsourcing strategy.  Peter was hard at work to expand his company’s offerings.  As I have written in the past, there are some post-recession effects that will have an impact on all of our businesses.  This means our positions won’t be as solid as they once were (just ask Elliott and Peter if you doubt this).

Most immediately, rising fuel cost are quickly impacting freight costs. If you made your reputation by sourcing to lower cost locations in far away places, your choices may come back to haunt you.  I think Elliott saw this but maybe he couldn’t implement fast enough.  Rising fuel costs will lead to higher energy costs which will lead to materials inflation so your suppliers lean programs’ effectiveness is the only thing keeping a price increase from coming your way.  Peter saw this and was well on his way, but maybe rising costs prevented him from investing in more product development as well.

Both good guys, both cut short in implementing their plan.  Owners/investors/bankers are impatient, just like our customers.  If I want a more solid position, the place I go is toward my customers.  How am I helping them reduce freight increases?  Do they know how much our lean programs have reduced materials’ increases?  Are we working together as tightly as possible to lower their costs and improve their time-to-market?  Maybe you have been impacted by a major change like this and maybe questions like these may help you get to more solid ground.  They sure help me.

With an election coming up, any incumbent could spin every story to show an improvement, but I let the numbers tell me the story.  Early indicators come from long lead industries (like nuclear power, ship building or large earthmoving vehicles) or from suppliers early in the supply chain (think raw materials and semiconductor equipment).  The good news is that nuclear power plant builds are booming as are companies like Deere and Catepillar.  Raw materials are up as well in the areas we watch like aluminum and steel.  Semiconductor equipment was a concern as they had a strong year previously, plus I had heard things were slowing. Tracy, who builds for large semiconductor equipment companies, reassured me the other week that things are booming again.

OK, but how long until we feel the recovery?  The next areas of recovery are the industries that are directly fed by these early indicator companies.  Nuclear feeds the utility companies, ship building feeds the transportation industry, earthmoving vehicles feed raw materials suppliers and semiconductor equipment feeds the chip guys.  It looks like they’re doing well also:

1. The Dow Jones Utility Index is UP from 406 a year ago to 458 today (13%)
2. The Transportation Services Freight Index is UP from 107 a year ago December to 114 this December (6.5%)
3. Aluminum ore has gone from below $0.60/lb in from 2 years ago to above $0.90/lb recently (50%)
4. The Philidelphia Semiconductor Index is flat over the past 12 months, but UP from 340 to 440 (29%) in the last 6 months.

Next in line are the “converters”.  These are the guys that use the power, the shipping, the raw materials and the chips.  These are guys like us sheet metal fabricators and the injection molding houses and the fastener distributors and the PCBA houses.  My conversations with these guys are that things are good but not great.  This month we heard of layoffs at some sheet metal shops.  We are still getting resumes from folks at lots of converters.  You’ll know the recovery has hit the converters when processing equipment sales pickup, wanted ads fill craigslist and capacity increases are announced.

Finally, the OEMs will start to wake up and begin to hustle.  Consumer confidence will be up and financing for capital equipment will be available.  Large companies that have cash now are buying companies to broaden their portfolio.  When the recovery hits them, their acquisitions will shift to capacity expansion type of investments.   We notice lots of scheduled orders getting pulled in and lots of expedites.  We also notice our customers become more concerned over lead times versus price.

Changes in technology and policy helped extend the last boom, but typically this cycle runs about 7 – 10 years.  Some say we are almost 2 years into this current recovery which would put us about 5 years from the peak.  Then over optimism will produce over capacity, more desperate companies will start lowering price to fill that unused capacity and we start all over again.

Here at ETM we have the history and experience from riding many of these economic cycles in many of these industry verticals.  We prepare both in the good times and in the bad times.  And it is always more fun to prepare for the good times.

The first thing I noticed about Kevin was that after being on a road trip for 3 weeks, he was very excited to talk about customer service when I called.  I different kind of person would schedule something after they “caught up.”  He also has an infectious approach to customer service – quoting his first mentor who often said “they would fly helicopters” to service their customers.  This attitude of doing whatever it takes is cultivated in every employee in everything they do.  Attitude is part of their company culture.

This attitude of doing whatever it takes also makes financial sense.  If an employee spends $100 to overnight a shipment, the profit on the shipment is lost, but Kevin’s point to me was that for our type of customer, a few hundred dollars is a small price to pay to keep a customer happy.  So the employees are empowered to do the right thing by the customer first, then later figure out the best way to cover the cost.  This attitude has paid off for SBS which started in 3,000 SF and now has over 90,000 SF located globally.

Kevin’s customer service stories reminded me of my favorite Nordstrom’s story.  A man walks into the store to buy shoes for his son that has 1 foot that is 2 sizes different than the other foot.  Expecting to pay for 2 pairs of shoes as he had done elsewhere, the man was shocked to find he had only been billed for 1 pair.  He brought the mistake to the salesperson’s attention only to hear, “No sir.  It was Nordstrom’s fault we did not have the proper shoes for your son.”

I am learning that customer service starts with an attitude of take care of the customer first, and ask questions later.  It starts at the top and is shared by everyone in the organization.  Kevin’s organization actually hires for it, rewards it and even promotes people based on it.  The other thing that I am learning is that all of our employees need to be empowered to do the right thing by the customer without fear of negative consequences.  This means being rewarded for doing right by the customer instead of penalized for costing the company more money.

I’ll leave you with one last thought; the entire employee handbook from Nordstrom’s:

“Welcome to Nordstrom

 We’re glad to have you with our Company. Our number one goal is to provide outstanding customer service. Set both your personal and professional goals high. We have great confidence in your ability to achieve them.

 Nordstrom Rules: Rule #1: Use best judgment in all situations. There will be no additional rules.

 Please feel free to ask your department manager, store manager, or division general manager any question at any time.”

As a local custom metal manufacturer we want to have high growth customers, but part of that deal is that we need to expect, indeed support, their transition to high volume production.  Along the way, we’ve also had to build up our capability.  Sometimes the production tooling gets delayed and the customer needs our help with more production.  Sometimes our customers get surprised by huge orders and they need our help before production is set-up.  This production capacity “flexing” over the years has really helped build our capacity “muscle.”

When we first started building server racks, we designed our manufacturing flow to build the 5 – 10 per month that the customer required.  Along the way, our customer has needed up to 200 racks/month and as a result we’ve gotten better at converting “prototype” lines into production lines and back again.  We’ve also gotten better at scaling up the systems (MRP, Quality, Documentation, etc.) to support the large runs and then scaling it down to keep costs under control.  The great compliment came this week from Bob who is launching product in Germanyand he was asking for our packaging instructions to help our German counterpart scale up faster.

Recently we were asked to set up a remote facility to manufacture products closer to their final distribution point.  We’ve planned for this before, so it was easy to adapt and adjust our last plan to the customer’s needs.  How about production in China and local assembly?  Not a problem, we’ve worked on that before, so we adapt & adjust so the customer has a plan quickly.  What about adding additional capabilities like polishing or tube bending?  That’s been done before too, all we needed were drawings and process validation time then we’re up & running.

I don’t know if we’ll ever have the 250,000 SF facilities that the big production houses have.  Quite frankly, I don’t know if our customers really want 1 large plant.  Our customers are asking for flexibility and strong customer support.  As long as we keep listening to customers like Phil and Bob, we’ll help them remain competitive globally.  Along the way, we’ll also keep building our capability and capacity “muscles” so we can take on more of the heavy lifting.

I met with Judy recently and we heard story after story of Alpha 1 patients – people who have had lung transplants and have regular oxygen regimens – that have tested the product and found remarkable improvements. My favorite story was about a woman with serious breathing issues who found that after using the device, had only one 5 day cold she was able to self medicate using over the counter medicine. In the past, her poor lung health would mean several hospital visits to recover from colds throughout the season. Not only did the woman have a much improved quality of life but she significantly reduced her medical expenses.

Dave is a semiconductor industry entrepreneur who, after successfully starting and growing another company, has sold that company and invested his time and money in creating this product. The design philosophy is fairly simple; it combines positive pressure technology from semiconductor clean rooms with ultraviolet radiation that kills 99.999% of germs. The result is an attractive, compact 48lb unit that mounts in a double hung window opening like your typical air conditioner, but can replace the air in your entire home.

The biggest challenge I see for Dave & Judy is not with the users or with the product. They’ve developed a paradigm changing technology and the vanguards of the old paradigm are fighting to hold on. Judy is very clear to remind me that they cannot make any medical improvement claims because the product is not yet FDA approved. This product goes far beyond and conventional re-circulating air purification products currently on the market, but insurance carriers are not willing offer reimbursement without Medicare endorsement (which requires FDA approval). Both Dave & Judy are working hard to gain FDA approval for this unit but it is a lengthy process with a paradigm shifting product.

We can make a difference. Check out the technical report on their web-site http://www.air-us.com and talk with Judy or Dave about the real life improvements that have heard from their initial users. Calculate the costs of all the medicines, the doctor visits, and the time involved. Make your own decision about how much your worrying has affected you. Then take at look at the top end legacy air filtration products out there and see what they can do for their $900 – $1,400 cost.

With our 50% ETM discount, you can make a huge difference in the lives of your loved ones for the cost of a typical air filtration device. To me, there is nothing better than a great deal on a great product and helping change the world.