Month: March 2014
It’s funny how lessons learned in different stages of our lives can come back and be applied again under a different name.
I’m a motorcycle rider, I ride and enjoy all styles of street motorcycles from Harleys to sportbikes. In my late 20’s I decided that riding sportbikes on the street was just getting too dangerous, so I hung up my street gear and began Roadracing at the club level, go figure . When I mean Club Roadracing I am referring to motorcycle competition on professional race courses such as Sears Point, Willow Springs, Thunderhill, Miller Motorsports and so on. I raced all over the west coast in the AFM series, and made guest appearances in other organizations, including WERA National rounds in Florida and Utah. To throw humility out the window for a minute, I was pretty darn successful. I held the class lap records at a number of tracks, won more races then I can remember, brought home a number of championships and earned top-10 plates 2 years in a row in the longest running Motorcycle Roadracing Club in the US. If all this sounds like gibberish, I will paraphrase. I was pretty damn good. Ok, humble mode back on.
If you are unfamiliar with club-level roadracing I will give you the nickel tour. The object is to race around a professional race course of 15-20 turns for 6-10 laps with 74 other idiots that are all competing for a plastic trophy and maybe a little contingency money. The slowest turns are maybe 30 MPH, and the straightaway speeds are in excess of 140 (middleweight bike class). You would drag your knees in every corner, trying not to crash while rubbing elbows with your competitors. Sometimes you did crash, and it hurt. All in all, this is about one of the most exciting (and dumb) things on the planet to do…. but not really.
This is where it gets strange.
If you ever go to the races, or happen to catch a race on TV you most likely think these guys are nuts, completely nuts. On the contrary, I found that in order to be successful and race at that level your actions on the track were really quite dull after a while. How can that be? Quite simply, everything a good top-running racer did on the track was calculated and consistent, I mean really consistent. Sure you are going a bazillion miles an hour but the key is consistency. Here are a few numbers to ponder: 2 mile track, 15 turns to the left and right, which means 15 braking and acceleration points. Low speed turn is 30, top speed is 140, the track is essentially 3 lanes wide with elevation changes, blind corners and chicanes. The focus was not to go fast, but to be consistent. Lap times were in the 1:59 range, and a good set of 6 laps would only vary by about .2 of a second, from 1:59.6 to 1:59.8. Think about that! With all the variation of speeds, the track and the conditions, a good racer would stay on the same line, brake at the same point, accelerate at the same moment and rate, and turn at the same inch of track every lap; lap after lap to pull off that consistency.
The Key to success was to be ultra-consistent, therefore any adjustments could be measured for effectiveness. The focus was not to force quickness, that came as a byproduct of the process, measurement, adjust and evaluate loop.
Fast forward a couple years when I got old and wise enough to quit racing. My career began to expand beyond engineering and product design and started interfacing more with Operations. When I participated in my first value stream event I was introduced to LEAN, and it just made sense. It wasn’t exactly like tearing down a straightaway with your hair on fire, but a lot of the same concepts were in play. Create and publish a process to standardize work. Measure that work with emphasis on consistency, resisting the urge to fix every problem every day. Once the flow is consistent, identify pint or waste points and make adjustments. Evaluate the outcome, then rinse and repeat. Just like my racing days, consistency is key. Even if you are doing the activity wrong, do it consistently wrong so it can be corrected systematically and sustainably.
Crashing happens from time to time, in life and in the workplace. Evaluate the failure and get back on the horse.
What do you think? A fair comparison? Let me know your thoughts.
In a prior blog on Gadgets and Gizmos I touched on product cost and the typical focus of the consumer on manufacturing cost compared to sale cost. A consumer might think that a widget is made from a little bit of plastic and metal bolted together, probably 50 cents to make, why does it cost me $10? Well, the real reason behind the $10 is supply and demand, but what makes the product commercially successful is the amount of margin the manufacturer can achieve between the sale price and the sum of the development and manufacturing costs. If the product costs $11 total to get to market but the market will only bear $10, it fails. On the flip side, $9 in cost for $10 in price leaves a little profit margin for firm sustainability. Pretty elementary, but let’s look a little closer at the overall product cost:
For a conventional consumer product such as a golf club or iPad there are 2 main areas of cost to get the item to market. We will call these ‘Development’ and ‘Operational’ costs.
Development costs are mostly one-time expenses that occur over the span of a product design cycle, which could be 2 weeks or 2 years or longer. That sounds awkward, but these are a group of expenses that are incurred one time to bring a product to a manufacturable state. These costs can include:
- Product Management time to evaluate concepts, market research, focus groups, specification creation and so on. This is mostly a man hour investment of resources.
- Engineering time to develop the concept into a functional and manufacturable product that meets specification and customer expectation. This activity includes a man hour investment as well as capital expenditures for prototypes, testing, tools, and other activities in the design cycle.
- Production tooling, this is typically under the Operations umbrella, however it is considered a one-time cost so it is included in development. Production tooling is the cost of hard or soft tools required to manufacture components within the product.
These costs can be significant to a company, and moreover these are all paid up-front before a single widget is sold. This is a risky proposition for an organization, which is why the Product Management stage is critical to ensure efforts and costs are recoverable. Development costs must be amortized into product price, which is where some mathematical magic has to happen to predict unit sales, overall product life and market price. Let’s look at a simple product such as a ball-point pen. It might take 1000 man-hours to fully develop a ball-point pen from concept to production, about $120-150k in cost. Prototypes and testing may run another $30-40k. Production tooling for that pen may include injection molded plastic, extrusions and metal stampings. This will be (hopefully) high volume, so quality tooling will run $90-120k. In the end, the first pen that gets sold cost over a quarter of a million bucks to make.
Operational costs are incremental expenses to manufacture and distribute products on a quantity basis. These costs include everything it takes to fabricate a product from scratch and get it into the consumer’s hands. I believe this is where most consumers draw their attention when they evaluate the value of a product, however operational costs include a lot of things that are not-so-obvious:
- Material costs: This includes both raw materials and purchased off-the-shelf components needed to complete the product. This is typically call the BOM cost, or Bill of Material cost.
- Transportation cost: This includes transportation of raw goods from mines or factories to processing points to fabrication plants to assembly facilities. After assembly a product enters a distribution network to transport the goods from the factory to the store shelves. This is a big expense, as the plastic within that ball-point pen may zig-zag the globe a number of times before reaching the consumer.
- Manufacturing cost: This is the cost of fabricating the raw materials into components of the product. Production tooling paid for in advance is used in this process, as well as non-tooled fabrication such as cutting, bending, welding, painting, etc.
- Assembly cost: This is the labor to assemble the goods from components into a finished good. Product testing the QA is included in this step.
- Packaging costs: This may include boxing of goods, shrink-wrap, bubble packs or a variety of other packaging methods for the salable product. Packaging can also include the cost of combining consumer goods into shippable lots to retailers.
- Distribution: This is distribution of finished goods through a network of nodes to get the product to store shelves for consumer purchase.
Again, Operational costs are per unit and economies of scale highly influence the final cost. Make a lot of something and material, shipping, manufacturing and distribution costs can be combined to drive down cost. Back to the example of the ballpoint pen, in high quantities the combined operational cost may be $.30 start to finish.
Pen #1 effectively costs the combined value of the Development and Operational costs, or roughly $310,000.30. If 1 million pens are made and the development cost is amortized over that quantity, the cost to make each pen is down to $.61, that’s getting more reasonable. 2 million pens? Cost just dropped to $.45, and so on. If the sale price is $.50, the firm is staring to see a profit. Of course this in an oversimplified example, in reality there are a number of variables that influence every aspect of the costs.
Where is all this going? I’m trying to show that there is much more than goes into the cost of a product that the plastic and metal alone. If I haven’t put you to sleep yet, I will show where CPI fits in. CPI and lean practices are aimed at eliminating waste in operations, ultimately driving down the incremental cost to manufacture and distribute a product. This is very impactful to a firm’s bottom line by reducing the COGS, or cost of goods sold. This is a direct line to profit, or an option to strategically reduce price to gain market share while retaining margin.
What about the Development (fixed) costs, where does CPI fit there? The development costs are already sunk in order to get the product into Operations. I believe the value of CPI in the design cycle is not necessarily about reducing development costs, but shortening time to market to allow for more, or more highly developed products.
Did you find this interesting? Please leave a comment.
I recently read a very interesting Blog by Ruth Schwartz on The New Labor Movement, I recommend you take a look. Ruth’s comments resonated with me on a topic that I have been struggling with for some time. How does a leadership team bridge the gap between old-school entrenched management and the new school approach of increasing employee engagement? In the end the company goal is the same, the difference is how you get there without confusing your staff or causing friction in the leadership teams.
To paraphrase Ruth, traditional jobs suck. Employees feel they need to look out for their own best interest and employers feel employees should be happy to a job. Employers practice a top-down approach of directing activity instead of engaging and collaborating with employees. This is felt as micromanagement and indifference towards employees opinions or suggestions. This rings true to my early employment history as well. Do what you are told and maaaaybe you will get a raise. The boss’s cousin gets the good shifts and promotions, but I didn’t want to say anything and risk my job.
To a large extent, this is traditional old-school leadership and management. The senior leadership teams knows best and dictates direction from above. In addition, traditional management is bottom line oriented, and attempts to increase the bottom line through cutting expensed and placing more demands on employees. Raises are scrutinized, hours increased, staffing cut and responsibilities spread amongst the standing. I would suggest there is a standing distrust between the staff and the leadership, the staff believes the leadership would squeeze a pint of blood every day out of every employee. In contrast, the leadership may believe that the staff is doing as little as possible to keep under the radar and maintain their job.
Trust is in the toilet, that can’t be good.
I have been through an MBA program and feel that I’m pretty well versed on the contrarian view of contemporary leadership. This is the leadership style that Ruth writes about, investing in your employees and building the relationship between management and staff through a number of transparent activities. This simple fundamental shift from traditional leadership says ‘take care of your employees, and your employees will take care of your customers.’ I touched on this on my blog on Ebay and Intentional Employee Engagement, where it is no secret that the new school technology and service giants in Silicon Valley go above-and-beyond catering to their employees, and their company performance doesn’t lie about their success. This approach attempts to increase the bottom line by increasing the top line revenue through company performance rather than expense cutting.
So here is the million dollar question, how does a mid-level leader bring contemporary management practices into corporations with entrenched old-school senior leadership? I’m positive there are more than a few organizations out there that are faced with this same dilemma. Senior management is looking through the window at Google’s full parking lot on a Friday night, instead of looking in the mirror at his own organization’s penny pinching and uncomfortable culture. As a contemporary mid-level leader, it’s difficult to roll out employee-centric programs when faced with budget cuts, increased load, staff reductions and most importantly, lack of upper management support.
One can choose to do nothing, which is guaranteed to accomplish nothing, or one could take baby steps which may lead in the right direction. One approach may be to push a grass roots initiative in the small area that the mid-level leader has influence over. Small gestures like information sharing and town halls to let the staff vent, if nothing else. Open decisions with the group to involve the entire team in the conversation to provide community ownership in the decisions made. Place trust in your staff and encourage experimentation and mistakes to better their abilities. Celebrate the mistakes to build trust with the staff, just knowing that failures are not punishment-worthy will go a long way. Recognition for above and beyond efforts with public praise a maybe few comp hours. All this can be low to no cost to the company, and should result in an uptick in team morale and performance. At some point the other groups in the organization will recognize the community in your team, which is sure to catch the eye of the upper management when work product increases. The mid-level leader’s task is to empower his staff and run interference so his team can excel before the nay-sayers swoop in.
This may sound like a simple approach but eh alternative is to do nothing, risk nothing, gain nothing. I don’t like those odds.
One day the current mid-level leaders will be the old guys, hopefully they are open enough to listen to the younger generation.
What are your suggestions, I’d love to hear them, maybe even put them to the test.
This is a short discussion today, more of an observation that puts an exclamation point on contemporary management and leadership theory. I spent last weekend driving from Reno to San Diego area, then back to Reno along the west coast. It was a good trip, lots of time to think while the miles ticked by. When I got to the Santa Clara area on US 101, traffic got busy and scenery turned urban. While I was negotiating the clackity old RV over to the slow lane I looked to the right and saw a beautiful green park, soccer field, tennis court and an incredibly well presented white building. No shit, this was the Ebay/Paypal corporate office.
I have read plenty of articles and case studies, as I am sure you have too on the unique approach that progressive Silicon Valley companies are using to attract and retain top talent but I had not seen it in person. This campus, for the whole 30 seconds I zoomed by, stood out in the urban setting. Green, well kept, inviting for those entering the facility, punctuated in the center by a professional business building. The first thing in my mind was ‘wow’, I want to work there. Michael Hyatt wrote about ‘wow’ experiences and going above and beyond to make an impression, Ebay certainly did that with this facility.
Of course I can’t speak to the actual working culture of the place, but it seemed pretty clear at face value that the organization was catering to it’s employees, and perspective employees. This feeds right into contemporary leadership and management which is built on the premise that happy employees are engaged employees, and engaged employees will lead to customer satisfaction. Simply put, don’t skimp the employees and concentrate on serving the customer, you will fail. Instead recruit and build the right team of employees, treat them as your number top resource and customer service is the byproduct. This is at odds with the satirical but oh-so-true approach of beating your employees until morale improves. This drives employees to concentrate their efforts on retaining their jobs, rather than putting their effort into growing the value of their company and serving the customer.
A few miles down the road I was still astounded by the Ebay facility, and off to the right was another phenomenal cluster of buildings with a fountain out front, this was the Oracle HQ. While not on this trip, I have also visited the Facebook compound around the corner in Menlo Park and the Google campus is a fixture in the area. Google is well known for its employee-centric programs such as shuttling services, laundry and recreation programs. Some might balk and say these are corporation with more money than they know what to do with. I beg to differ, I believe their success is due to their employee investment, rather than investing in their employees because of their success. I can say with confidence that their executives are not worried about counting cars in their parking lot on Friday night. Their employees are engaged.
Heck, one drive through the area and I’m writing a blog and wondering how I can bring these concepts back to my organization to boost my team. What are your thoughts?
So in previous conversations I had rambled on about Continuous Process Improvement (CPI), as well as the Product Design Cycle. These two items seem to be at odds with each other. CPI is about process, repetition and systematic adjustment of that process to improve efficiency. Product Design is about creativity, innovation and commercializing concepts into salable products. Sounds like oil and water, how do they mix?
Simply put, a mixed model should be employed.
Engineers and designers tend to object rather strongly when presented with timelines, deadlines, or requests to schedule their work output. This is partially rightfully so since you can’t schedule creativity, but not entirely true because the design cycle is far more then creative work. Good designers and teams understand that process is not meant to constrain their creativity, rather provide more time for it by streamlining repetitive tasks.
Product Design and development is often thought of as a sexy cycle of conceptualism, creativity, fabrication and product testing. While these are true steps in the process and are the kinds of steps that keep engineers excited about their work, the reality is that 40-50% or more of the design cycle is mechanical admin type tasks. These tasks can include product documentation, drafting, blueprints, supplier qualification, fabrication support, purchase orders, Bill of Material (BOM) creation and maintenance, and Engineering Change Orders (ECO’s) to release product into the operational world. Legacy product support is also on the task list for engineers and design teams, evaluating product performance reports and issuing corrective actions. What this really means is that engineers and product designers only spend a part of their time doing what they want to do, and a good part of the day doing admin work.
This is where CPI can step in, structure, document and measure the steps needed for team members to do repetitive tasks in order to reduce their cycle. This is at least a three-fold benefit to the organization. Engineers reduce the time they spend on admin to allow them more time to do the fun stuff. The organization can also benefit by realizing a reduction in overall design time. (This is always a balance with increasing engineers’ development time) The third benefit is the standardization of work output for supporting teams. BOM’s are standardized, ECO’s are standardized, drawings are standardized for quicker processing downstream.
Candidates for CPI? Start small, Requests for Purchase (RFP’s), these are requests from engineers that trigger purchasing to place orders for stock or prototype parts. There is little variation in the steps needed, ie a part number, desired vendor, vendor quote, quantity needed, time needed and approval for purchase. The flow is very standard and simple to map out with standard forms, standard routing and approval triggers to initiate the PO from purchasing. Sounds elementary, but without a process each engineer is on their own to place PO’s their own way. In my organization we have roughly 55 Mechanical and Electrical engineers located in 5 offices on 3 different continents, all filtering their RFP’s through a central procurement group. Before a standardized practice, this was a disaster of mis-information, missed approvals and mis-routings. After process we were able to reduce delivery time to the engineer, increase part accuracy and reduce the effort (and staffing) requirement on the procurement group. As an added benefit, when errors are found on the finance side of the house with department or task coding, we have defined mechanical steps we can retrace to root-cause the issue for future prevention.
There are other steps in the Design Cycle that are great candidates for CPI, but that’s good for another day. Thanks for reading, I hope you found this helpful, feel free leave a comment on what you think could be standardize.
Ever hear the phase ‘9 women can’t make a baby in a month?’ The first time I hear that phrase was from a boss and mentor of mine, a VP of Engineering. He said this in response to an unreasonable request to compress an already ridiculous project timeline even further by adding more people onto the task. At the time I thought it was a humorous statement, a reduction to the absurd to make a point but he was right on the money. Later in my career I realized that my mentor may have borrowed the phrase from a 1975 publication by Fredrick Brooks, but that does not matter. It was more impactful to hear it from the old goat himself.
What does this have to do with lean, or with lean applications in the product design cycle? Well from my perspective, I don’t believe that Lean specifically means fast, rather it means an even flow. Of course time savings are a byproduct of lean practices to standardize process and eliminate waste, but lean itself does not make things quick. In the procurement and manufacturing world lean may mean ordering components within lead-time to minimize both ‘waiting’ and ‘time on shelf’ of the component or work step. This is flow, a constant procession of product or objects through the workflow without bottlenecks or voids. The design cycle has a lot of similarities.
In the product design cycle there is a schedule of events that occur, from innovation to practical application to testing, documentation and release. Some steps are easier to quantify than others and some steps have large variation, but as a whole it can be considered a black box or lead time. In order for design cycles to flow like a lean operation, triggers to initiate the cycle must be strategically planned, and the output of the design cycle must be anticipated and planned for downstream. Just like manufacturing, upstream and downstream keys must be in synch to avoid the same bottlenecks and voids.
The departure of the product design cycle and the manufacturing cycle is in scalability and the level of skilled labor. In lean manufacturing, process sets are specifically designed to be easily reproducible so ‘manufacturing cells’ may be added or removed to meet demand peaks or lulls. In the design cycle, in contrast, labor is fairly specialized, expensive and time-intensive to train to the brand image. This means that opening an additional engineering cell is too time intensive to react to demand spikes, and reducing forces is too expensive to lose all the training and brand investment in the staff.
This is where 9 women can’t make a baby in a month, it’s just not that simple. Adding resources to crash a schedule in the design cycle will eventually crosses a point of diminishing returns. To take this a step further, if you have spare resources available to add to critical path items, you may have too many high dollar assets for your workload. For the design cycle to maintain a constant flow, Product Management decisions on development tasks must be strategic and timely, and operations activity must be ready to accept work product to get goods to market.
With proper planning, 9 women can deliver 9 babies in 9 months, but that’s a different story.
Love to hear your thoughts, feel free to leave a comment.
Bringing products to market is a risk-reward proposition. A good organization spends significant time determining if there is an appropriate ROI for a product prior to risking the capital and time commitments needed to bring the product to market. This is known as the ‘Strategic Product Plan’ that guides an organizations actions in the short and mid-term time horizons. There are lots of potential speed bumps along that path, and some are more costly that they look at face value.
Mistakes, they happen. An important key is product design is when they happen. It’s well known that mistakes and failures during the design cycle are expected, and should be encouraged. If no mistakes are being made, it suggests that teams are too conservative and not innovating or pushing the envelope. This is a recipe for being overtaken by your competition. Mistakes after the design cycle, during manufacturing or product deployment are another story. The magnitude of these types of mistakes are often overlooked.
Let’s look at a theoretical example. You company is developing a product that is intended to be leased to businesses and generate revenue from end-customer use. Think Redbox terminals, ATM machines, Arcade games or even self-service cash registers. This products cost your firm a soft cost to develop plus a certain hard cost to manufacture. In return your firm is expecting a daily fee from the businesses, which will recoup the development and manufacturing cost, plus a profit. Simple, right? Well, oops, something went wrong during manufacturing when a main component, such as the processing board failed due to a design error. It’s just a mistake, right? Lets look at the numbers:
Set the stage:
- 500 unit production run.
- Hard cost per unit to manufacture: $1500 / unit (does not include development cost)
- Expected Revenue : $100 per day
- Rework cost due to design error: $250 / unit, scrap and rework cost.
- Time delay for deployment: 3 weeks (21 days) for rework and re-manufacture.
In this case, a 500 piece manufacturing run is expected to be placed on a certain date. During the manufacturing an issue is found with a critical component, stopping production. The issue requires the replacement of the critical component at a cost of $250 per unit. ‘Ouch’ the design team feels, that adds up to $125,000! That buys a lot of cheeseburgers. This rework expense is often the focal point for the failure, but in reality its just a small portion of the overall impact. Take a look at a timeline for product deployment:
The $125,000 rework expense jumps out as a big blip in the product expense, but the bigger issue is the delay to market caused by the rework. New parts need to be made, tested and installed, in this case it is a 3 week delay in the install date to customers. Doing some quick math: at $100 a day in expected revenue per unit, times 500 units, that’s $50k per day in lost revenue. Multiply that by 21 days and the hit to the organization is $1.05m in lost revenue. That brings the financial impact to $1.175m, this type of mistake hurts, far more than just rework costs. Another case of ‘Time is Money.’
There are further costs that are difficult to quantify, including lost opportunity costs to design teams, manufacturing teams and others. This financial pain is also felt upstream in the supply chain because the organization may not pay it’s suppliers until the product is produced, meaning suppliers now have to carry material costs for additional weeks.
So what is the message here, don’t make mistakes? No, that is a silly statement to make, in the CPI world any post-it note that says ‘do better’ is thrown in the trash. Mistakes occur from a variety of reasons; some preventable, some not, some caused by typhoons, some caused by time crunches. They happen. The message here is to be cognizant of the full impact of mistakes and production delays to help guide design activities and due diligence at release. One mistake and production delay can be costly, likewise preventing one can be financially impactful!
What are your thoughts? Ever contemplate the value of a good/bad decision you made?