Lean Reflections

I’m reading a book, “Out of Poverty” by Paul Polak, that I have to write about before I even finish. If you only read the first chapter, your understanding of how to help people in extreme poverty will change forever. The book is “Out of Poverty” by Paul Polak, and he talks about people who live on less than $1 a day.

Most are in remote places – Nepal, India, Zambia, for example -- with no access to markets or jobs. They scratch out a living on farms of less than an acre, and go hungry when monsoon or drought destroys their crops.

Most people's first reaction when we learn of disaster or poverty is to want to send money or food. That’s the opposite of what Polak proposes. I don’t know anything about Ron Paul except that he said that such help taxes poor people in America to give money to rich bureaucrats in poor countries. Think about it.

Jeffery Sachs has been preaching that we need to look at these remote areas of poverty and help farmers increase productivity of their farms, as does Polak. But the approach of such thinkers has always been to give those farmers improved hybrid seeds and fertilizer, or to fund the digging of wells, and such like.

Polak has spent decades at the gemba of world poverty and has talked to poor families and walked their plots of land with them, listening to their understanding of their own problems. Large wells, more expensive seeds and fertilizer end up helping larger farmers, not those most in need of help. “Water lords” who own the land where wells have been dug will sell water to desperate small farmers at exorbitant prices.

What Polak has learned is the simplicity of the lean approach, though he probably doesn’t know a word of the lean lingo. He’s listened to thousands of people explain what is keeping them poor. Yes, there are ways to bring new ideas, but they have to fit what the local family needs, and be something the local farmer can do himself or invest very small sums in.

Polak respects these people as the ingenious and thrifty entrepreneurs that they really are. He learned from a farmer that he could irrigate a profitable vegetable field if he could utilize a very small source of water he had access to. He and the farmer came up with the idea of drip irrigation. What you’d have if you took your garden hose, punched little holes in it along its length and laid it next to your row of tomato plants. No large pumps. No sprayers losing significant moisture to evaporation before any water gets to the ground. No large well. No big expense. An investment, yes, but a small one.

Later Polak learned to his chagrin that drip irrigation had been used in Israel for a long time. But their systems were too costly. So he started going to university engineering departments and small inventors and asking for creative ideas. And found them. The challenge was always to come up with a method of irrigation, moving crops to distant markets, pumping water from small wells, and so on. But the idea wasn’t to give these things to those in need. It was to keep designing and trying until you had something that could be manufactured at a profit to meet a price point poor people could afford. Does that sound like determining value to the customer and working out the means of manufacturing to achieve costs that allow profitability? Does it sound like right-sized equipment?

Sometimes the new invention fails the customer it is intended for. The inventor learns at the gemba of the farmer’s field what the problem is, then goes back and improves the product.

The other requirement is that systems be scalable. As the poor farmer accumulates a small fund of savings, he or she is more than willing to invest in his business. So if he can afford only to irrigate a quarter of an acre at first, he can afford to irrigate another quarter acre a couple of years after first achieving profitability. And scalable in the sense that the tools or equipment can be manufactured locally, and it’s something can be produced around the world in the millions.

Why does Polak expect the manufacturer of the new product to profit? Because that creates work and prosperity for local people too. These are products that initially take minimal skill and minimum materials. Building little donkey carts, for example, if food can be produced but not transported to markets, by giving local people simple designs, attainable manufacturing skills and easy-to-find materials.

Polak has a “don’t bother” rule, if his local customers and distant inventors and engineers can’t come up with a product that can help thousands. It it’s not viable in a large market, local entrepreneurs will have no reason to go into production and he can’t justify the time of expensive design teams with the know-how to do invent new products. Then local entrepreneurs won’t have the wherewithal to produce their own new products either.

It still boils down to money, but very small sums of money. How do the formerly dollar-a-day people use their greater income? For new investment, but also for clothes and school fees so their children can be educate, or medicine when someone is sick, or a cellphone that can connect a isolated people with the rest of the world. It’s not too different from the method Mohammed Yunus developed for microlending. The two approaches can be used together. And guess what - there's an organization, not related to Polak's International Development Enterprises, called Engineers Without Borders.

That should be enough for you to get the basic picture. It’s a book everybody should read. You should read it. Soon.

Out of Poverty by Paul Polak

Mike Spector, The Wall Street Journal (as published in the online edition of the Atlanta Journal-Constitution, wrote a few days ago about Ford's surprising improvements in financial performance. One detail jumped out at me: "...quality ratings of Ford vehicles spiked. That chopped $1 billion off Ford's warranty costs last year."

That's billion with a "B." In manufacturing, we often view quality - as we should - as an end in itself. Just doing it right, with the right processes and human systems, to meet our customer's expectations. But, obviously, there's a big payoff for getting it right. If you're trying to promote change that improves quality, don't forget to dig out warranty costs as a persuader for doubters.

In New Castle, Delaware, there stands a hotel, intended to be a Radisson, built in 2000, that has never been used. It’s empty. You can’t find many bigger examples of waste than that.

The site is in a wetlands area, so there are specific requirements about the amount of land a building can use. In addition, most building codes require parking for a specific number of people based on the expected occupancy of the building. The capacity of the hotel will affect the acreage to be covered with asphalt.

All went well until the building was finished and the county noticed that it was two floors higher than what had been approved. Was it intentional, or a blunder made by both the county and the builders? Some say there are construction companies in Northern Delaware related to crime families. But maybe the county employees who saw and approved the plan were negligent. Or the developer had a miscommunication with its architects and engineers. All these claims have been made.

The county was outraged at the overbuilding. They refused to grant a certificate of occupancy. They said the builders could tear down the top two floors, or – get this – fill them with foam.

After eight years of legal wrangling and $1.6 million in attorney fees, buying and selling of the building, the original developers won $7.5 million from the county in court. It was a jury trial. Not hard to get juries to side against the government.

The new owners, who bought the hotel in 2003 for $11.2 million to add lodging for the horse racing track they operate, have found problems with the electrical system, fire sprinklers and temperature controls, fire escape stairs and fire doors. Hmmm… did they order enough stuff for the two extra floors on the hotel? Eight years of vacancy is a recipe for deterioration too.

Funny story. But think about the amount of copper, aluminum and steel sitting there for all this time. The polymers in the carpets, décor and plastic components – that will probably be scrapped – were produced from petroleum products. Labor was wasted in the construction, but also in manufacturing all the bathroom fixtures, doors and windows, and elevators. And fire control systems. And attorneys’ fees.

And it was a plain and simple human system at the root. Intentional or not, the lack of common understanding of the product and process produced a monster.

First, understand that my husband Mike took a Ford early retirement buyout and our pension and healthcare insurance benefits depend on the future of the company. However good Fancy Feast is, I don't want to be eating cat food because all my money went to buy medication. After all these buyouts, there are a lot of us out here who will be up s**t creek -- and too old to do much about it -- if Ford can't turn around.

So I've got personal reasons for watching what happens under Alan Mulally, and now Jim Farley, the marketing guy hired away from Toyota. Obviously, no matter how much money you save through lean, you've got to sell cars. They have to be appealing enough to get customers interested. I've been bored to death by our choices of Ford products to buy -- Ford employees can't drive competitors' cars to work and expect to do well. We don't get the great deals you might think we do - the employee discount on the smaller cars we favor are meager, because the profit margins are so slim.

Today's New York Times ("A Star at Toyota, a Believer at Ford") profiled Farley as he led a four-day summit of dealers and top executives and it's more than reassuring. I'm starting to feel some hope. Since Bill Ford hired Mulally, I've been waiting to see what kinds of people he'd bring in to breathe new life into the company. (I've got a Google news alert with the words "mulally hire" so I can hear when there was news on that front.)

Dealers have a right to be skeptical and angry. Product that won't sell. Inventory forced on them. A 1970s ordering process that requires all sorts of workarounds. Tepid ad campaigns. Lookalike vehicles.

The dealers hammered the execs. But at the end of the conference, Farley stood before 1,400 of them, and said, "The work here is simply more important than the work I was doing at Toyota." And the article tells why he'd say that. He got a standing ovation.

I won't even try to list all the things Farley has said and done. The article does it better. At heart, he's a Ford guy. A grandfather who worked at the Ford Rouge River plant in Dearborn, and later became a Ford dealer. His first car was a classic 1966 black Mustang that he immediately drove from California to Detroit - that's what Detroiters do, drive cross-country. I need to know whether he spent a lot of time taking his car apart on his driveway, if I'm going to see him as a Detroit kind of guy. He'd need to know what it's like to have grease under his fingernails.

I'm cautious, but may be starting to be a believer that Farley is a believer in Ford, as well as experienced in understanding problems and finding solutions through people and product. A lot depends on him. He's at the end of the company that makes it or breaks it - next to the customer. Watch closely.

Yuri Kageyama of the Associated Press reported early this morning that Toyota will stop building Hino trucks at its TABC Inc., plant in Long Beach, Calif. Production will be be moved to Hino's other U.S. plant in West Virginia by July, according to a statement by Hino spokesman Hidenobu Tezuka.

That plant will continue to make parts for Toyota. Hino's annual production capacity in North America will be reduced to 4,500 trucks a year from 9,500. Hino's North American sales for the last fiscal year dropped 19 percent to about 6,600 trucks from 8,200 trucks the previous year, according to the AP story. The drop is blamed on high fuel prices and a slow economy. Hino is 50.11 percent owned by Toyota.

Toyota watchers looking for the company to make a misstep that violates its much-studied principles will ask, “What about the workers?” Kristopher Hanson, Long Beach Press-Telegram writer, says the company is offering buyouts to employees with 10 or more years of experience, with as many as 100 accepted. The reports also don’t say how many jobs are being cut, and whether there are enough contingency workers to make up the difference. Will full-time associates be let go, and how will the company help them?

Hanson reports that Louie Diaz, a TABC employee and vice president of Teamsters Local 848TABC workers said they were given a deadline of today to consider the buyout offer, (Hanson doesn’t say when employees were told about it) but that deadline may be extended. The Teamsters represent more than 500 workers at the site.

"It's an unfortunate situation where the company is taking good jobs from Long Beach and sending them off to facilities all over the place in other states," Diaz told Hanson. "We're very concerned."

As noted, the plant doesn’t have all its eggs in the Hino basket. The plant will continue to make other parts, so some workers will stay.

Elsewhere, Harley-Davidson announced it is cutting 370 unionized and 360 nonproduction workers from the payroll. Sales of the bikes are down in the U.S. and, although they are growing overseas, prospects don’t look promising. Some have speculated that Harley is limiting production to maintain its scarcity factor in marketing. Though Harley is among the best in lean production, it evidently likes long lead times between itself and its dealers’ order dates. Hey – it maintains the mystique that attracts buyers, so it’s a legitimate business strategy. Won’t make the workers, mostly in York, Pa., any happier, though.

It was interesting to hear yesterday that Chrysler and Nissan are working together on some new vehicles. It was not surprising to hear that Chrysler will manufacture a pickup truck for Nissan in Mexico, and that the Nissan product for Chrysler will be made in Asia. But it may have been a rebuke to doomsayers to hear that current production in Saltillo, MX, will be moved to a plant outside St. Louis.

In addition, Chrysler and new partner Getrag will build an innovative fuel-efficient dual wet clutch (whatever that is) at a plant going up near Tipton, IN, that will employ 1,400 people. In Kokomo last month, workers at Chrysler’s casting plant learned that they will make transmission cases for the new transmission, and engine blocks for a new six-cylinder engine Chrysler will be introducing. Chrysler spokesman Ed Saenz said the company won't hire more workers to deal with the extra work, which says a lot for productivity gains there. The Kokomo Casting Plant employs 760 people, who are probably sleeping a little better after hearing the news. The new work for Kokomo casting and the Tipton plant are part of a $3 billion investment in powertrain upgrades by Chrysler in North America.

Chrysler would never make these moves based on labor costs alone. It has to be that executives are seeing the effects of excellent plants and total system cost that makes manufacturing in the U.S. a good deal.

Yet good manufacturing results may not be the only reason for the move to Missouri. Gov. Matt Blunt said in a statement that "…it shows that the pro-jobs, pro-growth changes we have implemented are helping employers and entrepreneurs succeed in Missouri." Let’s hope the state didn’t just buy the jobs.

And it’s an ill wind that blows nobody good. A factor in production decisions is the soft dollar. Ontario is getting anxious about jobs moving to the U.S. Catherine Madden, an analyst who tracks auto manufacturing for Global Insight, says, "…advantages have gone away with the U.S. dollar weakening so much." She said GM, Ford Motor Co. and Chrysler LLC may threaten to move assembly work from Canada to the United States in upcoming contract talks with the Canadian Auto Workers union.

Not all the automotive employment news is rosy, however. Striking workers at American Axle have raised the ire of Richard Dauch, once regarded as a friend of labor. Dauch made $10 million in 2007, but he wants the same two-tier wage concessions as companies like Dana have gotten that would pay new workers about $14 an hour. He’s been a holdout in current union negotiations, despite the fact that he’s idling his customers’ plants by starving them of parts.

Dauch has punished unions before by shifting production out of the country. An earlier conflict between Dauch and the UAW, says an article this week in Crain’s Detroit Business, hurt the Buffalo Gear, Axle & Linkage plant in Buffalo, N.Y. Workers there were slated to build axles for the next-generation 2009 Chevrolet Camaro muscle car. But after the union local declined to agree to contract concessions, Buffalo employees were told in September 2006 that Camaro axles would be built elsewhere. A little more than a year later, American Axle idled its Buffalo plant.

According to Crain’s, the UAW suspects the work will go to Mexico. That would mean the axles would travel 2,000 miles to the Camaro plant in Oshawa, Ontario. The trip from Buffalo would have been 120 miles, and the parts would cross two international borders instead of one.

In lean terms, that adds up to the wastes of time, flexibility, and resources. With longer distance and lead time, production plans need to be frozen sooner (not really a factor if other parts have the same lead time, however). Fuel for trucks and trains is costing more and more which has to add to the final cost of the parts to GM, burning it creates CO2 and particulate emissions and depletes finite stocks of oil. But as most readers know, hourly wages - no longer a dominating cost of production - distracts executives from considering total system cost of a product.

There was an article on NPR this morning about China's "one child" law. As you know, that has been in place for decades and limits most parents from having more than one child. Now, two only-child parents can have two children. (There may be some exceptions for farm families, if I recall correctly.) When it comes to consumption of scarce resources, this has seemed to some as a good thing.

Demographers in China are now warning of some looming crises. One is a high proportion of older people who will have to be supported by a much smaller base of young people. Not so different from our baby-boomer crisis, except that we allow immigration and have a long history of mechanization and automation.

Another is that the birth rate for boys is much higher than that for girls. That is due to the cultural preference for boys in China, and the ready availability of abortion. Think it's hard to find a girlfriend here? Male Chinese engineers may have yet another reason to stay on after their education in other countries.

The third really has economists in China worried. Too small a labor force for low-wage manufacturing jobs, which will go to India or Bangladesh. It's no secret that lean and automation are increasingly important in the China of the future. But it sounds less likely that your job will go there. Better pick another place to worry about.