supply chain

Chinese Manufacturers Ask: ‘How Can Americans Still Afford to Buy from Us?’

Chinese Manufacturers Ask How Can Americans Still Afford to Buy from Us.jpg

Excellent write up repeating the pitfalls from basing decisions on ‘piece-price’ and failing to factor actual total cost of ownership – with some perspective from the international business community laughing at how North Americans miss this.  It doesn’t seem to matter how often this is communicated, CFO’s and purchasing managers keep using inaccurate costs to base decisions on.  However now that shipping costs are 10x higher, finance/accounting, purchasing will incur a greater loss for missing this – learn to calculate your total cost of ownership.

Key points from article:   

“The cost benefit to manufacturing in China just isn’t there anymore.”

 

“in the U.S., purchasing organizations are primarily fixed on obtaining the lowest “piece-price,” pretty much regardless of other factors.

When asked “why,” I responded that reduction in material was the primary metric used to judge and reward purchasing managers.

I was then again asked, “why?” My response was that material variance is a primary focus when U.S. corporate CFOs report their quarterly financial results to stock analysts where, by the way, total cost is seldom—if ever—mentioned.

I had to explain this several times, as most of the attendees were incredulous to the fact.”

 

“Most suppliers are geographically close to their customers” – *a JIT practice – “and so are more closely integrated with them than their western counterparts.”

“Total cost,” not “piece-price” is what is measured.

 

“Despite most of the attending companies having current or past business relations with American customers, most were completely unaware of how Americans viewed performance in its purchasing function.

It didn’t make sense to them, but did generate a few laughs”

“if honest total cost metrics are employed, the cost benefit to sourcing in China just isn’t there anymore.”

 article link: https://www.industryweek.com/supply-chain/supply-chain-initiative/article/21176987/chinese-manufacturers-are-wondering-how-can-americans-still-afford-to-buy-from-us

Harry Moser, Reshoring Initiative CEO, set up a total cost calculator CFO's can use to learn their Total Cost of Ownership Estimator available here https://www.reshorenow.org/tco-estimator

 

I’ve used this to calculate actual cost comparisons at more than one company and it typically is more economical to source locally – which also reduces sourcing from region typically supplying product high in defects, which increases lead times when you have to reorder to replace defective stock and let the customer know you won’t be on time.  Local sourcing also reduces distance & associated lead times, a direct driver of sales and bottom line results.

 *I can't recall a business that knew their actual cost of offshoring, do you know yours?

the Lego Turnaround

Lego-bricks.jpg

For those who enjoy turnarounds as much as I do,

How Lego Went From Nearly Bankrupt to the Most Powerful Brand in the World

https://www.successagency.com/growth/2018/02/27/lego-bankrupt-powerful-brand

How Lego Became The Apple Of Toys

01-08-15

After a decade-long slump, Lego has rebuilt itself into a global juggernaut. An exclusive look inside the company’s top-secret Future Lab.

https://www.fastcompany.com/3040223/when-it-clicks-it-clicks

Lego banner.jpg

Results:

Lego is so popular, it can’t keep up with demand

The company has worked to reduce sales

By Andrew Liptak

Sep 7, 2016

https://www.theverge.com/2016/9/7/12829974/lego-sales-2016-growth-demand-factory-strain

Lego Sales DKK Billions.jpg

“chart of the LEGO’s complete sales history from its founding in 1932 through its most recent year. LEGO faced bankruptcy in 2003, made some major internal changes, and in 2007 began a period of eight years of 21% annual sales growth and 36% annual profit growth. The streak slowed down in 2016”

https://theleadershipnetwork.com/article/lessons-from-lego-what-do-you-do-when-your-current-growth-phase-ends

Lego Sales 2003-2017 Billions.jpg

Rebuilding Lego, Brick by Brick

How a supply chain transformation helped put the beloved toymaker back together again.

Aug 29, 2007 

Issue 48 (originally published by Booz & Company)

these are my notes/key points, link below to full article, worth reading; also touches on how standardization drives creativity.

“The Lego Group had lost money four out of the seven years from 1998 through 2004. Sales dropped 30% in 2003 and 10% more in 2004, when profit margins stood at –30%. Lego Group executives estimated that the company was destroying €250,000 ($337,000) in value every day.

The Lego Group’s supply chain was at least 10 years out of date.  Poor customer service and spotty availability of products were eroding the com­pany’s franchise in key markets.

it took many years of underperformance before the company realized that the supply chain was a major source of its difficulties.

What made those problems especially hard to identify was that they grew out of the company’s core strengths: its capacity for innovation and its commitment to quality. Those were the very advantages that the company’s leaders had relied on.

Three-quarters of the Lego Group’s sales every year were from new, mostly nonelectronic products. “I believe that the focus on electronic competition was really a blame game,”

the “Kitchen,” the company’s product development lab

disregard for the costs of innovation. The company designers were dreaming up new toys without factoring in the price of materials or the costs of production. That kind of carefree creativity is unsustainable
where cost pressures are a constant concern.

did not align its supply chain with that business strategy.

teams placed their orders haphazardly and changed them frequently, preventing operations from piecing together a reliable picture of demand needs, supply capabilities, and inventory levels. This murkiness led to overall capacity utilization of just 70%.

such a fragmented system
Day-to-day operations were often chaotic. Operators routinely responded to last-minute demands, readily implementing costly changeovers.

rationalizing the cost of the company’s materials would be one of the easier parts of the transformation and would yield savings immediately.

Constraints don’t destroy creativity or product excellence, and they can even enhance them.

the perceived mandate had evolved into a crutch. “This idea had become an emotional concept and an excuse to oppose new cost-saving initiatives,” he says. “Anytime there was something someone didn’t want to do, they would say, ‘You cannot do that because of quality.’”

the Lego Group cut its resin costs in half and shrink its supplier roster by 80%.

the operational team put a process in place to help designers make more cost-effective choices. 

Cost transparency gave developers a new way to define their achievement. “The best cooks are not the ones who have all the ingredients in front of them. They’re the ones who go into whatever kitchen and work with whatever they have,”

a new set of constraints could in fact enable them to become even more creative.”

also needed to move its distribution channels closer to the customer — and to lower its bloated distribution costs.

First, the number of its logistics providers was cut from 26 to three or four — enough to ensure resilience and gain greater economies of scale while still encouraging competition among the suppliers. This step alone saved more than 10% in transportation costs.

leapfrog the competition by redesigning its entire distribution system.

Although many companies have taken manufacturing to lower-cost markets and to contract providers, surprisingly few have done the same with distribution, although identical advantages exist. The Lego Group phased out five centers in Denmark, Germany, and France and created a single new center in the Czech Republic

- saved approximately €50 million ($67 million) since 2004, and forecasts savings in excess of €100 million ($135 million) over the next two years.
The tremendous gains in efficiency meant that despite the impact of rising oil prices on materials and transportation, stock turnover increased by 12 percent in 2005, and the same year, the Lego Group recorded its first profits — €61 million ($72 million) — since 2002. This positive trend further continued in 2006, with the Lego Group turnover up by 11 percent over 2005, and profits up by a staggering 240%

Addressing operations (streamlined product development, sourcing, manufacturing, and distribution) has allowed us to again focus on developing the business, on innovation, and on developing our organization to become a much more creative place to work”

https://www.strategy-business.com/article/07306?gko=813c3

The LEGO Group spells its trademarked brand name and its company name in uppercase letters.

(If you want to know the Lego co.’s origins: https://www.history.com/news/the-disastrous-backstory-behind-the-invention-of-lego-bricks)

Don’t Blame “Just in Time” for Your Risky Supply Chain Strategy

The problems are driven by a lowest-piece-price strategy that leads to LONG distances. *That's not JIT.

Excellent business write up for senior management coherency regarding the supply chain they have set up by Mark Graban here:

https://www.leanblog.org/2020/03/covid-19-dont-blame-toyota-or-just-in-time-for-your-risky-supply-chain-strategy

20200309 Dont Blame JIT for your Risky Supply Chain Strategy.JPG