Friday, April 02, 2010

Cats and Dogs in Manufacturing

Many times in manufacturing career I have struggled in dealing with the dilemma of producing the cats and dogs. The cats and dogs are those parts or products that are typically the small volume, hard to make, mainly less profitable, or generally the pain in the ass parts that cause us headaches and disrupt the harmony in our manufacturing flow.

Since our lean manufacturing focus is to improve flow, how do we deal with our cats and dogs?

Do we outsource our cats and dogs so we can maximize our internal efficiency by producing only our high runners? Do we discontinue making the cats and dogs entirely if they are not profitable? Do we outsource some of our high runners to work on the cats and dogs? Do we separate the cats and dogs from the rest of the pack?

It would be easy for us to take the path of least resistance and either outsource them or drop them from our product offering. Life is too short so why struggle with the headaches day after day. With our short term thinking and pressure for quick results, we can present convincing arguments to get rid of these cats and dogs and do it fast. Especially if we are not making any money on them, it should be a slam dunk to get rid of them. Let’s just focus on our core competency and we will be more profitable.

Sounds logical or not?

From my experience, I do not completely trust our accounting systems in determining the profitability of individual parts or products. With the typical standard cost method, erroneous data, estimated inputs based on some formula or worse, some average and our sometimes strange allocation of costs; how can we really make good decisions on true profitability on a part by part basis? Just take a stopwatch to gemba and do a simple random audit to see that our data is as reliable and trustworthy as a celebrity in rehab.

If we outsource these cats and dogs, passing the headache on to others to deal with, we will only add additional waste to our overall process. We will need to increase our efforts to insure the quality of these parts now on the outside, increase our inventory levels to protect our delivery to our customers and most likely soon end up paying more for these parts. Before long, we will end up dropping them because they will be deemed unprofitable.

In the book, The Birth of Lean, Taiichi Ohno faced the same dilemma at Toyota; his thoughts on this issue were described as follows:

“A lot of people in the company thought that we should outsource small-volume parts to low-cost contractors and make the large-volume parts on our own, like bicycle manufacturers did. They figured that we could build an export business by getting the contractors to supply parts on a just-in-time basis and by assembling vehicles from those parts and from the parts that we made in-house.

I argued for taking the opposite approach. I insisted that we should produce low-volume items in-house and buy large-volume parts-stuff that anyone cold make inexpensively-from outside suppliers. Making the low-volume parts in-house would mean high unit costs, and that would pressure us to tackle kaizen improvements and cost reductions.”

What a great viewpoint, to send out the easier, high-volume parts and keep the hard ones in-house to pressure our kaizen efforts. Think about that for a moment. Do we trust outside suppliers to kaizen better than we can internally? Do easy, high volume parts present the same kaizen opportunities that low-running parts provide? Which would challenge us to be better problem solvers? As for our customers, which kinds of products are growing in demand, the generic, high-volume products or the custom, low-volume products? How about the trend in the future?

What do you think?


Tim McMahon said...

Nice post. I see this issue a lot in our specialty products business. This complexity is the reason many customer come to us. It is value added for them. It does force us to improve more than at our larger volume product lines because of the constant challenge. The return on investment for individual improvements is lower than the larger volume lines but I think the profitablilty overall is higher.

Tim McMahon
A Lean Journey said...

Keeping the cats and dogs in-house, as Ohno promoted, makes sense when the organization has the ability to improve the production of these animals and to learn from these challenges. Too often companies outsource what they consider their non core competency work, reducing the opportunity to learn and improve, and speeding up a vicious cycle of having more of what they do become non core.

Mike Wroblewski said...

Thanks Tim. I think you hit it dead on, the specialty products are why the customers come to us. Sometimes this gets lost in the cost reduction quest.

Mike Wroblewski said...

Thanks Jon, good points in core versus non-core. I think the whole outsourcing trend can end up as a losing move if we don't have a solid the long term strategy.