Archive for the ‘productivity’ Category

How could I pass on blogging about the Wall Street Journal reporting on May 21 that 100 U.S. engineers and managers were flown across the Atlantic and told: “Do as the Belgians do!”?

The article, titled “Indiana Steel Mill Revived With Lessons From Abroad ,“ is part of their series on how globalization can improve local organizations and may be one reason why American manufacturing is growing again.  “Some steel mills are destroyed by globalization, others reborn.

Left for dead a decade ago, this 50-year-old facility on the shores of Lake Michigan has been rejuvenated thanks to an unusual experiment by its owner, Luxembourg-based ArcelorMittal.

In 2008, Burns Harbor was “twinned” with a hypermodern mill in Gent, Belgium. Over 100 U.S. engineers and managers, who were flown across the Atlantic, were told: Do as the Belgians do.

Burns Harbor now enjoys record output. Its furnaces, where steel is made out of iron ore, coal and limestone, are run with software developed in Belgium. Robots are in. Pencils are out. Workers are learning to make the same amount of steel with nearly half the people it employed three decades ago. Productivity is nearing Belgian levels.

Burns Harbor, according to the WSJ, is a case in point of the “upsides of globalization: … it puts pressure on U.S. factories to become more efficient to keep up with global competition, making it possible for them to survive.”  There are a few observations to be made: (more…)

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The current issue of Businessweek has an interesting profile of a Monomoy Capital Partners, a private equity firm with about $700 million in investments (My Week at Private Equity Boot Camp, Apr 26). Private equity deals are not the normal focus of this blog, but the article highlights an intriguing aspect of how Monomoy goes about deals. To take over a company and then be able to spin it off for a profit requires some combination of cleaning up balance sheets, rethinking the acquisition’s strategy, or straightening out the firm’s operations. As  the article tells it, Monomoy’s approach to the latter is (from an operational perspective) is encouraging.

To buy a company and sell it at a profit requires a complex skill set: financing, restructuring, negotiating new leases and labor contracts, and, of course, “operations,” the term private equity uses for “making things.” Improving operations can mean parachuting in a consultant or a former chief executive officer as an adviser. Monomoy goes further. It occupies a plant floor like heavy infantry, with yellow tape, label makers, and overwhelming force.

In part, Monomoy does this through a series of two-week “boot camps.” Four times a year, the firm pulls about 20 managers from the manufacturers in its portfolio and sends them to one of its plants to suggest—and carry out—efficiencies.  …

Monomoy has adopted Toyota’s system. Five of the seven people in Stewart’s operations group spent time on the line at the Toyota plant in Georgetown, among them Mike Bray, also in the training room. Bray, tall and goateed, runs the boot camps for Monomoy. He uses the word “kaizen” as a transitive verb and as a noun with an indefinite article, as in “We’re going to kaizen this” and “We ran a kaizen on it.”


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Two days ago, we discussed in class how some companies (like IKEA or Shouldice Hospital) have figured out to turn smart outsourcing of work to customers into a win-win.  Such strategy, also called co-production, can lead to higher customer satisfaction, involvement, ownership, and flexibility.  (As he has proclaimed before on our Operations Room blog, my good colleague and blogger Marty often prefers self-service…)

But, like everything in life, there are trade-offs and we must seek a balance.  Pushing co-production too far can be destructive; in The New Yorker, James Surowiecki describes the disasters at Circuit City and Home Depot.  In retail, customers often are not fully informed about product selection, availability, location, and characteristics.  Well-trained sales people can be of tremendous help, increasing sales (by reducing walk-outs due to frustration or phantom out-of-stocks), customer satisfaction (and hence future sales through repeat business), and employee morale (and reducing churn).  Marty has blogged about our MIT colleague Zeynep Ton‘s study which found that four low-price retailers with much higher labor cost than their competitors also are more profitable. In another empirical study, Wharton colleagues Marshall Fisher, Krishnan, and Serguei Netessine quantified the increase in retail employee productivity:

“increasing associate payroll by $1 at a given store is associated with a sales lift of anywhere from $4 to $28, depending on the current level of payroll relative to store sales. The implication of this finding on retail performance is quite dramatic.”

I love facts.

But clearly, the sales lift will be concave in the staffing level as going beyond a certain optimal point will no further increase sales.  The question then is: what is the optimal staffing level where marginal cost equals marginal revenue?  Time and motion studies allow a reasonable understanding of the product-centric tasks (receiving and restocking) but the customer-facing service tasks are more nebulous and any quantification (which is needed for modeling) requires very detailed data-streams.  But this is coming: INSEAD colleague Nils Rudi is embarking on very detailed data-gathering of customer-staff interaction patterns which we hope to report on soon…

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American manufacturing has been in the news a lot lately.  The Economist (Hard times, lean firms, Dec 31), the Wall Street Journal (In U.S., a Cheaper Labor Pool, Jan 6), Businesweek (It’s a Man vs. Machine Recovery, Jan 5), and the Atlantic (Making It in America, Jan/Feb — currently not now available on-line) all have had articles on the state of US manufacturing. The articles have delivered some interesting numbers. From the Journal, we have:

U.S. manufacturing labor costs per unit of output in 2010 were 13% below the level of a decade earlier as workers became more productive, according to the U.S. Bureau of Labor Statistics. The U.S. outperformed Germany, where unit labor costs increased 2.3%; Canada, where they rose 18%, and South Korea, up 15%.

The graph at right illustrates the change. There are a couple of issues behind this are worth mentioning. First, changing work rules and greater employee flexibility is part of this. The article highlights labor disputes between US manufacturers and Canadian workers that in some instances have resulted in the closing of Canadian factories. Navistar, for example, closed an Ontario plant in part because its American workers (represented by the UAW) agreed that any of Navistar’s plants should be able to build Navistar’s products.

The second point is that exchange rates matter. The Loonie, in particular, has appreciated against the US dollar and that has made making stuff in the Midwest more attractive. Of course, that advantage is more fleeting that changes in work rules and increases in productivity.


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Three days ago, my friend Sheri forwarded me an email she had received from American Rights At Work (excerpts below) about sweatshop conditions in an Amazon warehouse.  I told my executive MBA class yesterday that I should write a blog entry about this for two reasons:

  1. Illustration of the social power of the Internet to force change for the better. This story will quickly make it to the major newspapers which will force Amazon to quickly address this before it becomes a PR crisis.  (My colleague Daniel Diermeier will surely write about the reputation management principles that Amazon should follow.)
  2. The use of performance measurement and temporary workers in a warehouse/service operation where every employee move is recorded.


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Another interesting service ops story. One of the challenges in service is assuring staff are productive and friendly. Yes, manufacturers need to worry about productivity but capital and technology often play a much bigger role in determining what gets done today. Even if worker effort is the deciding factor in how much gets made in a factory, services are still different since at least some of the staff has to be customer facing. The customer who buys a car or a shirt never comes face to face with the workers who made it. That is not the case at a fast food restaurant. Here the service aspect of service matters.

And that gets us to a New York Times piece of Pret a Manger, a British sandwich chain that is now expanding in the US who provides fast service with a smile (Would You Like a Smile With That?, Aug 7). Pret a Manger aims to serve customers within 60  seconds and while being pleasant and  friendly and so far has been able to do this even in New York. Further, they have a workforce turnover of only 60%. (Remember that this is fast food where turnover rate is often well over 100%.)

So what is their secret sauce? (more…)

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The Wall Street Journal had an interesting article on the impact of the rise of the Canadian Dollar on the manufacturing sector there and what firms do to fight it (“Loonie Hinders Canadian Firms“).

According to the article, Canada’s rising dollar has started impacting the country’s manufacturing sector, which is trying to stay competitive:

The Loonie, nicknamed for the waterfowl on the one-dollar coin here, hit a post-World War II high in 2007, the peak of a long flight higher that triggered a frenzy of cost-cutting among manufacturers—from moving production out of Canada to sourcing raw materials and other input costs in cheaper U.S. dollars. Executives started taking currency hedging more seriously.


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“Work smarter, not harder” is a phrase straight out of a Dilbert strip, but as the Wall Street Journal points out whether America has been working smarter or harder is an important question for the US economy (Moment of Truth for Productivity Boom, May 6). Productivity has been strong and growing pretty much through the recession and now the recovery.  For example, the Labor Department reported on Thursday that nonfarm worker productivity rose 3.6% in the first quarter. The question is what is driving that productivity growth. One possibility is that workers are generally scared about losing their jobs and have been willing to go the extra mile to keep their jobs. That is, they are working harder. The other possibility is that forced to make do with fewer bodies, firms have found ways reduce unnecessary tasks, eliminate mistakes, increase machine uptime and yields etc. That is, they have fond ways to work smarter. According to the article, both have been going on:

Some of the productivity gains experienced by K&S Tool and Manufacturing in High Point, N.C., are almost certainly temporary, says Joe Hughes, who helps run the company his father started out of the family garage in 1974. K&S, a machine shop, makes everything from roll bars for forklifts to components for giant electric motors. The recession wasn’t kind to it. The company had about 100 employees in mid-2008, but had cut back to about 60 by April 2009 as customers slashed orders. …

Much of the company’s productivity gain comes from changes in the way people work—rather than new technology or other physical changes. Mr. Hughes, the boss, has started doing work that was previously done by skilled hourly employees. When the company got a contract last summer from Caterpillar Inc. to make a new engine part, Mr. Hughes went into the shop, designed the part and set up the machines so they could do the work. Similarly, another manager now spends part of his time helping to load and unload trucks. Ostensibly, the company is getting more out of its workers because two of its managers are doing tasks formerly done by hourly employees. But the ultimate impact on cost and efficiency is more difficult to gauge. When Mr. Hughes is on the plant floor futzing with machines, he isn’t courting new customers.

So K&S is working harder. Other firms in the same region, however, are working smarter, looking at changes in operating procedures to boost output.

Consider Greensboro, N.C.-based Unifi Inc., a maker of polyester yarn. … [Unifi] had just $50 million in capital spending in the five years before the recession. But the company has still managed to lift productivity. The upshot of this is visible at Unifi’s Yadkinville plant, where it “textures” yarn—a process that gives it bulk and strength. The plant is the size of 16 football fields and is lined with machines that stretch and heat the yarn. Scattered workers dart here and there. Most of this automation was added years ago. “Every piece of equipment we have here is pre-2000,” says Unifi Chief Executive William Jasper. “We have to find out how to be more efficient with what we have. Last year, the plant focused on reducing how often yarn breaks during the texturing process. Each time that happens, machines are shut down, yarn is wasted, and workers have to spend time clearing up the problem.

The company held a brainstorming session and came up with around 25 cheap fixes. Then, it ran statistical tests to determine which of the fixes would make a difference. “Creelers,” whose job it is to splice strands of yarn together with a heat gun, were told to be more vigilant about removing stray bits of yarn. That tiny change eliminated many of the breaks.


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Check out this bit of eye candy from the Wall Street Journal (Radical Shifts Take Hold in U.S. Manufacturing, Feb 3):

This graph shows how capacity has changed over the recession in various industries.  Some industries have contracted while others have expanded.  The story goes that firms with commodity (or close to commodity) products have closed US capacity and moved overseas.  Some of this simply represents moving to where markets now are.  For example, Huntsman Corp has been expanding its production of basic chemicals in China and the Mideast in part because that is where they are being used.  What it has left in the US is focusing on industries like aviation.  The point then is that the US manufacturing base is being remade.  The semiconductor industry shows what is staying:

A large chunk of semiconductor production takes place abroad, but many companies still prefer to produce in the U.S., particularly if their manufacturing entails little human labor or is highly complex. Being close to the U.S.-based design centers of major chip users like computer maker Dell Inc. and consumer-electronics maker Apple Inc. also can be an advantage.

“This is a kind of manufacturing that will make sense to do in the U.S. for a long time to come,” said Tim Peddecord, chief executive of privately held memory-module producer Avant Technology, which recently opened a new 50,000-square-foot plant in Pflugerville, Texas. The new plant will boost the company’s capacity to 800,000 modules a month from 500,000.

Mr. Peddecord said his company is bulking up after a shakeout that drove many rivals out of business. Manufacturing in the U.S., he said, allows it to turn around U.S. orders in 24 hours, an advantage in an industry where demand is volatile and clients try to keep inventories low. In addition, the reduced freight costs, compared with shipping goods from China, can offset the added cost of U.S. labor, since labor accounts for less than a hundredth of his average sales price.


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