The Big Lie About

Outsourcing

John Shook

October 5, 2011

A presentation derived from

four conversations • John to Bruce:

– “I just had some great gemba visits…”

• Bruce to John:

– “Great! That‟s the title of your talk…”

• John:

– “…?...”

Bruce: “Make things lean in USA”

• Jim I, owner of a medium-sized business:

– “The recession taught me that businesses – like mine

– have been sold a complete bill of goods on the

benefits of outsourcing. It‟s all a lie.”

• Jim II, CEO of a large business:

– “The recession taught us that making things where

we sell them is good business.”

• Waku, COO of a Toyota supplier in Japan:

– “TPS is all about trust…”

Jim I and II: The outsourcing lie

A lie in two parts:

•…in simple economics

•…in the basic assumption of the how and

why of business in general and of value

stream dynamics in particular

The outsourcing lie in two parts

The economic lie:

•Jim I: “I am taking money OUT of my wallet and

giving it to someone else…”

•Also, piece-price models show narrowly defined,

even ill-defined, savings. An analysis of total cost

usually reveals a very different picture

– Take a look at Harry Moser‟s total cost

calculator at www.reshorenow.com

– Or the story of “Mathew Lovejoy” and “Acme

Alliance” at www.lean.org

The outsourcing lie in two parts

• A lie in simple economics

• A lie in the basic assumptions of the value

stream dynamics

–

End-to-End Flow Through Vertical Integration

Ford Model T Supply Stream

A Supply Chain as One Giant Conveyor

Running Through the Country

Ford Model T Supply Stream at River Rouge

Giant Conveyors for “Ore to Assembly”

15 million sq. ft.

100,000 workers

100 miles of railroad track

15 miles of roads

And, of course, conveyors. 120 miles worth.

And 6000 suppliers

The Rouge 1932 - Death by Complexity

The outsourcing lie in two parts

• A lie in simple economics

• A lack of understanding of the basic

assumptions of the value stream dynamics

• But, it wasn‟t that complexity that killed

extreme vertical integration. Not directly,

anyway.

The outsourcing lie in two parts

• A lie in simple economics

• A lack of understanding of the basic

assumptions of the value stream dynamics

• But, it wasn‟t that complexity that killed

extreme vertical integration

• It was Michael Porter and Inaki Lopez

Momma Bear Supply Chains

-the just-right mix of “core competency”

and “vertical integration”

The ideal supply chain is one with

the effectiveness and efficiency of

vertical integration but with the

flexibility of looser networks of

suppliers.

Blending “vertical integration with “core

competency”

• But, describing it that way can be

interpreted as a “solution to

copy”

• We‟ve been down that road

before in the lean community…

Japanese COO Student of TPS

• “TPS is all about trust”.

• Trust - like “the outsourcing lie” - has two

parts:

– “I trust you to do your best…”

– “I trust you to do it „right‟…”

Japanese COO Student of TPS

“The key is trust. People at each stage of the value

stream have got to believe, to know, that their

colleagues upstream really will resupply them

immediately when and as necessary. Only then will

they have the confidence to abandon their safety

nets. Likewise, they've got to believe, to know, that

the orders that come in from their colleagues

downstream really do represent replenishment

demand for stuff actually used. Only then will they

have the requisite sense of urgency to respond

promptly. Our job as managers, therefore, is to

instill that kind of trust in our organization."

Integrating People and Processes

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Actual

Employee -

Signal the Problem

Manager - Immediate Response

Together – GTS, ID root causes,

decide on countermeasures

Apply tools as

necessary

Standard

Andon

The Work of Managers - Correcting Out-of-Standard Conditions

STANDARD CURRENT

CONDITION

Lean managers establish systems for

signaling problems and responding to them

“If some problem occurs in one-piece-flow

manufacturing then the whole production

line stops. In this sense it is a very bad

system of manufacturing. But when

production stops everyone is forced to

solve the problem immediately. So team

members have to think, and through

thinking team members grow and become

better team members and people.”

T. Minoura, Toyota

Thinking Production System

Actual

Employee -

Signal the Problem

Manager - Immediate Response

Together – GTS, ID root causes,

decide on countermeasures

Apply tools as

necessary

Standard

Andon

The Work of Managers - Creating Out-of-Standard Conditions

STANDARD CURRENT

CONDITION

Lean managers establish systems for

signaling problems and responding to them

• the effectiveness and efficiency

of vertical integration

• the flexibility of looser networks

of suppliers.

Blending “vertical integration with “core

competency”

The outsourcing lie in two parts

• A lie in simple economics

• A lie in the basic assumptions of the value

stream dynamics

– We were encouraged to understand supply

chains as a series of discrete transactions

Total Lean Value Streams

• From analyzing the value chain as a series

of discrete transactions

• To seeing the value stream as series of

tight connections, each representing a

relationship that holds potential for deep

learning

• Exploiting value streams with this

understanding enables quick flexibility and

deep adaptability

Total Lean Value Streams

• From analyzing the value chain as a series of

discrete transactions

• To seeing the value stream as series of tight

connections, each representing a relationship

that holds potential for deep learning

• Exploiting value streams with this understanding

enables quick flexibility and deep adaptability

• From optimizing discrete transaction points to

creating an adaptive learning system

Lean Value Streams and Total

Lean Supply Chains

Don‟t “starve” the customer

Where’s my

sushi?!

The following process is the customer

Together…

…these equal Just In Time which equals Total System Efficiency

In a democracy (“Kanban Democracy”), the

customer isn‟t just “King”…

A democracy means rules (Rule of law)

(“Kanban Democracy”)

• The customer

doesn‟t decide just

on whim

• There is a

customer-supplier

agreement

– Rules they agree to

abide by

“Kanban Democracy” Kanban Rules

Properly implemented,

the processes embody

the thinking

Ex: Kanban rules: 1. Each item must have KB

2. No production without KB authorization

3. Etc…

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Total System Efficiency

What is a system?

•“A network of interdependent

components that work together to try to

accomplish the aim of the system. A

system must have an aim. Without an

aim, there is no system.”

•- W.E. Deming

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Cost Cutting Vs. Systematic Total Cost Reduction

Conventional Thinking

Cost + Profit = Price

Lean Thinking

Profit = Price – Cost

What is a system?

•A process (or network of processes)

with inputs, outputs and a feedback loop

that enables adaptation.”

•For example…

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Takt Time = 58.6

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Learning as a key objective of

value stream design - Zara

• Learning from customers built into

value stream design!

• Zara owns shops so it can learn

what its customers want. Then, it

cascades that learning quickly

through its development and

manufacturing operations.

We‟ve got great opportunity…

Who here can run some end-to-

end value stream experiments

to showcase at the 2012 NE

Shingo Conference?