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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
john shook
20
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…
35
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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36
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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john shook
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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?
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