Strategic Diversification

We continually stress the importance of tying your Lean implementation to a sound business strategy (Lessons in Lean, March-April-May 2008) and we've explored its role in survival during a downturn (Lessons in Lean, January 2009). One key element in that survival strategy that we will now elaborate on is diversification.

WHAT IS DIVERSIFICATION?
To understand diversification, one should know something about its opposite. Our work with hundreds of fabrication job shops over the years suggests a very common strategic weakness: a heavy dependence on one or a small number of customers.

The danger in this condition was frightfully manifest during the 2001/2002 tech industry downturn. Thousands of small precision fabricators simply went away as their key customers (Lucent, IBM, CISCO, HP, Sun and others) reduced orders precipitously in response to the "dot-com" industry demise. These shops had a decade to diversify their customer bases and secure the future, but many (perhaps most) failed to do so, opting instead to ride the crest of a revenue wave provided by one or two major customers.

Good examples of diversification are found in the compilation of a sound investment portfolio. Every competent investment adviser stresses a diversified range of investments, preferably a mix that includes companies and/or funds that are counter-cyclical to one another; i.e., the performance of certain securities is not at all correlated to the performance of others. When the value of one set of securities is down, the value of another set is up. The average return on this sort of portfolio has been proven superior to any other approach.

An equivalent to this logic when building a customer base obviously starts with cultivating multiple customers in different industries. Then, if this approach is modified to include target markets that have the counter-cyclical nature mentioned above, we can begin to level the effects of inevitable business ups and downs.

Of course, targeting a more diverse customer group is only the beginning. We must execute an aggressive marketing and sales effort to win new customers in the targeted markets. This, in turn, requires that we 1) gain a clear understanding of the wants and needs of each prospective customer, and 2) show that we have a unique capability for meeting these requirements.

WHERE LEAN FITS
In forging a unique value proposition for new (and existing) customers, Lean tools can be employed with great success. Consider, for example, the critically important Lean technique of Value Stream Mapping (Lessons in Lean, September 2008).

As we come to understand customer requirements in a target market, we can design and put in place a value stream that perfectly meets their needs. The shop layout will be configured to isolate, to the degree possible, each value stream. Management, supervision and technical people will "wrap around" the value streams in a manner that focuses necessary attention on the customer service and support. The organization structure will be designed to assign "womb-to-tomb" accountability for results within a value stream.

The ancillary benefit of the value stream focus is that it allows us to cope with the downside of diversity. Serving the needs of a diverse customer base is no small task. The "business within the business" created through the application of Lean tools is perhaps the only way to deal effectively with such widely varying demands. These concepts are illustrated well in the following case study.

Richards Sheet Metal (RSM), a 74-year-old family-owned fabrication business in Ogden, UT, faced the challenge of taking on new business while meeting an extraordinarily diverse set of customer demands. Over many years, the company built a reputation for fast turnaround and the capability to produce complex, custom fabrications in medium-gauge materials up to ½ in thick.

When Steve Richards, the current president and CEO and the grandson of the founder, assumed the presidency in 1985, he was determined to modernize and grow the business. "I saw a clear opportunity to capitalize more fully on our process expertise and diverse customer base," recalls Richards. He has since applied Lean manufacturing principles that doubled the size of the business and weathered a couple of economic downturns.

Market Characteristics
The company's market breaks down into nine categories:
1) Hard tool design and manufacturing, prototyping, and short-run stamping.
2) Fabricated components for high-rise, automated storage and retrieval systems.
3) Complete fabrication of heavy-duty conveyor systems.
4) Major fabricated sub-assemblies for telescoping aircraft boarding bridges.
5) Architectural sheet metal for commercial roofs, gutters, downspouts, and miscellaneous applications.
6) Repetitively fabricated items subcontracted to RSM by steel service centers.
7) On-site facilities maintenance, including the fabrication of repair parts.
8) Heavy fabrications for process equipment (hoppers, chutes, bins, separators).
9) Miscellaneous fabrication.

Within a category, the company has from one to 50 accounts, providing a total of about 200 customers. Customer expectations range from same-day turn-around on a time and material basis to just-in-time (JIT) deliveries of repetitive items triggered by customer pull signals. Product is assumed to be free of defects, and price competition can be fierce.

"We could have chosen to reduce the complexity by shedding certain customers or entire categories of work," notes Richards. "Instead, we chose to apply certain Lean principles to retain, grow, and serve the customer base we had built."

Streamlining Manufacturing Concepts
Early in the effort to address these challenges, RSM planned and executed a formal education, training, and technical support program for the application of Lean manufacturing techniques.

Figure 1 depicts the model of Lean manufacturing toolkits that the management team used to align the company's capabilities with the demands of its marketplace. Each quadrant of the Competition Quad (also referenced in earlier columns) represents the specific set of techniques and strategies that contributed to operating improvements.

Figure 2 details the 12 techniques of Lean that RSM used most from the Lean toolkit during early efforts to support a manufacturing strategy that would:
? Meet the unique requirements of each of the nine market segments being served.
? Avoid excessive indirect and administrative costs associated with managing the complexity imposed by market diversity.

Applications
One Lean technique – a focused layout – was a key to implementing this strategy. In conjunction with a 25,000 sq ft plant expansion, the company reorganized the facility into nine cells (value streams), each of which focused on a target market segment.

CNC punching, laser cutting, plasma cutting, and sawing are treated as shared resources, providing blanks for the downstream cells. Receiving, shipping, and painting are also shared resources. With these exceptions, the cells perform most of the work necessary to meet the expectations of their respective customers.

"Our next step was to assign a working team leader to each value stream," explains Richards. "Drawing from the principles embodied in the CFP quadrant, we trained team leaders and team members in Lean manufacturing principles and team-working skills. They now work quite independently and report directly to the plant manager with no intervening layer of supervision, a significant factor in keeping our costs low."

The value streams are subsets of the business, or "shops within the shop" that enable specialization of equipment, tooling, methods, and skills. This specialization allows the team to perform exceptionally well for a limited number of customers with similar needs for cost, quality, delivery, and other services.

Tools from the Systems and Resource Management (SRM) quadrant of the Competition Quad are used to manage capacity and measure value stream performance. Labor defines the value stream's capacity. Delivery promises are made according to the uncommitted time in a given time slot – usually a workday.

As delivery promises are made, RSM's manufacturing system back-schedules through the routing for each order to establish a start date. Orders are then ranked by start date and the list is sorted into a single day's work for each cell and shared resource center. This process ensures that each team leader knows exactly what is expected in terms of daily output and specific job deliveries.

Once the required capacity and schedules are known, a daily production meeting is held to monitor performance relative to the plan. This meeting revolves around the open order report (or schedule), which is updated daily and broken out by cell or shared resource center. Another critical tool is the daily production board shown in Figure 3.

This board is designed around the same business subsets reflected in the physical plant layout and the organization structure. The top of the board is laid out in days of the week, with subheadings for the daily plan (P), daily actual (A), cumulative plan (CP), and cumulative actual (CA). The "plan" is the run rate in required earned hours fixed by the forecast.

Richards describes a typical daily meeting: "Team leaders attend, along with representatives from engineering and sales. Each person speaks to two basic questions: Did you hit the run rate? Did you run to the rank-ordered schedule?" The run rate question is answered when each attendee posts the previous day's performance on the board under "actual" and marks it in green if the run rate was met, in red if it wasn't.

"Discussion focuses on how to recover lost capacity and to reschedule items that were missed," adds Richards. "A common outcome of this meeting is to swap jobs or manpower between cells, a means of fine-tuning capacity in the short term." These meetings seldom last more than 15 to 20 minutes, yet they provide a comprehensive review of the performance of the entire business.

RSM has the advantage of involving every leader in the company in decision-making and problem-solving related to on-time delivery and other customer service issues (see Figure 4).

Other Improvements
As the layout and organizational approach took shape, RSM also replaced an archaic, manual materials management and production control approach with a modern, computer-based system. Initial efforts to provide this new system with necessary data revealed some serious inadequacies, most of which have been addressed.

RSM goes to market through a group of five account managers who perform sales, estimating, engineering, and project management functions. Any one of the account managers might bring work to any one of the nine value streams; however, they tend to focus on two or three. Given his range of duties, each account manager is required to enter quotes and sales orders and create shop orders in the system.

Problems developed early with the accuracy and the completeness of the data being input. The challenge of getting the right data into the order was compounded by the range of requirements imposed by customers. These problems were tackled with techniques from both the Lean and Six Sigma quadrants. Kaizen events were chosen as the planning and implementation vehicle. The application of selected Lean and Six Sigma tools resulted in:
? "Cleaner" work orders for the shop.
? Reduced time and cost for generating a quote.
? Improved accuracy and consistency of quoted prices with respect to profit goals.
? A standard process for quoting, order entry, and job packet preparation.
? Improved success rate on quotes.

Improvement in these areas is ongoing, but current performance is good enough to support a high level of customer service and budgeted levels of profitability.

CONCLUSION
RSM fashioned a manufacturing strategy that enabled it to secure a strong market niche and position itself for future growth within that niche. The diversity in the customer base provided a welcome cushion as the economy turned sharply down in 2001/2002 – this owing to the fact that some of RSM's customers were impacted much less than others.

Today, for fabricators entering a poor economic climate that is made worse by having too many eggs in one basket, the RSM model indicates that a balance between strategic focus and diversity is important. Lean manufacturing techniques can help forge those competencies that allow a company to deal effectively with a much wider range of customer demands.

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David Dixon is the executive vice president of Technical Change Associates, Inc. and a registered professional engineer with more than 35 years of experience in lean manufacturing, Six Sigma and other improvement initiatives. For more information, call 801-621-8980 or visit www.technicalchange.com.