Starbucks goes lean to pull out of its slump

In June Daniel Corsten pointed out to us a very nice article about Starbucks and how they are continuing to rethink their operations (WSJ, “For Starbuck’s  Baristas, It’s Back to the Grind, 6/17/09).  In some cases Starbucks had let efficiency reduce the customer’s experience, such as grinding coffee only once a day.  Now, they will grind throughout the day so that the shop is filled with the aroma of freshly ground coffee – less efficient but better for the customer.  That said, they are not backpedaling on all efficiency.  For example, they are making their coffee brewers more flexible (instead of brewing only one variety, now they will switch) and consequently customers will experience stockouts of their favorite variety less often. And they have a team of 10 people focused on bringing to their shops “lean thinking” alla the Toyota Production System. Given that labor represents 24% of revenue, even slight improvements in motion can make a significant difference.  That means looking for how the company can reduce the walking, reaching, and bending that goes into the making of a cup of java.  Classic process analysis. (WSJ, Latest Starbucks Buzzword: ‘Lean’ Japanese Technique 8/4/09).  The changes seem to be having a positive effect – they reported better than expected fiscal third quarter profits this year (WSJ, 7/22/09).  They’ll need to keep it up – McDonald’s and Dunkin Donuts also understand the importance of lean in how they make their coffee.

Is JIT dragging us down?

We all know these are tough economic times, but do we know why the economy is struggling so mightily? One theory is that JIT (and other lean manufacturing practices) are to blame. See, for example,

http://jamesfallows.theatlantic.com/archives/2008/12/pensee_dept_followup_on_the_no.php

The metaphor is simple, animals with stored fat are more likely to survive in times of scarcity than thin animals.  Alternatively, think of a group of hikers on a glacier. JIT means they all tied together with very short ropes so when one falls, they all fall in quick succession.  Are these metaphors correct? Is lean manufacturing the cause of our woes? There is reason to believe it is in fact the scapegoat.

Consider the auto industry and GM in particular.  Their demand is now much lower than their capacity.  (Actually, it has been for a long time, just now there is a very large discrepancy.) If they maintain production at their capacity, then their inventory continues to build, converting cash into inventory. This can work for a little while but eventually you run out of cash, risking bankruptcy.  This is the problem they currently have.  The alternative is to stop production, but then you pay your workers to do nothing, so you still burn through cash but then have no product to show for it. This is very costly – in theory, inventory can eventually be converted into some revenue.  

Now consider the role of lean production in this mess. If you turn back time to one year ago, had GM been less lean, then they would have had less cash and more inventory.  Consequently, they would have had less of a buffer to weather the current storm, so their problems would have hit earlier or would have been more severe.  If they had been even leaner, then they would have had less inventory at that time and more cash, thereby giving them a bigger cushion to survive the downturn.  Based on this reasoning, their current problems are as bad as they are because they weren’t lean enough, not the other way around. 

It is possible to defend JIT in another way – if JIT were the problem, then we would expect the leanest of the auto manufacturers to be suffering the most.  Toyota and Honda are among the leanest, and they are suffering, but not by as much, which is again consistent with the notion that during this crisis, being lean is a help and not a hindrance. Maybe the better metaphor is the following.  Two people are thrown overboard a cruise ship and nobody notices, so they need to fend for themselves. They see an island in the distance and start to swim for safety.  Who is more likely to make it, the fit and lean person or the “master of the buffet” person?

Environmental Kaizen

Kaizen, or “continuous improvement”, means constantly working towards improving processes, no matter how small the improvement.  The idea of kaizen has famously been applied at Toyota to their manufacturing process but the concept has also been applied by GM to make their manufacturing plants more environmentally friendly.

GM’s Lansing Delta assembly plant in the the world’s only to have received Gold Certification from the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) system. They achieved this goal by making many small (and some large) improvements to their processes. For example, they use bright lights were tasks are needed and dim or no lighting where light is not needed (such as where robots are working).  The restrooms use rainwater collected from the roof and the roof is painted white to reduce heat absorption. (Both the light and rainwater examples emphasize that an important resource should be used only where needed.) But more important than any single idea, the implementation of Kaizen changes how employees view their environment and motivates them to generate further ideas.

Automotive News, August 11, 2008 – GM Factory a Model of Sustainable Manufacturing

Improving a process – US Airways’ on-time performance

Believe it or not, US Airways is now a lot better with on-time performance, even better than all of the other airlines (and this is hard to believe if you live in Philly, one of their hubs).  Apparently they are doing this with some good old basic process improvement techniques. For example:

- They have created a “rallying cry” to emphasize the importance of on-time performance.
- They support their rallying cry with financial incentives when goals are met.
- They have installed electronic displays for the baggage handlers so that they can monitor flight status and prioritize effort. A good example of providing workers with the necessary information needed to achieve a goal.
- They have runners that move bags between connecting flights when necessary.  This can be controversial. On the one hand it creates another process, which adds to variability. On the other hand, it prioritizes service where most needed.
- Buffer times has been added to schedules. And instead of doing this haphazardly, they appear to be adding buffers where buffers are most needed – on routes that experience the most uncertainty. This makes for a more efficient use of buffers.

To summarize, they are applying behavioral techniques (goals, incentives) and process changes to demonstrate that good on-time performance can be achieved by anyone.

Wall Street Journal, July 22, 2008 – How US Airways Vaulted to First Place

Quality management at the American Red Cross

According to the FDA, the American Red Cross is not as good at ensuring quality in the nation’s blood supply as it should be.  In fact, ” … despite $21 million in fines since 2003 and repeated promises to follow procedures intended to ensure the safety of the nation’s blood supply, it continues to fall short.”

This article describes some basic failures of quality management and illustrates some opportunities. For example, the Red Cross lacks a system to track errors (blood units that should not be introduced into the system) and hence has no mechanism to identify root causes and to develop solutions. 

Next, because it is a large ($2.1 billion in revenue) and decentralized organization (they use to have 53 operating regions and now 10) they lack uniform standard operating procedures.  Even when they have standard procedures, workers do not always follow them.  For example, a phlebotomist is suppose to swab a patient’s arm for 30 seconds and then let that area dry for 30 seconds, but those times are not always followed.  One solution is to make phlebotomists wear timing devices to ensure compliance. Another is to redesign the process to be more robust, especially with respect to ensuring that people comply with the standards.

The news is not all bad. A key lesson from quality management is the elimination of variability.  Red Cross workers sometimes forgot to ask all of the pre-screening questions to potential donors, thereby letting some donors pass even though they shouldn’t (e.g., if they had visited a malaria risk country).  To standardize the process, now potential donors must complete an on-line questionaire – the computer doesn’t forget to ask the question, so variability in the process is reduced.

NY Times 7/16/08 – Problems persist with Red Cross blood services
http://www.nytimes.com/2008/07/17/us/17cross.html

Improving the milk supply chain

Do you think the milk supply chain has been optimized? Think again! Deliverying milk is an old business, but apparently there is still room for some kaizen. WalMart has redesign the milk jug to be made of cardboard and with a rectangular shape. Rectangular means they stack on top of each other, thereby eliminating the cost of milk crates, the cost to clean them, the space they occupy and the weight they contain. They claim that these features allow them to reduce the number of deliveries to each store per week – from 5 to 2 – but I don’t think they fully explain why nor do I think such a reduction is due entirely to this redesign.

Milk is a dense item, so I suspect trucks “weigh out” before they “cube out”, i.e., the amount of milk a truck can carry is constrained by the weight of the load rather than the volume of the load. Hence, saving on volume doesn’t allow you to transport more milk. Therefore, the extra capacity per truck must be from the reduced weight of not having to carry milk crates. But to reduce the number of trips per week from 5 to 2 requires a 5/2 = 250% increase in carrying capacity per truck, which doesn’t seem realistic. Note, this assumes total demand at the store is assumed to remain constant and trucks make dedicated deliveries to stores. It is the latter assumption that may be the source of the discrepancy. Suppose before the change each truck delivered to 5 stores and each store sold the equivalent of one truckload per week. Because each store receives 1/5 of a truck per delivery, it needs 5 deliveries. Now change the routing so that each truck delivers to only 2 stores per trip, but keep the truck capacity constant. Now the store needs only 2 deliveries per week. Hence, a reduction from 5 deliveries to 2 probably only could happen if they change their routing given that a 250% increase in capacity is unlikely. Although the new milk containers increase capacity per truck, and this reduces costs, it does not reduce the total number of needed deliveries by 40%. If we could figure out how to do that, then we would really save a lot of fuel.

NY Times 6/30/2008 – Solution, or Mess? A Milk Jug for a Green Earth

http://www.nytimes.com/2008/06/30/business/30milk.html?ref=business