Forecasting and going lean – the inertia to change

There was an article in the WSJ this week about changes that Furniture Brands is making due to the recession (WSJ 9/20/1010).  (They make several lines of furniture, including Broyhill, Thomasville, and Lane Home Furnishings.) The first has to do with their forecasting and design process.

In the past, apparently, each year they would make a bunch of designs, show the designs to dealers at trade shows and then hope those designs would sell. In effect, they relied on dealers to have a sense of what their customers wanted. With the new system, they test their designs on consumers first, then show a more limited set of designs to dealers. They claim this approach has improved sales considerably.

There are reasons to believe that there new approach could be better. Dealers are supposed to have a good sense of what their local customers want. But if dealers are casual about their forecasting process, i.e., they rely on memory and gut feel, then it is likely that dealers could make bad choices. Furniture Brands’ customer testing process is more systematic and therefore potentially more reliable.

This reminds me of when vendor managed inventory (VMI)  was first introduced to the consumer packaged goods industry.  I worked with Campbell Soup to evaluate their VMI system in which they decided what to ship to their client retailers. They were able to lower their retailers’ inventories by about 2/3rds and raise their fill rates at the same time. What made that achievement remarkable was that their system was quite simple, painfully simple – forecast sales for the next few days based on a rolling average of sales in the previous weeks, choose an order up-to level that would achieve a given fill rate assuming a reasonable level of demand volatility. That’s it. The data Campbell Soup used could have been used by the retailer to achieve exactly the same result. There was no theoretical need for Campbell Soup to do it, but either they did it or the retailers, for whatever reason, would not. Hence, by applying a bit of systematic thinking, Campbell Soup was able to dramatically improve the supply chain. It is possible that this is what is going on with Furniture Brands consumer testing idea.

The article also mentions that Furniture Brands has made a strong push towards lean manufacturing starting in 2009. Their version of lean includes cross training worker to perform multiple tasks so as to avoid bottlenecks on the line. This idea has been well established to be effective since at least the mid 1980s. Why has it taken them so long to implement this? Why is the diffusion of lean manufacturing so slow? Good question. My only answer doesn’t seem adequate to me – because people won’t change unless motivated to change by “clear and present danger” (i.e., the recession). Inertial can indeed be strong.

Blockbuster – doomed by its own medicine

Blockbuster filed for bankruptcy protection this week, which was expected for quite some time (NY Times, 9/23/10).  Blockbuster surely had a good run, but ultimately was doomed by its own medicine.

Blockbuster grew to dominate the video tape/DVD rental business by providing convenience to its customers – many well-located stores and many copies of the movies/shows customers wanted to see. If you took the time to go to a Blockbuster, you knew you would find something worth watching.  This convenience was provided in large part by negotiating revenue sharing contracts with the movie studies, thereby allowing Blockbuster to stock a large inventory even when at item was first released.

Fast forward to today. I live two blocks/200 yards from a Blockbuster but I was surprised to discover a couple of weeks ago that it was gone.  My 15-year old son explained it to me – “why would I walk to Blockbuster to pay $5 for a movie when I can download the same movie to my PS3?” I had no idea that a PS3 could do that (isn’t it a game machine?) – clear evidence that the generation gap I swore I would avoid is right there in front of me. But I digress. The point is that Blockbuster is no longer as convenient as the alternatives – RedBox, Netflix, etc. It is no longer as important to have many copies of new releases in a store because customers don’t feel the need to leave their home. It is true that Blockbuster makes content available sooner to customers, but that doesn’t seem to have the value that it use to have – my kids troll around for movies of all ages and don’t  rush to see the latest thing.

It is unlikely that Blockbuster will ever regain the dominance it once had. Surely, it will not do it via its 3000 stores, a number that will have to decline. The fall of movie rentals has been predicted for at least a decade – the technology has finally advanced to the point to make it happen.

Do we need a Manufacturing Czar?

President Obama has named Ron Bloom as a special advisor to tackle the problem of declining manufacturing in the United States (see NY Times 9/10/10):

The President said “We’ve got to get back to making things.” Do we?

Here are the arguments why the decline in manufacturing is a problem:

• Without manufacturing we won’t be able to take advantage of emerging markets in green technology “I don’t want to see new solar panels or electric cars or advanced batteries manufactured in Europe or in Asia. I want to see them made right here in the U.S. of A. by American workers” says President Obama.
• Without manufacturing there will not be research and development in the U.S. (which are presumably higher paying).  The argument is that R&D and manufacturing have to be co-located.
• If R&D declines because of a lack of manufacturing, then innovation will decline and innovation is the engine of productivity growth.

And what are the causes of the problem:

• Unfair trade practices by China and others.
• Private equity only invest in firms that manufacturer in China because the U.S. is not “where you make things”.
• Large U.S. companies don’t want to promote domestic production because they now produce everywhere.

So what do they plan to do about the decline? Here the specifics are thin. They have ruled out subsidies. They will focus on trade diplomacy and improved export-import financing.

Unfortunately, for Mr. Bloom, I strongly suspect he will not be able to reverse the trend, nor do we want him too. But if he wanted to reverse the trend, he is not pulling the right lever.

To fix a problem requires identifying the cause. There are two reasons why manufacturing has declined in the U.S. First, although not mentioned in the article, transportation costs have declined.  If it costs a lot to move parts and finished good around, you need to do things locally. When you can start shipping and training and trucking things for cheap, your options as to where to manufacture expand. Second, things are much more modular than they use to be. Henry Ford’s designers had to be very close to the manufacturing process because I suspect design was an iterative process – design something, try to make it, redesign it, try to make that, etc. Now, computers, telecommunications and precision machinery means that for many things the design and the production can be decoupled – an Apple engineer can dream up the next Iphone in her office and send the specs over to China without fear that what she created will be costly to make.

So if the causes are cheaper transportation and let’s call it decoupled R&D, then what could be done to reverse the trend? We wouldn’t want to ban computers to prevent the former. But maybe we should make transportation more expensive. At least that would have an environmental benefit. But if it is expensive to move stuff from China to the U.S., then it is expensive to move it from the U.S. to Europe, i.e., it cuts both ways. Which brings me back to an earlier point – should we care? Our decline in manufacturing has also occurred during a period of increased productivity and standard of living. Where is the evidence that we have been hurt by the decline in domestic manufacturing?

And let’s consider the geo-politics of trying to break manufacturing ties with other countries. If we purchase nothing from China and China purchases nothing from us, will they be more or less inclined to use their military? (For that matter, how about the U.S.’ inclination to use its military.) The answer seems clear – as long as countries are linked together via trade, the world will be a safer place.

America should promote innovation and we should make things in America that make sense to make here (like cars). But we have better things to worry about than manufacturing’s declining percentage of the economy.