This Focused Performance Weblog is a "business management blog" containing links and commentary related primarily to organizational effectiveness with a "Theory of Constraints" perspective. TOC is noted for its applications in Project Management and Multi-Project Management (Critical Chain) and Operations Management (Drum-Buffer-Rope), as well as in Marketing, Strategic Planning and Change Management (TOC Thinking Processes). If you are on an archive page, current postings are found here.
Thursday, February 26, 2004
Remade in America -- This article from Forbes is, on the surface, a nice story about the common sense of (at least sometimes) bringing off-shored manufacturing back to the US. But buried in the end of this story about a lighting product are some interesting points...
...He solicited five bids for the work. A Canon factory in Newport News, Va. that makes laser printers and cartridges, among other things, won. Within three months LightWedge was back in production...
What the heck is a laser printer plant doing getting into the lighting business?
It's doing something very smart. I'll bet that there's probably capacity available at the Canon facility to absorb most of the assembly and fabrication effort involved. Canon is not limiting the use of its capacity to it's old product line. If my suspicions are right, it's selling its capacity and capability for precision assembly (a classic tactic in TOC strategy when faced with external constraints), creating a top line at the plant that, I suspect, drops almost straight to the bottom line. While your typical American firm obsesses over the middle lines of costs when faced with blocked growth, this Canon facility apparently recognizes that if you creatively take care of the top line, the bottom line is easier to manage.
...It was a costly move: $140,000 in new tooling and $40,000 in dies still in Shanghai. Bennett also took a hit to the bottom line: Unit costs in the U.S. are 20% higher than in China. All worth it, says Bennett, adding that the plant is turning out "beautiful stuff." He is paying $8 apiece for reading lamps that retail (at Barnes & Noble) for $35. He's counting on netting $200,000 pretax on sales of nearly $2 million for 2003.
[Rant Mode On] Unit costs? Bottom line? Aaarrrrggghhh! There is no direct connection between unit costs and bottom lines. For that matter, there is no such thing as a unit cost!
Yes, there are purely variable material costs that translate revenues to "financial throughput" (T), aka contribution margin, but the costs of producing these lights are not limited to what is really non-variable "direct labor." The operating expenses (OE) associated with overhead and coordination (not to mention the volumes of quality, saleable product) all factor in to the translation from Revenue and Throughput to Net Profit (T-OE=NP). No matter what the "unit cost," if you ain't getting quality goods to sell, you ain't gonna make money. In such situations, "lower unit costs" are irrelevant.
American management's obsession with mythical "unit costs," distracting "activity costs," and all those "middle lines" between the top and the bottom only lead to inappropriate off-shoring and out-sourcing, failure to focus on what really matters -- protection and growth of the top line, and downsized (and wasted) investments and resources. Even the usually commonly sensible Forbes perpetuates these obsessions with such silly comments. [Rant Mode Off]
posted by Frank - Permanent Link -
|
View Frank Patrick's profile
