Fast-Rite Blog

25 May

Reduce Cost? Or Add Value?

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Back in the late 1980′s there was an electronics store in the Chicago Suburbs that was wildly popular. Precision Video in Bellwood had all the best equipment. Their weekly ads listed a ton of deals every week on popular electronics such as TV’s, VCR’s, Audo equipment and more. They competed sucessfully with all the giants.. Fretters, Highland, Polk Brothers, Silo, Village Home Entertainment, others.

One item always stood out on the page, it seems for many years they advertised a 27″ Zenith Picture in Picture TV. I remember seeing this at $449.
All their competition slowly began to fade away, especially when Best Buy and Circuit City came into town. One by one they all fell.

In time that $449 became $399, then it became $349, $299, then $249. And finally Precision Video bit the dust too. The margins could no longer support them even though there was a great demand. Later, Circuit City folded, and since then Best Buy themselves has been on the ropes.

But a trend towards cost reduction has never stopped. This has eroded price – and margins, significantly. Manufacturers had to look to reduce cost in order to be competitive. And the first place they looked was at the cost of their raw components.

Then the American Auto industry rolled out a new trick.

One major Auto maker began to demand a 3% cost reduction from their suppliers, year after year. And to a large extent, they got it.
Why? Well, because at first, the margins of their suppliers at the time supported it.

But it was obvius from the start that this trend couldn’t go on forever. You couldn’t reduce and reduce and reduce and stay in business.
So the suppliers sharpened their pencil at first, and later, began to sharpen their operation. They started shaving everything they could, improving their efficiencies, so they could lean out their margins even more.

Was that good? Well, in many ways, yes. Business supply was not very efficient. American factories needed to tighten up our act, especially in automotive and other heavy industries.
But there were bad repercussions also. The relentless drive toward cost reduction has put a focus on the price versus the value. Yet we have a public, especially in the US, that wants more and more value for their money.
How do we do this?

Some have tried to do so by reducing the quality.

As the American automotive industry learned, quality is a given, and a drive to cost reduction can push the level of quality down. If that happens, business will flee.

Toyota had some bad press due to very poor management decisions with brake problems a few years ago, but just look back at what happened when the Camry came out years ago. As is typical, the American competition would go out and buy the competitor models, and take them apart to find out what made them tick.

David Magee tells the story of what they found out:

“… the Ford team members knew the Camry would soon take over; the vehicle was undeniably a wonder for the price. No other car came close. When Ford Engineers took a Camry apart piece by piece for study, many became mesmerized and others panic-stricken by the obvious quality, suggesting it was frightening to think Toyota could make a car so good.” – How Toyota Became #1: Leadership Lessons from the World’s Greatest Car Company – David Magee

THE MORAL OF THE STORY: It’s critical that we focus harder on Value Add than Cost Reduction.

At Fast-Rite, we spend a lot of time seeking to add value to our customers. We visit their plants, and identify opportunities to improve their operations, their product, and their cost effectiveness. One of the things we’ve learned is the value of another set of eyes, getting another’s input as to how to improve an operation.
Our customers know their products and their processes very well, yet we’ve been able to apply experience and a lifetime of learning to be able to identify and save them millions of dollars in productivity and hard cost savings.
One thing we’ve learned, you need experts, yet, not everyone that can help needs to be experts at your operation. In fact, sometimes you may find someone whose only work history was working at Dunkin’ Donuts can join a kaizen event for a manufacturing cell, and while they may not know beans about manufacturing, they learned a little bit about organization or ergonomics that the other members would not think of.

So we thought we’d give some examples of some of the things we’ve learned over the years. How to raise productivity is a job that will never be done. Continuous improvement will never be done.

In the next post on this series we’ll shed some light on a very simple matter: Light, and it’s relation to the work environment.

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