Turnaround with Lean Mindset

It was with great optimism and expectations that Bridgeport USA and Texmaco Indonesia came together to set up a joint venture for CNC and conventional machine tools, but sometimes, even the best laid plans can go awry, as it happened in this case. Here’s an in depth view at how establishing lean practices led to a complete turnaround. This setup was one of Texmaco’s business verticals among its textile and engineering businesses and its second one in machine tools.

The project was headed by seeded experts and a multicultural team comprising of American, British, Chinese, Singaporean and Indian members besides the locals. The land, building, machinery and manpower were installed, the engineers and workmen were trained at the collaborator’s factory in USA. Castings and gears were to be supplied by sister companies within the group. But, five years since inception, with everything in place, they had failed to produce even a single machine!

Identifying the central problem

In five years, some castings were developed (mostly defective) and some machining was done but was never converted into a complete machine. Internal discussions revealed that the business process was not well-defined and diverse views between the marketing and operational departments were creating a block. There was a value stream with nothing flowing because the thinking was very discrete.

We asked ourselves: What processes were going wrong? What could be done to change this situation? We then came upon a solution and in this article, out of the various products manufactured, the milling machine has been used as a reference example to explain the case.

The main issues

The factors that were identified as playing a role in the company not being able to produce any machines were:

• No clear authority in place, although people with roles were in place
• Indonesia was and is not a name known for machine tool production in the global market
• Focus on the product market matrix and price point for market entry was missing as was an evaluation of correct market scenes. Although the company was supported by technical knowhow from the parent company, a proper buy back arrangement was missing, thereby both sides were losing out on potential opportunities.
• Target markets were not clearly identified, although everybody knew that there was a market for such machines
• Core competencies required to build this business were not identified. A good business process, sound philosophy and proper perspective were felt wanting.
• The pricing factor had probably killed the project. There was total disconnection between expectation and reality. For example: the thinking that prevailed was that the management wanted to sell a milling machine at $10,000 per piece, while Taiwan sold similar machines for approximately one fourth the price. While Taiwan sold about 36,000 machines a year, Bridgeport’s numbers were at best in triple digits annually.
• The casting factor probably pulled down the project too. The group’s own foundry was dictating the price, quality and quantity of casting supplied. The foundry’s expectation was a price of US$1.40 per kg of casting, which could otherwise be sourced from Taiwan at that time for US$0.3 – 0.55 per kg in fully finished component condition!
• Since all the previous years had gone without testing a single product, the accuracy and reliability of the equipment, tooling and people were not proven and established.
• Lead times for various activities were not determined. Operations were not standardized and throughput times were not known.
• The initial requirements of milling heads were to be purchased from the collaborator. The prices of these were not competitive and in fact, were exorbitant, thus making the product unsellable. The brand may have had its name, but knowledgeable customers knew cost effective sources for similar machines and their features. The collaborators did not want the milling heads to be manufactured inhouse in the first few years, and wanted it to be sourced from them. The opportunities in machining centers presented more excitement, but the collaborators wanted this to be a subsequent development. Why?
• What was the strategic intent of the local partner? What was the overriding philosophy? Was there intent to make this company profitable? Was it serious about the joint venture plans?
• The plant and equipment supplied by the collaborators were rebuilt machines; they were never put to test here and were never beaten for production. The capacity, capability and reliability of this line was not proven and established.
• The percentage market share of the collaborator was in the second decimal of the milling machines market. Where was the argument then about what the customer’s wanted?
• Did the owners have intent to flourish in this business?

It was clear that we had to think of ways to quickly establish ourselves as global machine tool suppliers, and to do that we had to establish the manufacturing, its supply chain, establish throughput times, lead times, and deal with cash cycles etc., all while contending with detractions from peers and discrete thinking within the group management.

Formulating the strategy

The long-term objective was to develop a supply chain from within Indonesia and that would include our group companies – provided they were competitive. But in the short-term we had to address the market needs too. We had to develop reputation of being a reliable machine tool manufacturer and service provider. Considering the training and development time required within, we needed a strong short to medium-term strategy that could catapult us into the global markets and help understand the customer requirements and establish us as reliable suppliers.

Considerations:

1. Buy gears and castings from in-house group companies - We had to test our capability to produce all components in house. Could we develop them all simultaneously? Were we geared up for it? The milling head was a critical assembly and had intricate component machining, gear velocities, noise considerations etc. Among the machinery installed, there was no machine available to finish machine high precision parts. The hardening facilities for the spindle were also not installed. A group company that had a gear shop could have been asked to supply gears, but they did not have proper equipment to produce gears of quality class IT-5 and 6. So in our assessment the factory was not ready to produce the ‘heads’ in-house yet. We had to either source the components or the assembly in the short to medium term.
2. The group foundry was ready to supply castings. They had received the patterns of parts other than the head from the collaborator and made some sample castings. Quality issues on casting prevailed but, these could be resolved and overcome. The foundry was selling the castings at $1.40 per kg and wanted to be the final authority on price and salvaging standards! These factors would render us uncompetitive in the global market and hence was not acceptable.
3. The advantage of building this assembly in house was obvious, and we wanted to get to this stage and bring in all that value addition. However, in the beginning our priorities included customers, markets, channel partners, supply chain partners, working capital, etc. Thus, in the beginning we were not equipped to produce everything in-house.

Sourcing from points of cost advantage without sacrificing quality - Although cost-based strategy would have been the right approach, with the outsourcing thought the differentiation strategy may not hold out. We could source the parts or assemblies from India or Taiwan but this singular approach would not help develop internal competence.

Concurrent strategy

The critical issue was that even after five years since inception the joint venture had failed to produce machines, bag orders, establish markets, and corner a share in the market place. Everybody was eager to begin producing and delivering machines. The concurrent strategy was to set up two supply chains; one that focused on developing internal competence (long term), while the other sourced parts from Taiwan until such time we had developed competence to produce parts of the required quality in the required takt time. This would give us the following advantages and help overcome all the in-between problems:

• To start with, we would commence manufacture of all components other than the ‘milling head’, and work on perfecting the supply chain, procurement cost and quality, manufacturing processes, cycle times, lead times, throughput times, standardize work, develop the ability to solve problems, process documentation etc. All that would ensure rapid flow of components.
• Initially we would not be constrained by the results of in-house processes for component manufacture – considering the used machines handed down by the collaborator, and whose process capability was not established or proven. But, could respond to the market demands and fulfill those using outsourced components.
• One of the dominant challenges was building in the core competencies, lean systems and processes required to succeed. This was our top priority. The outsourcing strategy was to gain time to build Jidoka and Kaizen capabilities, knowledge of JIT tools and techniques, and while doing so not lose the present market, but to begin building a reputation and an image.

Bring in the CNC machining centers & CNC milling machines - Our intent was not to lose out on present markets while quickly moving on to future ones. We knew that to gain a share of this market we had to compete with the quality low cost manufacturers from other countries, besides South East Asian countries are not known to be machine tool producers. To make money in this market one had to produce at low costs and high volumes; however, the sales volumes and contributions could only improve by enriching the product mix. The collaborator had a range of CNC machining centers and CNC milling machines. The bigger opportunities, greater markets, and better contributions lay in these products.

Living the challenge of Possibility Thinking

The company had been in existence for five years incurring expenses without generating any revenue. Hence was in net cash negative, living on dole outs from the local parent. So, we had to setup a self-sustaining supply chain that would not demand upfront cash. Having done this successfully in my previous lean transformation the mechanics were known, but there the human system worked like a well oiled machine in control of time, process and quality. That level of human capability was yet to be developed here, and we did not have the luxury of time. I put my trust in the peoples capability even though unproven yet and told them we have to work like a machine to get this going. Everyone was excited and ready. Alas there was going to be some action.

We carefully selected supply partners, agreed on lead times, quality, delivery and a thirty day payment credit. We placed annual orders and indicated initial pickoff quantities that would self-convert into demand rates later. One supplier was nodal to the shipment of everyone’s parts. We then picked a liner that best maintained schedules. It took seven days for the ship to dock in Jakarta, two days to receive the container at factory and two days to build the machines. So the machines were ready for delivery in fifteen days from parts’ shipment. We shipped the machines, encashed the letters of credit and paid our suppliers on the thirtieth day.

Our focus on low lead times and waste prevention brought a huge cost advantage in addition to the negotiated prices. Taiwan was the biggest seller of such machines; the challenge for us was to be more competitive than Taiwan even though we were sourcing from Taiwan! To give you a broad idea, the costs worked thus then: If Taiwan sold a machine at approximately US$ 2,600/- we couldn’t price ourselves over this as it would hinder acquiring market and share. We had to be on par or better to gain entry to various markets. We challenged ourselves to sell at $2,200 - 2,300 a machine. And the backward working began on purchasing costs and lead times both for procurement and building the product.

We bought complete raw material in fully machined and ready to assemble condition at $ 1,180 per set. With internal fixed costs, painting, packing and warranty at $350 per set, there was a clear surplus generated of $670 (or $770) per set. This meant that at 100 machines per month we would generate a surplus in excess of $800,000 (or $925,000) per year! This was targeting to take a mere three per cent share from Taiwan. There was scope to take more market share and further consolidate revenues with the rest of the Bridgeport product range.

This was fantastic news for any factory that was struggling to produce its first machine for five years. Naturally as in house production of components took over, the contribution would only increase. The advantage of this strategy was in being able to start up manufacturing and delivering with short lead times, enabling to establish a network of dealers and build an image. 

The victory

From all the alternatives discussed above the dual strategy action taken by us was perhaps the best. The ownership of the group and the management at first were divided on this issue. However we went ahead as it was in the best interest of the company and its stake holders. Enacting the dual concurrent strategy we quickly had the factory buzzing with activity. In about six months we had established channels around the world, booked firm orders, which were covered by order commitments for the next year and a half, received letters of credits for payments.

What made this transformation happen? Lean thinking! The multi culture of the workforce was not an issue, even though they exhibited varied levels of resistance. As long as we were focused, thinking and acting lean, everything else fell into place.

Recognition

I was told that this was considered a prestigious US-Indonesia joint venture project. The previous five years had caused heart aches and disappointments at the projects dysfunction. Six months from embarking on the turnaround, one fine equatorial day we had an array or VIP guests disembarking from their helicopters that had landed on our football field. Ministers and Ambassadors followed the Indonesian President visiting the factory to see what was this magic that had created the turnaround! I am sure they were as pleased with what they saw as was our Chairman showing it off to them.