The second edition of Lean Thinking has been out two months now and at least a few members of the Lean Community seem to have used it for beach reading. I’m grateful, but they’ve also e-mailed me with an interesting question: “Whatever happened to the bicycle company you talk about in Chapter 3? Why isn’t its success mentioned in the new Chapter 14 in the same breath as Toyota’s?” Well…there is a story to tell and I thought I would share it as a bit of beach reading for everyone.
In 1995, I partnered with a number of investors to buy a small bicycle frame manufacturing company in the Boston area. My role as an investor and board member – not an employee – was to introduce appropriate lean knowledge for improving operational performance.
As we got started it looked amazingly easy: The firm built its high-end titanium bike frames to confirmed customer order and had a reputation for shipping within a week or two of receiving an order. However, to do this the company had created four months of almost completed frames, which underwent final fabrication and adjustments just before shipping. In addition, because of the batch mentality of its key supplier – the firm making the titanium tubing – the bike company had four months of tube stock on hand. Adding four months to four months, it was easy to see that throughput time for a piece of tubing, from entering the company until shipment to the customer, was eight months, and that this was where all the operating capital was tied up. (The cost of the tubing was 40 percent of the total shipped cost of the bike, so this was big money.)
Our plan was to eliminate the four months of partially completed frames and the four months of tube stock while maintaining the ability to ship almost immediately to customer specification. To do this we transformed the process village layout of the facility to create three cells for tube fabrication, tube welding, and final machining and adjustment. (We got some terrific advice from a number of sensei, ranging from Bill Moffit to Hajime Ohba, so all of the mistakes were strictly our own.) Then we ran down the inventory by reducing throughput time from the first cut on a tube to customer shipment to only two days for a custom frame. This permitted us to eliminate the storage areas and rent out half of the plant to another firm. Because we also increased productivity, while making a special effort to find jobs for the folks who were no longer needed — an easy task in the boom economy of 1996 — it looked like a win-win-win!
Then we made some mistakes:
The first was a technical effort to create a completely flexible welding fixture for any bicycle so that the welders could switch over from one bike to the next practically instantly and we could run bikes through the plant in the exact sequence of customer orders. It was a splendid thing to behold – and lingers in my memory very much like Mark Twain’s mechanical typesetting machine that consumed his entire fortune and never worked! We were so obsessed with lean purism – in which I was determined to make bikes in the exact sequence of customer orders – that we forgot some technical limits and the fact that many of our customers were not actually that concerned about waiting a bit for their bike. Indeed, some reported that if we could make a custom bike within two days of receiving an order, we must not have any business or their bike was really taken from inventory rather than custom built. Either way, we were not delighting our customers, who, like Harley Davidson buyers, placed positive value on waiting. So…we purposely added two weeks of lead time to custom frames!
The net result was that we tied up a lot of the capital freed up by the inventory reduction in a technology effort designed to serve a customer need that only we were feeling and that we were never able to complete. In the end, we had to accept the reality that small batches weren’t always a sin. The business take-away: Never put lean purity ahead of what’s realistic or what the customer actually wants!
Our next mistake was simple hubris on my part: I thought I could go to the titanium tube supplier — the only firm in the world able to make tubing that did not crack in our benders — and make such a persuasive case for converting their tube mill to lean methods that we would get better service with much smaller lots and lower pricing. (I was young back then.) It was only when I got to their tube mill in Louisiana and looked at their technology that I realized it was a lost cause. I asked if I could simply sit and watch while they did a complete tool changeover on their big machine, but they pointed out that since I was only in town for 24 hours I wouldn’t have time to watch the whole process! Then they asked if I wanted to buy their company too since they were underwater and on the market! (They were soon bought by a financial turnaround firm with zero interest in operational issues.)
Reality really began to sink in when we realized that the tube mill had only four customers – Boeing, Pratt & Whitney, GE Aircraft Engines, and us – and that a remarkable boom in the aircraft industry was just taking off. As a result, the supplier shipped us whatever they wanted to ship us whenever they wanted to ship it, and the best we could do was to get them to store the excess in their distribution warehouse near our plant. Because nothing fundamental had been done about costs and their plant was sold out for several years to come, it wasn’t surprising — indeed, we were lucky — that prices didn’t move. Business take-away: The extended value stream is critically important, but fixing it is always a lot harder than fixing your own operations. So, don’t count on unrealistic short-term benefits.
Our next mistake was just bad timing: As a result of the bubble economy and the ease of IPOs, almost all of the big bike companies like Cannondale, went public in the mid-1990s. As they did this, they needed to greatly increase sales to meet Wall Street expectations on growth. And the best way to do this was to offer retailers extremely favorable terms for putting bikes on the retail floor without paying carrying costs. That was one thing for $300 bikes but quite another for us with our $2,500 frames, yet retailers wanted us to match the terms of the big boys. (By the way, Cannondale went bankrupt with its easy floor plan strategy!)
We had a brilliant idea in mid-1997, which was to take a giant gamble and shift our sales channel to the web. We designed a site where buyers could build their own customized bikes on the screen and with just a few clicks send us a lot of money! The problem was that making a dramatic channel switch required both cash to get through a probable short-term drop in sales – as traditional dealers realized the rules had changed – as well as to advertise the new channel in high-end publications like GQ.
So, our president went to our bank and explained that we wanted to borrow to create a new business model. This quickly led to a discussion of collateral. In our two years running the business, we had gotten it from chronic losses to small profits, but we had also eliminated almost all of the assets. Work in process had gone from eight months to less than a week, receivables on finished products were zero since we shipped cash-on-delivery (COD), our equipment inventory had actually shrunk as we replaced fancy new machines with simple old machines (led by the “ancient reamer” whose manufacturer’s plate confirmed that it was a century old!), and we had eliminated half of the plant space. In short, we had created low-capital manufacturing, which is precisely where the world should be heading.
As our president went through the logic of our business model with the bank, their rejoinder was simple: “So, you are asking us to lend against a business that has no assets by design?”
“Right, this is the future of manufacturing!”
“Well…the future isn’t here yet. Good-bye.”
The business take-away: Don’t expect traditional financing sources to understand what you are trying to do with your lean transformation!
So…we concluded we couldn’t get there from here and called a broker. In short order we sold the company to a multinational sports equipment maker wanting to pick up another high-end brand. And that was that, except for one dispiriting final detail: The new owner immediately concluded that the problem was insufficient inventory and went back to making large batches of partially completed frames! They couldn’t make any money with this approach – surprise, surprise – and soon sold the company to another big firm where it now only exists as a marketing device, one badge among many.
On the brighter side, a number of the employees of our firm broke away to found a new firm and have made a solid success in the custom bike industry using the manufacturing methods we introduced. And for me the experience was invaluable in converting from a lean dreamer to a lean realist: I invested very little going in; I received very little coming out; and I got an invaluable education in what it really takes to transform a business.
I hope that your lean education is proceeding as well – even at the beach – and that you have a higher ratio of gain to pain!
President and Founder
Lean Enterprise Institute
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