In my last post, I wrote about how to define value and differentiate between value-added and non-value added activities. I thought about I could add value for my readers (customers) and decided to write a follow-up to that post with an IRL case-study from one of the companies I’ve worked at.
(Names and countries have been changed to protect the confidentiality of the company, products and supply-chain)
Case-Study 1
SOHO Inc is a Designer-Distributor of high-end home office furniture. They design, develop and distribute their furniture products in the USA, but all their products are manufactured across various Asian countries.
- Pique is one such home-office collection and is comprised of 5 SKU’s of filing cabinets, all of which include drawer locking systems.
- 4 of the 5 SKU’s use a single-side lock and the 5th SKU uses a different double-side lock.
- The single-side lock costs $3.50/set & has a Minimum Order Quantity of 1000 sets
- The double-side lock costs $13/set and has a Minimum Order Quantity of 500 sets
- Currently, the locking systems is purchased by SOHO Inc in the US from a reputed supplier ( 5-10 day lead-time after Purchase), re-sold to the Asian manufacturing vendor and is shipped to Asia (5-10 days shipping time and about $500 freight cost).
- Because of handling complexity, the Asian vendor prices
- the single-side lock at $7.50/Set &
- the double-side lock at $16.50/Set
- and includes the above as his BOM Line Item costs for the locks.
- The Asian vendor then manufactures the filing cabinets (about a 7 week lead-time), installs the locking systems and the finished assembled product is shipped back to the USA (5 weeks on an Ocean Container) for distribution to US customers.
- SOHO then inspects 100% of the products and adds about $8/unit in inspection labor to the BOM pricing of the units.
As a customer of filing cabinets, what parts of the above process would you be willing to pay for and find value-added?
At just first glance, I see only one value-added activity and most others are either Pure waste or Incidental Waste.
- Value-Added
- The Design and development of the Pique collection
- The Manufacturing of the various SKU’s
- Customer can store their sensitive documents in the filing cabinet and lock the filing cabinet for security
- Non-Value Added or Wastes
- When plenty of similar performing or better locking systems are available for purchase directly in Asia, choosing to purchase them in the US, re-sell and have all those freight and handling charges baked into the cost are Pure Wastes. I don’t see why these extraneous costs should be passed to the customer.
- The $8/unit being added into pricing for Inspection labor? Absolutely nuts and Pure Waste! Why should the customer pay for the lack of trust SOHO has in their supplier’s ability to produce quality product?
- All of the long lead-times for shipping back and forth could be classified as Incidental Wastes. Why Incidental, and not Pure? The answer depends on what SOHO has chosen to define as value-add for their own internal processes. SOHO decided a long time ago that the cheaper costs of manufacturing from Asia would enable them to provide better value in terms of price to their customers. So, the result of that decision is long shipping lead-times, which is necessary and a limitation of the current supply-chain system.
The next steps would be to identify wastes to eliminate the Pure Wastes and find ways to improve performance on the Incidental wastes above.This is what SOHO did –
- Identified a locking system hardware supplier domestic to the Asian vendor with a lock set cost of $1.5/set as delivered to the Asian vendor. This saved SOHO $6/unit on 4 SKU’s
- Enabled the vendor to purchase lock systems directly from their domestic source. This eliminated the Purchasing coplexisty when SOHO was involved and removed one step.
- Changed the design of the SKU that required the double-side lock, to take a single-side lock system instead. This saved us $15 per unit on that SKU
- Eliminated the freight costs of $500 to ship lock systems from US to Asia (Bonus points for helping reduce carbon footprint)
- Vendor passed on the savings from eliminating the unnecessary shipping and handling costs and reduced the Unit prices.
Would you have done anything differently? Do you agree with my analysis of the shipping lead-times as Incidental Wastes based on our internal definition of the Value Stream? Let me know your comments below! If you have any keys you’ve used to unlock your complex problems, please share!