John Shook on "The big lie about outsourcing"

The keynote speaker at today's "Made Lean in America" conference, is John Shook, CEO of the Lean Enterprise Institute.  He is seen here with Lesa Nichols, whom John describes as a true TPS (Toyota Production System) expert with GBMP (Greater Boston Manufacturing Partnership).  His speech is entitled "The Big Lie About Outsourcing."  I'll try to pick up main points as he talks and relay them to you.

John related two recent conversations with CEOs of two American businesses, one medium sized and one large.  The CEOs at both had outsourced parts of their manufacturing processes, but had concluded, when thinking about the current recession, that they could do better by bringing things back from overseas.  Making things where you sell them seemed to make more sense, if you could do so in accordance with Lean principles.  Indeed, says Shook, outsourcing takes us far from the concept of effective value stream management.  It is not a matter of just the lowest piece price.  But even with a low piece price, it is not always cheaper to go abroad.  The lowest labor cost is not always indicative of total value.  The rush to outsource to garner economies often meant that we lost the core capabilities of our companies.

Value stream dynamics is a way to think about this. 

The ideal supply chain is one with the effectiveness and efficiency of vertical integration, but with the flexibility of looser networks of suppliers.  But that is very difficult to accomplish, and describing it that way can be interpreted as a "a solution to copy," without understanding the real purpose of the relationships.

The key is trust among all the participants in the value stream.  Within a company, TPS/Lean does this is a very specific way.  It is both a social system and a technical system.  When a person sees a problem, s/he calls it out; the manager responds in real time; a root-cause analysis is performed; and solutions are developed and implemented.  The philosophy is, "I'm going to trust the front-line worker to initiate this."

If this is true within a company, it also has to be true between the company and its suppliers.  We should not think of the supply chain (outsourcing) as series of discrete transactions.  Instead, it should be viewed as an opportunity for deep learning.  This creates deep adaptability as things change.  Instead of optimizing discrete transaction points, we want to create an adaptive learning system.

We need to work towards the concept of total system efficiency, not just low piece costs.  How can we synchronize things through this system?  The same kind of trust needed within a company must exist across the corporate relationship, too.  This is very different from what we have seen over the last several years.

We have a great opportunity: To reconfigure value streams, both with and between companies, and make them as rational as possible.