S1-E15 Transcript Dr Steve Melnyk Professor of Operations Management

s1-e15-MTR.

Tim: Welcome to the Manufacturing Talk Radio, we are here in the ISM Show in beautiful Las Vegas, Nevada and Lew, our co-host is going to introduce your guest this morning.

Lew: Thank you, Tim. I’d like to introduce Dr. Steven Melnyk, Professor of Operations in Supply Chain Management of Michigan State University. I presume that’s in Michigan.

Dr. Steven: You got it, thank you very much.

Lew: Ok, thank you for joining us today.

Dr. Steven: My pleasure, Lew.

Lew: I will have a session here of learning a little bit about how Michigan State handles all the issues regarding employees, skills and talents and education and so on. Do you have an opening statement that you’d like to address or we should get right into the show?

Dr. Steven: I’m just going to simply say that there are a lot of stuff that we will be talking about today is really the result of research that we are dealing at Michigan State University and the supply chain group which is right now is engaged in a major initiative to understand where’s the future of the supply chain going what are the things that are going to enable to go forward and what are the things that are going to hold us back. The reason why we are doing that is because it is one of the top supply chain programs in the country. You don’t teach people about the past, you teach them about the future. Cains who was an economist once was asked “do you think about the present or the future” and he said “the future” because that where I will spend the rest of my life.

Lew: Well said, well said. Regarding manufacturing in the way it was and the way it is, how would you identify then and now?

Dr. Steven: That’s an interesting question because there is a lot of interest right now in re-shoring and what people are assuming is we are going to see jobs coming back to the States. There were essentially like the jobs that we saw in the 60s, 70s and 80s. Let me give you an idea, there is a fundamental shift. When I graduated from high school —00:02:45— of my kids in the ice age, I graduated in Hamilton, Ontario. In Hamilton we had Steel Co and DFAS Co and not that far away from us was the Ford assembly plant. Many of my colleagues when they graduated, I mean the kids I went to school with, what the decided to do is as soon as they graduated, they put their application into DFAS Co and Steel co and became assembly man at Ford. It was low skilled, repetitive but highly paid and their idea was that’s the job they are going to have for the rest of their lives.  1990s came and a lot of those people found themselves without jobs when we outsourced. Now we are starting to see that we are coming back, why are we coming back to the States because we are starting to find that people are looking for product that’s responsive, quality, innovative has things like sustainability. This is a demand for a product that’s being driven by technology. Its being driven by customer demand and if you want to be involved in this neon world, you are going to be highly skilled, you got to be proficient with computers, more importantly you are going to be able to talk with people outside of your other employees you got to talk with top management, you’ve got to talk with engineering, you’ve got to be able to tell him what works and doesn’t work. And you’ve got to keep training yourself because, here’s what you need to think about, there was a study that was recently done, their interesting finding that an engineer who takes a 4-year degree by the time he graduates half of the stuff he’s been told is obsolete, think about that over a lifetime.

Lew: Well, that’s the way the growth of technology has taken us today. They come out with a new iPhone every 8 months and its kind of continue that way, its not going to ever go back to the way it was. Therefore and I’ve gone and done a lot of travelling recently overseas and the overseas markets are still into buying American, it’s a quality product and we have to keep up with that with regards to skilled labour.

Dr. Steven: Here’s the point, what’s really helping us with re-shoring and bringing back the manufacturing is people in China, people in India they want to live like we do and that’s a critical factor. If you think about what’s happening I’ve seen studies coming all about China that they are estimating, specially in the East Coast of China, Shanghai, etc, Guangzhou Province, they are estimating that by 2015 or 2016, the salaries the wages you pay a worker there are going to be equivalent to what you pay a worker in the States. What’s interesting is that what we’ve done in the States is that what we’ve done in the States and this is a new manufacturing is the rate of productivity is exceeding, the cost increases by paying higher wages and what’s happening, the irony is work is coming back to the States because we are becoming the low cost center, isn’t that ironic?

Lew: Took technology to do that.

Dr. Steven: That’s part of it. They also took the fact that people now recognize that you’re not simply buying cost, in fact cost is becoming almost like a given. What are you buying? You’re buying responsiveness, you’re buying the ability that if you place an order today, you’ll get something very quickly. There are companies that are coming out in the States like Café Press where you can design a product, a mug, a key chain, they have a myriad of products in their catalogue, you can design it online and they will deliver it, if you want it next day. I’ve heard of a company that they will allow you to design candies to your specifications and you can print them and get them delivered next day, they are using technology and that means they have to have people who can live with this technology.

Tim: Steven, is this a different phase for Michigan State University, you mentioned that an engineer half of what he learns by the time he graduates is obsolete, is this a different phase for the university to teach?

Dr. Steven: Yes and the reason is becoming because what’s happening is the rate of technology is becoming faster and faster, we are still trying to see more slow being applied, not something too high-tech but also to how we view problem. If its that’s the case, here is an example, I’ve known so many programs out there, the university programs on supply chain, they are teaching lean and that’s everything for them, guess what LEAN is nowadays almost given, its not a competitive advantage. You’ve got to be able to know when to use one of these technologies and when not to use one of these technologies and that’s the challenge. At Michigan State, we teach our students and we work with companies to manage what we refer to as the management paradox. That is for a short a term, you manage the stability, in the long term you plan for change. We want to make sure we want to be able to anticipate the change so our students and the people we work with understands not only where we are but where we are going to and to do that, you are going to have to work with an environment that’s faster and faster, that’s going to affect the education in delivery, in content and in the concepts we teach.

Tim: and do you see most of that being delivered at the classroom level and on screen rather than printed book, you couldn’t print books fast enough.

Dr. Steven: You’re right and there’s a new coming out on books, I forgot the exact title but its almost like its content embedded book where you have a book and you have links built into the books and what you do is you use a QR reader and they get you to a website and they show you the latest developments on the book but what you really are bringing up is the fact that this technology is not only creating a demand for a new workforce its also creating a demand for a new method of education and the reason being is because education cost are going up and we are trying to see the concepts of MOC’s which are Massive Online Courses. What MOCs are doing is they are starting to challenge how we teach and the other reason is that for many of the new students who are millenniums it’s the way they learn, what you’re seeing is manufacturing is experiencing a revolution, education is experiencing a revolution and in revolutions there are winners and losers.

Tim: Right, you know my neck of the worlds were done in Atlanta, Georgia, you will see a lot of vacant strip malls and a lot of strip malls are under construction even one mile away is vacant and its taking enormous risk. In the university world and you’re talking about this Massive Online Courses, is there going to be a need for all of the land grand colleges to be as big as they are or as broad as they are in the future or are we going to see consolidation?

Dr. Steven: That’s a good question and that’s one of the challenges I just read a report that came out I think it was an economist and one of the things they brought up in this report, he said, it may not be the large language in schools in which you get hit —-00:10:31— in Michigan States or the University of Wisconsin or the schools which were developed under that philosophy. The schools are going to get hit are the regional schools because what’s going to happen, they don’t have the resource base and there’s going to be a competition. When somebody brought a statistic to me, they said if Harvard was to come in and lets say you are in Atlanta, Georgia or lets say you’re out in one of the areas lets say 50-60 miles from Atlanta. You can go to and pick a  —00:11:03— and I wont and you had the trouble, you pick one of the small regional schools and you can pay anywhere from $50,000 – $70,000 for the MBA and I can give you that same MBA over online for the same price and have it come from Harvard, which would you take?

Lew: That’s very true, it could be very competitive.

Dr. Steven: And the thing that you’re going to is that you’re not simply conveying how you teach, you’re conveying content. What people are really becoming aware of is that you got 2 things going on in schools, you’ve got delivery and you’ve got content and if you don’t master both of those, you’re dead. As I told people, you either create it or you release it, when it comes to knowledge either create it or release it and you’d rather be in the business creating it and many of these smaller schools are not that good at creating really forth forward seeing knowledge.

Tim: In Michigan State University, you’re here at the ISM conference, why is Michigan State University at ISM conference.

Dr. Steven: Because as a program in supply chain, first of all, le’ts be realistic, supply chain came out from the business community, piece of trivia, do you realise that the first time the term supply chain management used was in financial times, I think it was in June 4th 1982. A guy was describing the integrated system that he was developing and in that article, he used a term supply chain, so a lot of the developments we see in supply chain come out of the business community, research if its going to be effective has got and being published in academic journals and its going to be acted on by practitioners, by the people that you see walking around ISM. What we do in coming here is we are trying to get a sense of what are the concerns, we ask the questions of ourselves on a regular basis, what is it that keeps these people up at night and why? And the other we do is we are getting validation on what we are representing, is there value to our approach, our thinking. When you put those two things together, you will start to see why schools like Michigan State, schools like Arizona State or Pen. State are doing so well because by working closely with the practitioner community, we ensure that we are not simply creating stuff which is intellectually rigorous but also stuff which has an impact.

Tim: Ok, in talking with Tom, the CEO of ISM, we spoke with Thomas Nep and we are hearing these number of three to six hundred thousand vacant jobs in manufacturing. To the students going at the Michigan State is they go 3-year courses realize that there’s that kind of opportunity out there for them?

Dr. Steven: Yes and the reason that they do may not be in manufacturing but in supply chain overall.

Tim: Yes, ok.

Dr. Steven: and the reason that they do this is because we are becoming a supply chain enterprise. I see board of directors for Apex and only me in the academic. Apex begin as an operations management manufacturers society and they’re telling you right upfront that their future is not manufacturing, its in delivery and that means that’s the supply chain. There are opportunities, people come to Michigan State and we have a lot of students are coming to Michigan States from overseas because they want to get to know what we are teaching the American students that they can apply in China and in India, in Pakistan. We see that all the time and in fact, I want to make a statement, that number is going to grow because you are going to see not only the demand for the functionally type supply chain people, the scheduler, the people works —00:15:13—- but you’re also going to see an increasing demand for the guy, the person who can interface with top management. Because increasingly and you see it Apple, firms are trying to recognize that supply chain is not simply a good idea they have at the table when they do strategy, it’s required. That’s becoming the future so it’s going to grow.

Tim: On the different tech Steven, once you have your new millennium trained and new skills and technology and supply chain manufacturing and so on, how do you keep them?

Dr. Steven: You’re getting into something really, really interesting, both at Michigan State and at Apex we’ve been kind of struggling with the issue of what makes the millennium students so different from the gen-x and the baby born and the reality is they’re really different. They learn online, they see themselves as part of communities, when they go on to a job, they don’t want to be on the same job. Remember I described the person, the guy who graduated with me out of Glendale High School and Hamilton Ontario, he expected to go on and get a position in Steel Core in assembly position, he work on the assembly line in Ford and for the rest of his life that’s everything he is going to do. The millenniums when they sit down, you know what they want?

Lew: The next job.

Dr. Steven: They want variety, they want you to keep training them and if they can’t get it at their current position, here’s what they are going to do, they are going to move. Why is that so important? Here’s the reality, Americans are talking about the fact there’s a skill shortage and then we have to go to places like Germany which has a very well developed program for developing the skilled craftsman. They are going to look at that process they are going to say the challenge is for us to get enough workers. No, the challenge is first to get enough skilled workers, the second is to keep them and its not enough to pay them, it’s you’ve got to pay them and you’ve got to give them variety, you got to treat them differently. That’s the one thing that we are trying to see very clearly, its not that the gen-x or the millenniums have a feeling of entitlement, that they think they’re good, etc. It’s they view things differently, they’re looking for variety, challenge, they want to come in and feel that they’re doing something great and you know what the funny thing is, we are trying to seek companies who’ve realize that when it comes to supply chain people coming out from Michigan State, they give rotation programs, now we are also trying to see the same lodge  of being applied by companies to get these workers, these people to come in and not only to be manufacturing people but to come in and to stay at their companies because if you don’t keep them, you’ve just got to replace them.

Lew: Sure it’s a never ending revolving door. In our metals company All Metals and Forge we find that we could get new people in for example into the quality department and then we send them out for quality training and they get a certificate and that certificate is all powerful, very meaningful to them and it wasn’t that way 20-30 years ago so we are seeing in our own small way exactly what you’re talking about.

Dr. Steven: And so the challenge which we are really picking up is a really a multi-station challenge. The first thing is how do we get people in public school, not high school, in public school, the grade schools to become aware that there’s this great opportunity because they think of manufacturing the same way that you see; have ever seen the Charlie Chaplin’s Modern Times.

Lew: Yes, bits and pieces.

Dr. Steven: Yes, bits and pieces, the very kind of regulated, charged, very disciplined, very —00:19:29—  environment, its not that. Its clean, its fluid, its —00:19:34— stimulating, we got to get people to understand its not your fathers manufacturing world guys. And so we are going to do it at the early level, the grade schools, we got to make that they‘re aware of it at the public schools. Once they get into universities or into community colleges, we’ve got to make sure that companies understand that its in best interest to develop an environment where we keep them once we get them.

Lew: Costs too much to replace them.

Dr. Steven: Yes, have you ever seen some of the costs? 3 years ago I did a consulting job with a pharmaceutical company located in North Carolina. They mentioned the fact that it takes them about 18 weeks just to get a person to do quality management trained. Then it’s another 9 to 18 weeks before they are considered up the speed. You think about that that means if you train a person who is up to speed and that person decides to leave, you are not just simply looking for the new guy, the new person. You are looking for someone who’s going to be brought in and then they’ve got to be trained and they’ve got to be brought up the  speed and that’s a big, big cost.

Lew: Sure, 9 weeks of training and then they don’t work out.

Dr. Steven: But supposing that they do work out, how do you keep them? Here’s what you need to think about, its this challenge that you’re picking up it requires us to rethink not only education but also how we manage the workplace, variety, opportunities, community all of those are things that we are still trying to see millenniums talk about.

Tim: Steven, in this conference, was there any one or two things that you heard or picked up on that you’re going to take back to Michigan State.

Dr. Steven: Yes, its because initially it goes back to my —00:21:44—that’s why I’m reaching out I was in the army many, many years ago so I picked that up. Anyway, the first thing I’m going to picked up is this notion that theres a lot more emphasis here on culture that I’ve seen in the past.

Tim: Ok.

Dr. Steven: and that’s important, that means that not only do you manage people from a systems perspective, from the data perspective but you have to also understand the culture of it because if you ever go to Ford, Ford has a wonderful sign and the sign says “Culture eats strategy for breakfast” and I think they’re just trying to see and awareness in fact there was a session this morning on a CEO level of where people were talking about this notion of culture having to be considered. Number two, just trying to see more emphasis on supply chain as being strategic and that is really different. In the past, if you went to conference like this, all of the sessions would be on how to generate or foster bottom line growth. Bottom line growth is cost reduction. I’ve seeing more and more presentations that are dealing with topline growth and to do topline you have to be strategic. The third thing that I’m picking up is the notion that the rate of technology is going so fast that the challenge is how you keep people who are professional buyers. Purchasing managers, supply chain managers, how do you keep them current in a world where the pace of technology is just accelerating everyday.

Tim: Right, that would be very challenging. It would certainly be challenging for manufacturers and it will be challenging for the universities and  Steven we wanted to thank you for coming here from Michigan State University being at the show and also for being on Manufacturing Talk Radio, we’ve really enjoyed it.

Dr. Steven: Thank you very much, my pleasure.

Lew: Thank you.

Dr. Steven: Take care.

Tim: Take care now.

Tim: Welcome to Manufacturing Talk Radio, we have a very special guest with us today we are excited to introduce and my co-host Lew Weis will introduce him, Lew?

Lew: I’d like to introduce George Krauter from Store Room Solutions located in Radner, Pennsylvania, George, welcome.

George: Thank you, its good to be here.

Lew: How is the show has been for you?

George: The show has really gone very well, we’ve had a lot of prospects and a lot of interest in what we do.

Lew: Tell us what you do.

George: Store Room Solutions is a very unique provider of all categories of what we call MRO supplies which is Maintenance Repair and Operating material and we are unique in just about all of our revenue comes from being onsite inside of our clients facilities. Most of our clients are manufacturers of products. Also we are involved with institutions, hospitals, universities but most of our concentration is with the manufacturing segment of the economy.

Lew: when you say that you take over the store room, please be more specific, tell me about that.

George: Ok, if you consider that all of the purchasing that a particular facility does, what their total spend is you can cut it into 3 categories which is the production parts, the materials that goes into their product, the capital expenditures and then there’s MRO; Maintenance Repair and Operating supplies and every facility has an MRO store room and that store room represents a very small part of what they spend, maybe just 6 to 7 to 8 percent but in reality it creates upwards of 70 to 80 percent of all the purchasing and receiving activity.

Tim: Why is that its only a 6 to 7 to 8 percent spend but it’s a ten fold increase in purchasing activity?

George: because the companies would have a lot of concentration on the high spend, that’s where most of the people in this organization ISM, that’s where they spend most of their time. The function of MRO is generally ignored because of that percentage, it’s a lot of parts, lot of activity, a lot low value and that’s why their percentage is low. One of the things that we purport is that if you are in the manufacturing business, lets just say you’re manufacturing forklift trucks. That’s your expertise, the trucks that you build are excellent and that’s your core competency, your core competency does not extend to running a hardware store. By definition MRO store, well, it’s a store, its like a home depot, so that’s not the business that you’re in if you are a manufacturer of forklift trucks. So what we say is that you should outsource that, you should move away from that cost, the cost that can be recovered and allow an expert to run that store room.

Tim: Let me just clarify it for myself, your client has a store room and he is struggling to make sure he has inventories, he’s got employees for ordering parts and so on and what you do is that you come in and you take over the store room operation, the inventory that he has is blown off at some point, so your inventory and you take full responsibility that there’s always going to be part there and no issues with delays and so on?

George: That was well said, do you want to be a sales man for us?

Tim: When I retire.

George: That was right on, this is the way it should be, many companies, our clients have recognized this. One of the things that has to happen is that you have to have key performance indicators and those key performance indicators have to be realized in order to sustain the program. One of the most important things that has to happen and one of the most important values that comes out of being onsite is connecting the store room to the needs of maintenance reliability. Maintenance invest a lot of money, a lot of activity in various maintenance reliability program, they want to be lean, they want to produce a reliable plant so the plant can produce a reliable product and reliable product means that somebody buys it more than once.

If you have an unreliable store room that unreliability will demean, will distract from the goals of maintenance. So as a part of what we do and reducing total cost of ownership, we make sure that the store owner is connected, is coordinated with the needs of maintenance. So if maintenance has a project and the project requires a part, if they go to the store room, what happens? If the store room doesn’t have it then they have downtime. So the unreliability of a store room affects the total cost of the product. When a store room is unreliable which most of them are when they’re run by the company themselves then maintenance and various kinds of people will sub-stock, they’ll pullout more than they need and they’ll put it in sub-stocks just to make sure that they have the part and you cant blame if the program in a store room that was run properly by a company with that expertise then their sub-stocks disappear, the duplications in the supply pattern disappears and again to reach an optimum total cost of ownership situation.

Tim: Explain to me when you say its your inventory, you burn off their inventory and it becomes your inventory, what’s the advantage to my company to have your inventory and my MRO shop.

George: Ok, there’s really 2 cost benefits, financial and non-financial. Financial benefits comes from reducing the price of the part and then to answer your question, reducing the investment in inventory. If you can reduce and recover the dollars in inventory then you have more dollars for projects, you have the cost of money that you’ve saved and its ok to reduce inventory, the financial disciplines and companies are always putting precious to reduce their inventory, recover their cash while if you reduce your inventory and now you have downtime then there’s no benefits of reducing it.

What happens is that when we start in a store, we have an implementation plans that specifically relates to the particular needs of the plant and the entire inventory that’s in the store room is in fact the client’s. Now we start to begin to issue their materials and we determine what’s repetitive. As that material is issued, we now comingle our inventory to the point where it is supported the fill rates are up in the 98%-98% range.  When the last of their inventory is issued and our inventory is now issued that’s when we begin to —00:33:07:00— for that is taken from stock.

Tim: Well it seems like it’s a huge advantage it’s a 5%-6% to 7% spend than they’re freeing up 5, 6, 7% capital when they shift to your inventory is that right?

George: actually it’s much more than that. If you have a truism, if you have a $3M MRO spend and again I would say what is your definition of MRO, because it varies from company to company. If you have a $3M spend, most always you will have an inventory of $4M or $5M, in other words here is another reason not to be in this business because your turn is a negative inventory turn. If you want to talk about a successful story, look at Home Depot. I bet their inventory turn is way up 6%, 7%, 8%, it has to be for a profitable situation but here we are with a negative inventory turn duplications and stock. People stocking outside of store room because its unreliable, I can go on and on and on and how much time do we have?

Lew: You’re doing good, you’re doing good. I have a question for you, your software that manages the inventory, do you do analysis of what is their usage so you can keep the inventory levels low based on their needs as opposed to the company that you’re working with may not have been doing an analysis of their inventory flow.

George: You’re touching on something that is critical meaning that we need the cooperation of all of the disciplines. Those people who will designate what the inventory level is are mostly directors of maintenance, engineers and they always want more inventories, invitefully so because of their experience whereas in our situation, we work with maintenance engineer and come up with an optimum min-max situation and again one of the KPIs is fill rates will be a hundred percent on critical spares. Will be 98%-99% on overall with all of the fill rates, no store room that’s operated by a company themselves, no store room can hit those numbers.

Tim: They don’t hit those numbers because its their kind of on the backseat, the backbone if you will, they’re not getting the kind of support that they need within the organization, is that what you saying?

George: Well, I’ll talk in general in terms, most store rooms are not coordinated with the needs of maintenance, and there are really four disciplines that are involved. Finance normally wants fewer inventories and buys it at a cheaper price, purchasing mantra is to buy it less and pay less for it so they go out on a quote. Engineering is always looking to make improvements and as a result of that will put new parts in and that effects if the old part are obsolete then the new parts increase inventory. Then there’s maintenance, because of their bad experience of not having the parts there will want more and more and more inventory. So what success requires is a coordination and agreement from all those disciplines to move forward together and to answer your question that in most companies does not exist when the store room is in-house. Sometimes purchasing is in-charge of it, sometimes maintenance, sometimes even finance is in-charge and they have different ideas, they have different directions as to what their goals are. Our company when we go onsite, we get the goals in line, everybody has to agree. If everybody doesn’t agree, you have a good chance to fail and we can recognize that, we will recognize when the program is in danger. Someone asked me from my experience to right down how many ways can I prove where I can be defeated and I said I’ve never thought about  writing them down and I did so I got the 35 without even thinking and so I went to 50 and through 5 more in for a good  measure and there are actually things had happen. Our experience we will recognize when these things are going to happen and we can avoid them so our success rate is just pretty fantastic because of this experience and the dedication, we don’t have any other source of revenue, we have to make it work.

Tim: Sure you seem to have the handle on this very well and I know there are other companies other competitors that you have out there, how long have you been doing this?

George: Well, I started the company in 1971, We built that business and I sold it in 1994 and stayed and retired for a while and then Store Room Solutions came along and they ask me to market it, just to market and I just love it, it’s such a wonderful experience.

Tim: Retirement is an ugly word so we wont talk about that but I am going to ask you one more question if any of our listeners want to be able to get in touch with your company, could you give us your URL address.

George: Its storeroomsolutions.com and I personally would be gkrauter@storeroomsolutions.com

Lew: Real quickly as we wrap up here George before we go to our commercial break, is there anything else you want to share with our listeners before we go to commercial?

George: I believe most company are not aware of the values that can be released from MRO. Most companies will just say it is what it is and we have to walk by it. it’s a money losing situation, it’s the drains on their profits and if they had a manufacturing function that was not performing well was a drain on the profits, they would change it or get rid of it and yet most companies put up with this situation that exist with a non-reliable store room. What I would leave everybody with is think about it, look at it as an opportunity and no matter what you do, there’s value to be released and it should be acted upon.

Tim: George, well said and we really appreciate you’re spending the time with us and hopefully our listeners will pick up your word and act on them.

George: Well, thanks very much for the opportunity, I really enjoyed it.

Tim: Thank you.

Lew: I think certainly if there’s an opportunity to free up some cash within an organization, this is a great one and thank you very much for joining us on Manufacturing Talk Radio.