Plan "B" for China - Entropy Busters® - October 2019

Entropy Busters® Series

Plan "B" for your China Supply Chain

Volume 2 | Number 10 | October 2019

What's Plan "B" for your China Supply Chain?

Let's start with the realization that plan "A" to relocate operations to China had a major flaw.  If you moved manufacturing to China, India or any other low- cost producing country with the intention of importing goods back to North America or Europe (half a world away), then your plan was unsound!

I was taught to do everything possible to reduce lead-times and increase inventory velocity!  Why is this important?  Longer lead-times increase inventory. More inventory equates to less profits.  Why?  Because inventory delays fixing problems. When I see corporations chasing the labor "ghost", I cringe!  Labor typically accounts for 8-12% of the total cost of ownership.  But too many leaders only have one play in their play book: to reduce labor costs by moving head count to low cost countries!  They are missing 90% of the total cost of ownership! 

Why?  Leaders view raw materials as a fixed cost. And inventory carrying cost incrementally at about 6% (Prime +1), and too often leaders believe the only variable they can control are labor costs.

We have not injected Operational Excellence into our American DNA.

Yes, we have innovation in our DNA: just look at Tesla, Apple, Facebook, Google, and Amazon. However, too often, corporations are looking to the silver bullet of innovation to resolve their lack of global competitiveness.

Operational Excellence is the long-term game plan. It takes patience, tenacity and grit to achieve it.Operational Excellence, gains are typically more sustainable, enterprise empowering and greater long-term profits are the result.

If the US is going to regain manufacturing leadership, we must establish and inject the Operational Excellence philosophy into all functions of our enterprises

We cannot forget the total cost of ownership.  Over the long-term, when lead-times are increased, so are total costs. 

  • Longer lead-times typically increase forecasting variance which necessitates more inventory.

  • The longer lead-times and increased inventories negatively impact customer service with lost flexibility and responsiveness to change.

  • Engineering changes take longer to implement and are more costly

  • Cost increases to support a complex supply chain.

  • Cost of quality increases due to the length of the supply chain.

  • Cost of Inventory Increases.

    • Obsolesce cost increases.

    • Inventory shrink, loss and damage increases.

    • Transportation cost increases.


Over the past three decades Japanese, Korean and European manufacturers have invested heavily in US plants and infrastructure.  During this same period, US automotive manufacturers have lost an estimated 40-50% of the domestic market share to both Japanese, Korean and European transplants who have provided better quality and more options for the same price.  What do they know that we don't?  They understand the total cost of ownership and how to drive costs down though operational excellence. 

Japanese automakers tout US-based jobs at all-time high as Trump ramps up trade war

Japanese car makers in America - Twenty years down the road (From 2002)

I believe that over the next few years, the inability to manage total cost improvements will be seen as an error in judgment and lack of foresight on the part of industrial leaders and US government economic policies.  Additionally, the long-term impact to the US middle-class tradesman and industrial complex will be devastating. We can't afford to lose the middle-classes’ important contribution to our economy. They are the drivers of our economic stability!

Not only should the enterprise’s total cost of ownership be top priority; but leaders need to uphold corporate values and ethics.  Corporate leaders must be careful not to compromise the integrity of the company to which their guardianship has been entrusted.

For example, the Chinese government’s:

  • Gross currency manipulations.

  • Raw material subsidies.

  • Anti- American policies.

  • Intellectual property laws openly violated.

  • Human rights violations.

  • Unethical loans to third-world countries with the un-disclosed intention of controlling their natural resources.

Finally, do we really think countries with anti-American policies are concerned with our long-term viability?

One question. As the guardian for your enterprise, is this your legacy?

Self-Ranking - Pick one of the four questions below and then fill in your comments in the space provided.

  1. Don't think this applies to your business or enterprise? (Write three to four reasons why it might not.)

  2. This is a new idea and strategy, it’s something we need to work toward. (Brainstorm the first steps.)

  3. We can do better, modify our strategy, and now we are moving in the right direction. (What are the next steps to ensure success?)

  4. Our team gets the necessary time to keep their minds fresh and we have plans to live our dreams. (Comment on how you're ready.)

    • ____________________________________________.

    • ____________________________________________.

    • ____________________________________________.

    • ____________________________________________.

Screen Shot 2019-09-14 at 7.08.30 AM.png

Art Koch's Profit Chain™

Dramatic improvements to inventory velocity, increased customer service and corporate profits”

Entropy Busters®

Stop letting the process manage you! Become the champion of your game plan and achieve sustainable profits.

Inventory Is Evil!™

in·ven·to·ry / ˈin-vən-ˌtȯr-ē / noun

Inventory is the term for the goods available for sale and raw materials used to produce goods available for sale.

in·ven·to·ry is evil! / ˈin-vən-ˌtȯr-ē is ˈē-vəl / phrase

Left unchecked inventory has many negative unintended consequences to profitability.
It hides problems; therefore, it delays fixing problems!


Art Koch's Profit Chain™
Turning Operational Problems into Profits™


Thanks in advance for your time. As always, thanks for being a loyal client. Looking forward to helping you and your team again soon.

Carpe diem,

Art Koch
Arthur Koch Management Consulting, LLC
+1 (336) 260-9441

Incrementalism is alive and well. - Art Koch's Profit Chain™

Often, I read that incrementalism is dead.  And the way forward is innovation.  I view the debate differently.

 Within organizations there is a diverse group of people.  I see incrementalism and innovation as different tools within a tool chest.  You would never think of using a wrench in place of a screw driver.  So why would you expect to have a kaizen to address getting the last 0.1% rework out of a bottleneck process?

I believe the biggest error made when working with innovation and incremental tools, is the misalignment assigning individuals to each tool and not understanding the shortcoming of each.

  • Some individuals are slower paced, plotter and even keeled or more methodical.  However, they can still very effective and impactful.  Assign them to incremental projects.

  • Some individuals are faster paced, more extrovert, ready to make the big splash and are not too concerned with the impact of the wave on the organization.  When this energy is used correctly it is very effective and impactful. Assign them to innovation projects.

 As practitioners of change, we should understand the capabilities and imperfections of our tools set.

  • Incrementalism:

    • Capabilities:

      • You slow down to see the fine details and the subtle changes required.

      • Has significant compounding impact to change over years.

    • Imperfections:

      • Can be stick in analysis paralysis

      • Risk never get anything implemented.

      • Only see the individual tree and the forest.  Myopic vision.

  • Innovation:

    • Capabilities:

      • Quick delivery of solutions.

      • Significant and rapid gains.

    • Imperfections:

      • Sustainability and missing root cause are consistent Achilles heels.

      • Miss the nuances, root causes and smaller problems that can plague companies for years and slowly erode profits.

      • Risk leaving behind key/critical members of the team.

The Incremental and Innovation Win-Win: - Use Both Tools

  • We need everyone as part of the solution if you want to compete long team internationally.

  • Two areas generating improvements to profitability is better than one.

Incrementalism vs.innovation

Incrementalism vs.innovation

Art Koch's Profit Chain™ - Cheap is Cheap - Buyer Beware!

A couple weeks ago I posted about Cheap is Cheap - Buyer Beware!

I discussed how buying cheap lets entropy into your organizations. We are seeing this play out in real time with the Boeing 737-MAX, DO NOT let this happen to your organization! It looks as though Boeing went with a low price contractor. Here are five things that can help you to avoid this type of error.

Do you have a buyers in a purchasing department or commodity specialist in a procurement departments?

Ask these five questions.

  1. What percent of the team are professionals with education and certification supply chain or procurement management.

  2. Who does procurement report into? If it’s finance, I can guarantee they are focused on the incorrect metrics.

  3. What percent of the time do you reward contact to the lowest price bid?

  4. Do you have a supplier score card and are the rankings credible?

  5. What percent of suppliers are jointly working with procurement, supplier quality engineering and design engineering to reduce total cost?


  • Staff a department with unskilled workers, you create a cost center.

  • Staff a department with skilled professionals, you create a profit center.

Below is my original post from July 8, 2019.


A quick way of adding Entropy into your organization is via purchasing.

If you’re always buying from the lowest price vendor, you’re running a purchasing department.

If you’re working to understand the TOTAL cost of ownership and rewarding suppliers that support; excellent customer service, flexibility delivery, outstanding quality and jointly deliver ongoing cost reductions, you have a world class procurement function that builds supplier partnerships.

The best way of becoming an Entropy Busters™ zealot. Never open the door and let it in…

Ask yourself and the team these three questions.

  1. What percent do we reward contact to the lowest price bid?

  2. Do we have a supplier score card and are the rankings credible?

  3. What percent of suppliers are jointly working with procurement, supplier quality engineering and design engineering?

If you don’t readily have the answers to these questions, you’re letting entropy into the process

Cheap is Cheap - Buyer Beware!

Art Koch's Profit Chain™ - Service Parts Procurement Strategy

How much data do you use to analyze demand when quoting service parts?

If you’re not using at least three years of demand to quote service parts your leaving money on the table.

How are you consolidating the spend? Are you working the rationalize your supply base? Once again, you are likely leaving money on the table. Within in the service parts sector, do your partnership suppliers a favor, consolidate the spend, this will increase their long-term volume and improve total cost of ownership.