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

The Simple Mistakes of Executive Development.

At one point in our careers we all have been part of executive development. Some good, some could have been executed better.

I often see mistakes and/or steps missing in executive development implementation. So before jumping in to the deep end of the pool, there are four elements that should be concerned:

  1. The objectives. What is it you’re looking to achieve?

  2. How will success be measured. Are you getting, better, worst or staying the same?

  3. What is the value to the team, leadership, and organization?

  4. Development plan customized to your needs. Once these have been agreed to, be certain there is a development plan customized to your needs.

When done properly there will be successful buy-in and sustainability.

Keep it this simple. Focus on 1-2 development areas.

5 Fatal Post Go-Live Mistakes that Will Destroy any Successful Systems Implementation.

I’m working with a client, and we are ready to Go-Live with a systems implementation for inventory optimization and replenishment planning.  We’ve already successfully implemented demand planning, and at this moment, everything is pointing toward another successful launch.   

However, spending a few minutes to brainstorm the factors that could go wrong in the post Go-live phase is beneficial.  Here are my Top 5 mistakes.

1.     Too little communication.

·      There is nothing worse than a team that is unaware of what is happening and is therefore unprepared for the next steps of action.

·      Set-up an internal e-mail address for users to ask questions and to give feedback.  Be certain to address any questions or concerns in a timely manner.

·      Be prepared to hear the negative out of the gate and don’t overreact.  Listen; there will be nuggets of information for the team to address.  Often any negativity or pushback is associated with training/learning the new processes and change management. 

·      Send frequent newsletters on tips, tricks and answers to any questions.

2.     Underestimating Data Integrity.

·      Past process tolerances usually don’t support the new normal.  The level of effort necessary to sustain data that was cleansed prior to Go-live can be daunting.

·      Implement visual daily management – VDM, for managing data errors.

·      Make sure there is a clear understanding of the new linkages and critical points for the new solution.

3.     Taking your foot off the gas and going back to business as usual.

·      Avoid the temptation for team members to return to their past roles.

·      Team members are the next generation of leaders and the new subject matter experts of the enterprise.  Be certain the changing of the guard isn’t underestimated and/or missed.

·      The Go-live date isn’t the project end.  Think of it as the starting and/or mid-point.

·      Most projects have cross-functional teams.  As the team goes through the process of storming, norming and performing, departmental silos will disappear.  With this process of change comes team work, creativity, excellent critical thinking and problem resolution skills.  Additionally, the team builds an excellent in-depth knowledge of the business.  Don’t miss the opportunity to leverage this into the future!

·      When necessary, interject new blood into the team.  It keeps the team fresh and avoids burnout. 

·      Keep the problem resolution culture going and get ahead of the curve on issues; build user acceptance and let the team know legacy problems can be solved.

·      Celebrate success of the gains made up to this point, and keep forward momentum going.  Encourage the organization to feel great about their hard work and success.

4.     Document how everything fits together and works - Data mapping.

5.     Pick-up the loose ends; the tasks you were unable to accomplish due to budgets, timelines and scope.  Taking action will make the solution more robust, increase user acceptance and create a culture of team empowerment.


Exceed the ROI expected!!!

Entropy Busters® Series - The Rule of 1% = 50%

Article after article has been written about the advantages of complexity reduction and what should be done. However, too often there is little focus on the root cause of entropy creeping into the enterprise. A recent Forbes article outlines the seven steps to reduce complexity. Each step mentioned addresses the symptoms of the illness and not the disease. We are not doing a good enough job of asking, "Do we really need so many exceptions?" or "That's a really stupid rule". Rather, we need to be asking, "What's driving and creating such complexity?"

The Elegance of Simplicity

Why are there stupid rules, why do we need a multimillion dollar ERP, CRM, MRP...?

Looking at Southwest Airlines; They have 706 aircraft; 98.2% of those are two Boeing models, the 737-300 and 737-800. Both aircraft only use one engine type, the CFM56. They have open seating, which does not require a complex ticketing systems. We can all agree Southwest has addressed complexity head-on.

What if I were to tell you that every business I've completed the following analysis for had this outcome?

Class % Demand % Part Numbers

"A" 80% 5-15%

"B" 15% 10-20%

"C" 4% 10-25%

"D" 1% 40-55%

MYTH, "If you focus on the 80%: the results will come". In the short-term you can make the argument that this is correct. However, in the long-term the results are not sustainable, because the last 1% is draining the teams resources. We must shift the paradigm and focus on eliminating the drivers for the last 1% or 50% of the complexity.

We allow entropy to creep into our organizations. en · tro · py /ˈentrəpē/ noun. Lack of order or predictability; gradual decline into disorder.

What would your business look like if complexity was cut in half? Would you need a complex ERP, CRM, and MRP? My premise is that the reason we need such complex processes and operations that require exception after exception and tribal knowledge is the sheer scope of our product offerings and parts required to support.

Over the past 20-30 years much has been written and accomplished in all areas of business satisfying customer expectations. We keep adding more and more offerings, functionality and larger sizes, in many cases without the processes to support such variety. Let's take a hard look at ourselves and agree there is a tipping point and exceptions to this line of thought. Again, look at Southwest Airlines and Apple. One firm is a discount air carrier and the other is high-end consumer electronics manufacturer. Both are excellent examples of operating complex equipment with a simple business design, model and product offering. Surely your business can be designed without the last 1% of demand or 50% of complexity?

Stop thinking of a process, a committee or new initiative for complexity reduction. Tell the team and customer you're eliminating the last 1% of demand.

Blow up the current model.

The latest business buzz-word is "Disruptive".

Be disruptive!

Be an Entropy Busters®!

What would this mean to your business design, organization, supply and customer base?

Rule of 1% = 50%

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

Inventory Is Evil!™ - The Classic Inventory Floating Over Problems

This is the classic image of a boat representing inventory. The higher the water level, more inventory. The rocks represent problems within the business. As you lower the water level/inventory the problems are exposed.

Remember, Inventory Is Evil!™ - Because it delays and hides problem resolution.

The three common barriers when planing on inventory velocity improvements.

  1. Fear of the unknown. Making the issues bigger than actually. Nothing is ever as bad as the initial fear.

  2. Lack of total leadership engagement. Inventory velocity improvements are a culture shift requiring total team involvement, not just supply chain.

  3. Where to start? It’s a big elephant. Just one or tow small areas. Get early successes, build momentum and team confidence.

Inventory Floating over Problems

What are your three concerns that are keeping you from starting?

  1. ______________________________________________?

  2. ______________________________________________?

  3. ______________________________________________?

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.

Entropy Busters™ - Cheap is Cheap - Buyer Beware!

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.

Remember, Cheap is Cheap - Buyer Beware!

Cheap is Cheap - Buyer Beware!

Cheap is Cheap - Buyer Beware!

Three Powerful Elements Small and Medium Sized Companies can do to improve their Supply Chain Management - Art Koch's Profit Chain™

During a thought leadership meeting I was asked what can small and medium sized companies do to improve their Supply Chain Management.

  1. Increase Professionalism

  2. Have meaningful Key Performance Indices - KPI’s

  3. Improve Inventory Velocity

Art Koch's Profit Chain™ - Tenacity And Will Power Win Every Time

I like to say “If it were easy, it would have been done”. This is what I like to call; Unlock the Art of Change™. These are used to get people to shift their frame of focus and start thinking differently.

Often I see individuals just stop trying, even after two or three attempts. Today we live in a society that craves instant gratification, when coupled with Leaders looking for the next big bang, an organization could be doomed.

It’s easier to quit. It’s socially more acceptable to not dream big.

It’s hard to fail hundreds of times before you get it right the first time. It’s hard to be in the gym, library, or lab when all your friends are at the party.

Tenacity And Will Power Win Every Time

It’s sweet to smell success. It’s sweet to feel the satisfaction of knowing you’re right.

Just ask; Elbert Einstein, Alexander Graham Bell, Thomas Edison, Jim Womack, Edwards Deming, Jonas Salk (Cure of Polio), and many sports figures.

If It Was So Easy, It Would Have been Done Already!

Embrace the challenge!

Be the Leader You Always Believed You Could Be!

Art Koch's Profit Chain™ - Process Improvements

Just completed an excellent two day session for Core User training of team members at Optimas Solutions. We not only were able to train the core team, we also validated our design with significant data for ToolsGroup SO99+ Inventory Optimization and Replenishment Planning modules. Step functional forward for all stake holders.

Here are some photos of the training session.

Claudio imparting his wisdom.

Claudio imparting his wisdom.

Can you “smell” the focus?

Can you “smell” the focus?

After significant hard work and success. It was time for a little fun and team building. Both Supply Chain and IT needed a couple hours to let off some steam and energy. I think bowling did the trick.

Team Supply Chain plotting their strategy for the next game.

Team Supply Chain plotting their strategy for the next game.

We learned Team IT could bowl!

We learned Team IT could bowl!

And Team UK plotting an exit....

And Team UK plotting an exit....

Next step, CRP! Let’s show the same drive, grit and determination. Success has no boundaries!