Fall 2007 - The Best Manufacturing Philosophy
What's New at Charlie Reid & Associates?
Welcome, to our second e-newsletter, the only newsletter on the market focused exclusively on providing investors with insight and information about the process of evaluating manufacturing or technically based targets.

What's new at Charlie Reid & Associates?  Well mostly that Charlie Reid is in a "below the knee" cast for another month after surgery on his ankle.
Oh well, it'll give me time to write these news letters.

How to tell whether or not you should read on

For those of you with extremely busy schedules here's the ultra condensed version:
There are a number of more advance operational philosophies that generally represent "better" ways run a manufacturing company than traditional/old school operations management approaches. 

Having said this, the point of this newsletter is to advise you that there is no "best" Manufacturing Philosophy.  While it is interesting to know which philosophy a target follows (or says it follows), it is far more important to know how well the target executes the one it does use. 

Poor investment decisions can be made by placing too much stock in one philosophy vs another.   
If you get this and don't need to know more feel free to skip to the bottom of the email to the paragraph beginning "I hope you find this info useful", and read the article "Manufacturing Philosophies 101" (download the pdf version of this article - 424KB), at your leisure. If on the other hand you'd like see examples of what I mean and perhaps get more detail, I believe you will find it worthwhile to continue reading.

Real Life Due Diligence Examples
Here's an example.  Lean Manufacturing is generally believed to be an exceptionally good operational philosophy to follow.  It is my favoured approach when working with manufacturing companies and I have taught it for years.  In one real life instance I was brought in to provide a second opinion on a target that was found to have scored very poorly on a Lean Manufacturing assessment during due diligence.  Under closer scrutiny I determined that the evaluation was 100% accurate but had completely missed the point of due diligence.  The target company was traditionally managed and therefore not very Lean, but it was uncommonly well run and exceptionally well controlled.  I concluded that this target would meet or exceed the operational projections under review AND that if it adopted a few Lean principles it would significantly exceed expectations.  In the end it did.

Here a good deal was almost passed over as a result of placing too much emphasis on the importance of being a Lean Manufacturing operation. 

In another example an autoparts company that would arguably have scored very well in a Lean review was found to have missed one particular element of Lean that would generally not be that important except that the target was closer to full capacity than it believed.  Closer scrutiny revealed that the target was facing an imminent shortage of capacity that represented a fatal shortcoming in my opinion.  The investment ($15,000,000) did not proceed.  The Target went CCAA 90 days later.

Here a bad deal might have transacted had a detailed due diligence review been forgone because the company was a relatively good Lean shop.

The point is, that while its important to know what a target's underlying operational philosophy is, it's more important to know how well they execute the one they use.

The Best Manufacturing Philosophy?
I am often asked by clients with a promising manufacturing target in hand, which approach to manufacturing is best.  Often my clients are aware of some of the leading thinking in operations (such as Lean Manufacturing, Theory of Constraints (TOC), Six Sigma, etc); and perhaps their target professes to be a disciple of one of them.

The attached document provides brief descriptions of the most prevalent operating philosophies you'll find in prospective manufacturing targets (including not having a philosophy):
  • Lean Manufacturing
  • Theory of Constraints (TOC)
  • Six Sigma
  • MRP I and MRP II
  • Finite Scheduling
  • No Philosophy
Each section includes some things to look for, listen for or ask about on your inaugural plant visits.

Lean vs Theory of Constraints (TOC) vs Six Sigma? Manufacturing Philosophies and the Impact on Due Diligence
The simple truth is that there is no single best approach.  A former Strategic Planning Partner of mine said it best.  He used to say "There is no one universally true dogma - except for that one about there being no one universally true dogma".

The fact is that most operations could benefit from a little bit of all of the above approaches (except the last one) and bits and pieces of a few others.  Sadly, it is extremely rare to find such well a balanced operation.  But then again relying on one particular approach to manufacturing and doing it well will almost never hurt an operation.

Evaluating the operational philosophy followed by your target therefore has almost nothing to do with determining whether they use the right one.  Instead if has far more to do with how well they execute on the one they do use (whether they can articulate the philosophy or not). 

It's a Continuum
It's a continuum.  I've seen plenty of companies that claim to be "lean" when all they do is execute a small number of "lean principles".  It's a question of degree.  From a diligence perspective you need to know how stable the target's operations are.  How well or poorly the target executes, say, Constraint Management compared to how well they say they do, gives you an indication of:   A. Their understanding of the principles and thus their competence and B. The upside potential.  Really Lean manufacturing operations, for example, will typically have less up side potential for operational cost reduction.

I should point out that, not being Lean or not being TOC, or not being six sigma does not equate to a weak or risky prospect.  In my experience, the vast majority of manufacturing companies either don't have an articulated manufacturing philosophy or rely on traditional ops management approaches.  These are often solid stable manufacturing companies that can be depended on to perform consistently in the future.  If they got Lean, sure, they'd perform better, but that's upside potential for you. 

I hope you find this info useful.  Don't forget to check out our website at www.charliereid.com.   And of course feel free to contact me directly at 416-580-9573.

Good Hunting!