Klarinet Archive - Posting 001182.txt from 2000/02

From: Neil Leupold <leupold_1@-----.com>
Subj: [kl] why is life so expensive
Date: Tue, 29 Feb 2000 17:51:19 -0500

Warning:

Short business management seminar follows. Don't read on if
you couldn't give less than a flaming rat's rear-end about the
business aspects of that ligature you paid for.

--- Gil Guerrero <gil-man@-----.net> wrote:

> 1) Precision manufacturing, as is apparent on many of the ligatures
> described, has a high reject rate. Parts that are machined or molded will
> often come out misshapen or will have other failures. Extra units have to
> be run to get a satisfactory number of "acceptable" parts.

What must also be considered in this situation is the cost of the
scrap and rework. If the rejects are thrown out, the company didn't
merely lose the value of the raw materials -- it also lost whatever
direct labor wages were associated with the production of that reject
in the first place. And if a product is reworked, the company absorbs
not only the original cost of making the reject, but the cost of fix-
ing the darned thing as well. I won't address the allocation of fixed
and variable overhead, but suffice it to say, there are a lot of costs
baked into the product which have no direct relation to the product
itself (but they are necessary).

There is also the issue of supplier relations, not only with respect
to the price of raw materials, but with respect to quality as well.
Naturally, we would hope that the manufacturer has a competent pur-
chasing manager...somebody who knows how to develop a fruitful rela-
tionship with suppliers such that the prices are fair. If not, then
the company will pay too much for raw materials, and guess who picks
up the effect of that high price? Equally critical to this negotia-
tion are the quality standards of that supplier. If the raw materials
they supply are below the quality standard as established by the manu-
facturer, excessive scrap and rework are inevitable. It is the manu-
facturer's responsibility -- to their shareholders (if they're a public
company), to their customers, and to their own bottom line -- to insist
that their suppliers meet minimum quality standards in order to minimize
the costs of scrap and rework. Forcing the supplier to reimburse the
company for scrap and rework waste is not the answer.

Less observably, the company also needlessly loses some of the value
of the machine that was used to make the product. This manifests it-
self in the form of accelerated equipment depreciation on the company's
balance sheet (a contra-asset). Because of a high rework rate, the com-
pany ends up maintaining and repairing the machine more often, and will
ultimately have to replace it earlier than would have been necessary had
quality control been higher. If the useful life of an asset ends prema-
turely relative to its depreciation schedule, the company sustains a
capital loss.

Who ends up paying for scrap/rework, expensive raw materials, and
capital losses? We do, in the form of high prices.

> 2) Plating also has a reject rate. If you like silver/nickel/gold
> /rhodium/unobtainium, the guy who is plating them may not have
> cleaned it correctly, or left it in the bath too long, and there
> will be rejects here, also.

Which brings up the obvious issue of worker training. Too often,
corporate management is extremely myopic, managing the company en-
tirely for cash flows or short term gains in net income. They scoff
at the notion of laying out money to improve their workers' skills
or institute statistical process controls to ensure that all oper-
ations are under statistical control. "You have to spend money to
make money." Ain't it the truth. The biggest and easiest gains in
quality and productivity quite often come simply by using current
equipment to its optimum capacity (which many companies don't do),
or upgrading outmoded technology with computers and equipment that
can literally double throughput and product quality -- at a fraction
of what it's costing them to throw out rejects and repair machines
that are incapable of meeting the necessary specs or tolerances for
the product. Managers often overlook these opportunities, thinking
that as long as the product is making it out the door, they have
more important things to worry about.

Gil went on to write:

> But don't be so quick to assume that some little guy is getting rich
> because the hand-carved thing of beauty he put in your hand sells for
> a 100 bucks. He probably threw away 4 of them to find the one that he
> sold.

This, along with all of the other issues I mentioned above, points in only
one direction for an explanation: the company's management team. I almost
wish these companies WERE getting rich by charging an obscene mark-up on
their products. SOMEbody should be. The only influence we as consumers
have on the issue is to vote with our checkbooks. But if you need high
quality, you often find yourself shelling out ridiculous amounts of money
to obtain it. Barring collusion and violation of anti-trust laws, it is
reasonable to assume that competition in the ligature market is not terribly
fierce. Otherwise, these companies would be forced to continuously improve
and innovate in order to sustain their competitive advantage. This involves
things like insisting that raw materials suppliers are ISO 9000 (or better
yet, 6-sigma) certified, to ensure that all materials meet or exceed the
manufacturer's specifications (assuming the manufacturer has any raw mater-
ial specs to begin with). It is inexcusable (or at least it should be) for
a company to smugly pile on one unnecessary cost after another, in the form
of scrap, rework, and unstable production processes, which we pay for when
we buy their product. Even if a company's market strategy is product differ-
entiation (i.e.; high quality products, for which consumers pay a premium),
that is not an acceptable rationale for failing to optimize the quality and
productivity of their manufacturing operations. When a company is privately
owned, however, it is difficult to convince managers to act on the wealth of
knowledge that is available to them and cut the waste out of production. The
issue is amplified when market competition is not stiff enough to force quality
improvement. If there were an entrepreneurial clarinetist out there with some
solid management savvy, he would do us a great service by setting up a lean
manufacturing operation, forcing quality up and prices down, while making
larger margins than any of his competitors in the industry relative to
clarinet accessories. 'Probably too much to hope for.

-- Neil
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