Do Not Outsource! But If You Do, Remember These 3 Things

Ok, maybe the title is a bit provocative – this applies first and foremost to startup companies. This text is part two of Introduction to Lean Production Scale-Up Model. You can find the first part here.

What happens throughout the production scaling of a startup is a lot of learning in two equally essential sectors: From the market and customers’ needs (the market build-measure-learn loop), but also about the production process (the production build-measure-learn loop).

double loop

In the early stages of production scale-up, all work must focus on optimizing the learning process that can be best achieved when the production is done in-house. When using a subcontractor in the early stages of development, the company will also find it difficult to continue to the later stages of scale-up because the subcontracting partners hold the tacit knowledge and thus the negotiation power in the developing partnership.

It is tempting to outsource production or parts of it to speed up the development and reduce the need for capital investment. Subcontracting can indeed offer very tangible and attractive benefits: Facilities and supply chains are ready, and the need for upfront investments is limited to name a few, but these benefits are not related to the primary goal that is the efficient learning. If a subcontractor does the production at an early stage, the learning will happen at the subcontractor, not internally at the company.

Using a subcontractor also fights against some of the Lean principles. A subcontractor adds additional layers of management and material handling that do not add value to the customer. Additional material handling is especially the case if the subcontractor is used to do only some parts of the production. In such an arrangement, materials are loaded and unloaded between a different location that does not serve as a value-adding function.

An additional difficulty of using subcontractors in the early stage is the lack of incentives for the subcontractor to do continuous development of the production process and the suboptimal operational infrastructure of the subcontractor. Example of misaligned interests and operational infrastructure between the company and the subcontractor could be a situation where the company learns the clients want to pick up products evening time, but the subcontractor has nobody working after office hours. When you are the only client the subcontractor has requested this change in working hours you know completing this change will cost you a lot. In general, the subcontractor has minimal incentives to modify its operations to match the needs of one small client the best possible way.

One clear benefit a subcontractor can have is access to better prices and hard-to-acquire parts and machines. If this is the case, a subcontractor could be used to produce subassemblies involving these parts and machines. Yes, this would be a step for more complex and expensive, most likely also slower, production, but if this way is seen as the fastest way to learn, then it is the correct way.

If in-house production is not an option.

There are certain environments where in-house production is not a feasible option. Examples of these are regulated industries where you might have very long and expensive processes to get a certified production facility working from scratch.

Have your own people at the subcontractor.

If using a subcontractor is a must, the best possible option would be having the company’s own employees to run the production at the subcontractor’s facility. The need of hiring own employees can be restricted to the core functions of the production and to the parts that are related to the innovation, but the broader the scope of collected knowledge from the day-to-day work, the better. Warehouse management, packing, maintenance, and logistics are examples of the areas that could be left for the subcontractor to handle.

Use multiple subcontractors.

Hiring more than one subcontracting company is a method to position the hiring company better in long term negotiations. When the subcontractor is not the only one with the needed skills and machinery in place, the hiring company has a good position when difficulties eventually arise. In case of a poor performance of subcontractor or if the subcontractor wants to charge you more of their work, having an alternative or two gives the hiring company good negotiation power. Having a second subcontractor means some increase in cost related to managing the co-operating, but the costs should not double.

Form a partnership with the subcontractor.

As explained earlier, one of the risks in working with subcontractors is the level of commitment for long-term co-operation. Financial investments for the joint project of production development by both parties can lower the risk. The subcontractor could invest in the hiring company and thus creating a clear incentive for developing the production together in the long-term. Other option could be establishing a common production company owned collectively by the innovation owner and the subcontractor. In the new company, the day-to-day management would be handled by the production professionals from the subcontractor, and the innovation owner would concentrate on research and development, marketing and other aspects of the business. The co-ownership would give both parties security as the success of the owners of the newly created company are intertwined.

Introducing Lean Production Scale-Up

Lean Production Scale-Up is a four-step model designed for companies operating in untested markets with untested technology. The purpose of the model is the reduce the high capital risk that is associated especially with companies using new technology and innovations. The model enables the company to make its technology investments as soon as possible time-wise, but as late as possible in the learning curve.

I developed the model based on my experiences in production development in various startup companies both in the medical and food industries.

While the Lean Startup movement serves many types of startups, there is one aspect that has not been included in the broader public discussion. Lean Startup concentrates on finding the market fit for the untested product or service as efficiently as possible but assumes that the same level of uncertainty does not exist in the internal operations of the company. Companies like Spotify, Dropbox, and Facebook, had critical and untested assumptions regarding their business models when they started, but they did not need to doubt if the product was doable technically once market fit was confirmed.

The situation is critically different for companies that are involved in a business where the product or the production process is involving an innovation. Industries like 3D printing and food grown in bioreactors are operating in untested markets, but they are also working with unproven technology.

Build- Measure- Learn Double Loop.

Lean Startup focuses on optimizing learning by using the Build-Measure-Learn loop. For companies also having internal unknowns, a second loop is needed that is for the production process.

An Information Technology or service company must look into improving their working process for improvement as well, but in most cases, a software company is using existing coding languages, software, and hardware. When working with building new physical products with new machines and machine setups, new raw materials and so on the need for internal learning and improving the working process in the company is multiplied. Together, the two Build-Measure-Learn Loops form the Build-Measure-Learn Double Loop.

double loop

Figure 1: Build-Measure-Learn Double Loop

Lean Production Scale-Up Model

By using this model, a company with new innovation can navigate its way from an idea to full-scale production. Alternatively, in the case that innovation or the business model using it does not add value to customers or is not technically feasible, the company can identify this as soon as possible.

The Lean Production Scale-Up model consists of four steps. The model is divided into these exact four questions to maximize the efficiency of the scale-up process. Each step asks the question that the company must answer by using the Build-Measure-Learn Double Loop. The questions are answered one-by-one in the specific order.

The primary goal of the early production when working with innovation is not to generate profit for the company, and it is not to have a positive gross margin, but to reach the learning goals of each step and taking those steps as fast as possible. If you do something else than what is necessary at that step at hand, you increase your expenditure, risks, and what is worst you slow down learning and business assumption validation.

  • Step 1: Is there a demand? The question is quite similar to step 2, but asking first is there any demand at all, key assumptions can be invalidated without the need of financial commitments to production space and machinery that must be in place in step 2.
  • Step 2: Is the demand sustainable and scalable? After confirming that there is some interest comes the time to validate that the demand is not limited to too small customer segments and that the customers will turn into returning customers and advocates. Some investments are now needed, but only the ones that are necessary to collect the learnings are taken. All development ideas related to improving production efficiency are postponed.
  • Step 3: Is positive gross margin achievable? Once demand and market fit are clear, its time to confirm not only that the product can be produced on an industrial scale, but also that it can be done with a positive gross margin. At this stage when still operating with suboptimal machinery (the quick & dirty solution you have put in place so far) actually having positive gross margin is difficult, but you can collect evidence that positive gross margin can be reached. For example, changing too small warehouse to a larger one and investing in an automated packing line will improve your operational costs significantly.
  • Step 4: Continuous development. The company acquires the full-scale profit-generating production line. Learning is still essential for the young company, but the learning curve starts to slow down, and development starts to resemble established company: The development in the production process is now numerous small steps, while in the previous steps it was mostly fewer, but substantial steps. At this stage, the Lean Production Scale-Up has run its course and hands the control over to Lean Management that is specialized in continuous development.

By following the four-step model, a company with new physical innovation can navigate its way from an idea to full-scale production. Alternatively, in the case that innovation or the business model using it does not add value to customers or is not technically feasible, the company can identify this as soon as possible.

A major part of the financial risk involved in the production scale-up is associated with the relatively large upfront investments. Setting up a workshop, let alone a laboratory requires a set of tools and machines. Acquiring suitable working space and required tools is intensive investment wise. Making these investments as soon as possible time-wise, but as late as possible in the learning curve is the goal of Lean Production Scale-Up.

Avoid outsourcing

What happens throughout the Lean Production Scale-Up model is a lot of learning in two equally important sectors: From the market and customers’ needs (the market build-measure-learn loop), but also about the production process (the production build-measure-learn loop). It is tempting to outsource production or parts of it to speed up the development and reduce the need for capital investment. Subcontracting can indeed offer very tangible and tempting benefits: Facilities and supply chains are ready, no need for upfront investments or hiring production operators to name a few but looking for these benefits are not the purpose of the early stage production. If production is done by a subcontractor at an early stage, the learning will happen at the subcontractor, not internally at the company. All work must focus on optimizing the learning process that can be best achieved when the production is done in-house. When using a subcontractor in the early stages of development, the company will also find it difficult to continue to the later stages of scale-up because the subcontracting partners hold the tacit knowledge and thus the negotiation power in the developing partnership.

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Here you got a glance at what my Lean Production Scale-Up- book project is about! The idea is still fresh is only now starting to take shape. So far I have some 30 pages about the topic going more in detail how the four steps would look like in practice and what are the dos and don’ts for the starting company that is operating in the untested market with untested technology.

Edit: Second part of introducing the model can be found here: Do Not Outsource! But If You Do, Remember These 3 Things

Would you like to read more on the topic? Any feedback on this blog post? Please get in touch by email or twitter!

Your friend, Ilkka Taponen

Nothing is more important than AI

Most of us are familiar with the concept that it is better to fix the cause than the effect. This idea is at the core of the Lean Manufacturing concept, created by Taiichi Ohno and Toyota.  Lean Manufacturing was later developed into the Lean startup- movement inspired by Eric Ries that aims to maximize the speed of learning.

Even though we’re aware of this principle, we very often end up doing the opposite. It is natural to just fix the effect, as it is faster and the results are easier to see. Yet in the long run, you lose time and money with this method, because, with the root cause unfixed, the same effect will occur.

The future of technology holds amazing sci-fi-like tools. Nanotechnology, bioengineering, genetics, robotics, space-travel and so on. But the only technology that can help us fight the root cause of poor productivity and resource-wasting is the development of Artificial Intelligence, AI. All the listed technological advantages aim to increase the efficiency of human activities, but the difference is that AI is the only one that can help us understand which activities are worth doing in the first place, and how to do them in the most efficient way. For example, while robotics help us do things in high efficiency, maybe that activity was not needed at all in the first place. In other words, while AI can give us the GPS coordinates to our destination and map to follow, robotics can only make us move incredibly fast, and we humans decide on the direction in which we want to move. My example of robotics comes from physical production, but the same idea applies also to product design, marketing, HR and so on.

Our world is not lacking food, physical resources or talent. Yet we are wasting all of these in staggering amounts daily, especially human talent. We need improvement in the use of the world’s resources, and for this AI is the most important technology.

The significance of AI has been recognized widely, and all major technology companies are involved in developing ways to improve the technology and offer multiple ways to implement it into our lives. Even though the benefits of AI management tools are clear, strong incentives exist in the modern global market to fight against the “AI manager”.

AI management tools would steer companies toward long-term, sustainable growth, but the contemporary stock exchange and marketplace encourage them to seek short-term profits. Since investors want to see short-term value increase in the companies they invest in, the management they name have incentives to sacrifice long-term plans over short-term ones. This is obviously nothing new, but every time AI takes a step forward, the decision to act against facts will have a higher opportunity cost. Eventually, this cost will be so high that it cannot be ignored, but the sooner we can bring AI into decision-making, the better. And since we are fighting issues like global warming and other ecological disasters, there really is no time to waste.

Fighting against better solutions sounds counter-intuitive, but the world is full of similar examples where existing structures prevent obvious improvements from taking over. Why do they still have separate taps for hot and cold water in the UK? Why do Phillips-head screws still exist when we have Torx screws? Why don’t all cars come with Run Flat tires? The Run Flat tires, the PAX system, is especially interesting. The PAX solution offers better safety and flexibility for the customer, the technology was shared with multiple tyre and car manufacturers, and market studies show that the demand is there, but still, we are not using it. The answer lies in co-adaptation and co-innovation risks. When there is some external entity in the supply chain that is not benefiting from the improvement, they will not be active in taking it into use, or, even worse, they might fight against the change. In this case, a co-adaptation risk occurred. Car service companies did not have high enough incentive to invest in PAX- machinery, and cars with these tires could not find a convenient service network. This theory and the PAX system example is presented in Ron Adner’s book The Wide Lens.

Technology is advancing faster day by day. AI management tools will be the most significant of all upcoming advances because they will make all other advancements faster. Improving technology and creating applications for it is not enough, as there are obstacles to solve before AI is widely taken into use. Finding ways to smooth the path for AI to enter our world is the second most important task we face now, right after AI itself. And these two tasks will be the last ones we humans will have to do on our own.

There is nothing quite so useless as doing with great efficiency something that should not be done at all.” – Peter Drucker

Further reading:

Lean Startup:  http://theleanstartup.com/

The Wide Lens: http://thewidelensbook.com/

The PAX- system: https://en.wikipedia.org/wiki/Michelin_PAX_System

Deep Knowledge Ventures, the first company to appoint AI to its board of directors: http://www.deepknowledgeventures.com/

aurinko

 

Starter Kit for Ento-Entrepreneurs

Lately, quite a few people have reached out for me for tips for starting a new Insect for Food and Feed- companies. I am very happy to see the industry growing and it is my pleasure to help out. To make your starting easier I have here collected some links and tips on how to get started and how to avoid some of the pitfalls.

I believe strongly in the Lean movement, not only in daily work but also larger projects that starting a new company is. To prevent unnecessary work and loss of resources, start by collecting data and objectively evaluating the potential of your business plan.  To learn more about Lean and modern business management check out the great Lean Startup- book by Eric Ries.

Study the literature. Unfortunately, there are only very few publications on the business side of IFF- business, biological knowledge can be found much easier. My thesis that I wrote in 2015 is still one of few publications looking at the production and supply chain side of this specific industry. The thesis comes with full list of references that can you use to dig deeper into all the discussed topics. Here below are some links I recommend you to read. Other than the links listed here you might want to check also the Directory from the menu bar, from there you can find all my blog posts e.g about how to choose the best species to farm.

Get connected with insect entrepreneurs. The largest database online with contact information can be found from this website, just click the “Entomology Company Database” from the menu bar. I also recommend that you will contact your local association of IFF companies, here are some links:

By getting connected you will get essential tips from more experienced people and you can team up to work on topics that you the concerns about (health of genetic pool, fighting horizontal integration issues etc).

Contact your local Food Safety Authority. In the USA it is the FDA, in EU- level its EFSA. In other words, the one that interprets the national laws regarding food and feed. They are there to serve you and they will tell you the status of insect food and feed in your environment. A nice collection of the legal status’ can be found here.

Stay up to date. The following links are for news sites and social media channels that keep you up to date with the latest news in the field.

  • 4ento is a news center for everything around the topic.
  • Robert Nathan Allen is the founder Little Herds- association. Follow him on Twitter for the latest especially in North America.
  • Food Navigator is news center for Food & Beverage industry, follows closely also IFF- industry.
  • All About Feed is similar to Food Navigator, just with the feed aspect.
  • Facebook-group Food Insect Newsletter.

Flow and Resource Effectiveness – Case of a Football Event

In this blog I offer you something that might seem bit off topic first, but in the end is actually heavily linked with productivity and effectiveness also in insect farming. I was recently  invited to attend a football game to a stadium where I usually do not go. The home team’s head coach Mika Lehkosuo is a leading talent of his profession in Finland and he has been heavily involved of bringing a new type of thinking to Finnish football; consistency and constant improvement.

These qualities are in the core of Lean thinking, a working philosophy I also discussed in my thesis. Even though I introduced the coach for you now, I will be giving here an example of possibilities of lean thinking outside of the playing field, from the stadium services that were not arranged very well. I have to say that the level is the norm rather than an exception for what I am used to in sports events. Stadium services in this case are the stands selling beer, coffee, sausages etc.

There are two ways to look at working effectiveness, Resource and Flow. Resource effectiveness is the traditional way where the organization is making sure that all the employees are occupied with something to do all the time. It would be a clear sign of having too many resources if some of the employees have nothing to do at times, right? It might be so that the employees are fully occupied, but their time is in fact used to unnecessary tasks. An example is presented in the end of the text.

Flow effectiveness approaches the need of employees from the different point of view. The question here is not how the get the most out of the employees, but how to minimize the number of unfinished tasks, in this case the waiting customers. For me it seems that at the stadium the organization has been thinking only of the Resource effectiveness.  Even though all the stands were open they could have had more employees in them. The resource effectiveness was very high; the employees had customers to serve from already before the start of the intermission all the way a bit past the break when the second half of the game was already on. It is worth noticing that the customers, the spectators of the game, have learned that they must leave the stands before the intermission starts in order to be able to get the beer or sausage or at least avoid long queue.

It is clear that this is bad customer service. People pay to see the game and are forced to skip part of the show only because they want to spend more money. Surely the organization is aware of this issue and possibly they justify the situation for costs reasons (Resource effectiveness). The justification is valid only if only the direct costs are considered. Now in this current way it is true that the Sales Divided by Variable Costs- rate is better compared to situation where there are more employees, but the Resource thinking brings many hidden secondary costs and actually it might be so that the adding of employees might in the long run be more cost effective. Let’s break down the negative effects the Resource thinking is bringing that would be solved by Flow thinking. In other words what would happen is the amount of employees would be decided on the basis how can we serve the customers the fastest:

Increased customer satisfaction. People will enjoy the event more when they get good and speedy service. Enjoying the event will increase their tendency to come back again. The increased demand for tickets in the long run caused by the good service decreases the needs for costly marketing campaigns. The increased need for marketing campaign is a secondary cost of bad service.  Even though added employees to the selling stands decrease the direct profits of the sales, but in fact the organization could view the lost direct profits as investments for marketing. I want to underline here that even though I wrote that the profits are lost, according to the lean thinking the profits are lost only in the short run, but the adding of employees is a profitable choice in the long run for the explained reasons.

Increased employee satisfaction. In the current situation employees are working under increased stress as the customers are tense or even upset for the long wait. The endless- looking queue is breathing to the necks of the employees while they are trying doing their best. Increased employee satisfaction will lead to smaller employee turnover, less sick leaves, and to better and friendlier service. And lasts my favorite..

Increased employee effectiveness. When an employee is in charge of multiple tasks they are forced to stop and start the tasks multiple times. This forces employees to use their time for actions that do not create value for the customer. Let’s have an example where a customer buys a beer: 1. The employee takes the order 2. walks few steps for the fridge 3. pours the beer 4. walks back to counter 5. hands out the beer 6. opens the register 7. takes the payment From these 7 identified steps only the 4 bolded ones are necessary and value bringing actions, the other 3 are simply Muda, the Japanese term used in school of Lean for waste. If there would be a beer pouring employee helping let’s say three cashiers all the employees would have an increased effectivity rate. In this example the cashier does not have to walk anywhere; just takes the order, asks for the beer from the colleague, and takes the payment. Additionally, the register does not have to be closed as the cashier is present all the time. Now careful with terms! The employees are effective because they do value adding actions even though they might be standing idle for minute or two here and there. All the Muda is stripped away.

By the traditional thinking the idle standing employee is not effective but a traditional organization does not differentiate the tasks as value bringing and waste creating tasks. So putting it short the employees are doing less but they are more effective.