Podcast #83 is an in-depth conversation with Jim D'Addario, the CEO of D'Addario, Inc., a manufacturer of guitar strings, drum heads, and other musical accessories. Jim and his family company were featured on CNN late last year, highlighting how lean manufacturing has helped save and create jobs as part of their business strategy. Jim agreed to speak with me to delve into more detail about their use of lean management principles.
Jim is a hands-on CEO who gets out on the shop floor, which seems to be a big advantage for lean success. He describes his personal transition from a starting point of “not seeing the benefits” after lean was initially proposed to him to reaching a point where he articulates very well how lean allows D'Addario to better serve their customers' needs.
D'Addario began in the warehouse, where, prior to implementing lean, the operations strategy involved millions of dollars in warehouse automation. Now, with lean, they have freed up space, deployed people, and can ship orders that come in by 5 PM on the same day, as opposed to a 48-hour turnaround before lean. Customers can hold less inventory and order more frequently in smaller batches. While this might increase order picking costs for D'Addario, Jim emphasized the increased customer contact and the benefits that come with it.
D'Addario has long been committed to its people, avoiding layoffs whenever possible. During lean improvements, people are redeployed and cross-trained to increase flexibility. Now, with lean, D'Addario was able to shut down a California warehouse, resulting in job loss. However, the company has consistently sought to bring jobs to Long Island, acquiring product lines and relocating production from China. In the case of guitar straps, Jim emphasized that while the unit labor cost for sewing is higher, they don't have “110 days lead time” coming from China. Customer service is better, and that's good for D'Addario's business.
Jim said:
“We've moved more and more work here and we'll continue to do that.”
For earlier episodes, visit the main Podcast page, which includes information on how to subscribe via RSS or via Apple Podcasts.
Transcript:
Mark Graban:
Hi, this is Mark Graban. This is episode number 83 of the Lean Blog Podcast. Thanks for joining us. It is January 27, 2010. Our guest today is Jim D'Addario, the CEO of D'Addario, which is a Long Island-based manufacturer of guitar strings, drumheads, and other musical accessories. I think you're really going to love listening to Jim talk about the importance of Lean in their business strategy, how they are redeploying people, freeing up space, investing in their business, and moving a lot of production and jobs from China to New York. So it's a great story. I invite you to go to the blog post for a link to a CNN video from late last year featuring Jim and D'Addario, the company. But here we're going to go into much more detail about their Lean efforts, so I hope you enjoy listening. Well, Jim, I want to thank you for taking time out of your day to talk to us here on the Lean Blog Podcast.
Jim D'Addario:
Oh, you're welcome. It's my pleasure.
Mark Graban:
So it was great seeing the CNN piece about you and your company, and I'll link to that on the blog for anybody that wants to go and see that video. But I was wondering if we could dive a little deeper into what you're doing with Lean at the company. If you could introduce yourself and the company briefly and talk about how you first learned about Lean.
Jim D'Addario:
Sure. Our company just specializes in manufacturing musical instrument accessories, and about 90% of the 6,000 SKUs that we have are made in the USA already, and about 10% are made in offshore, or mostly China. And we embarked upon Lean two and a half years ago by making a huge commitment up from the very top down to the bottom. And we selected 12 strong people out of 28 applicants in our organization, from line workers all the way up to top management positions. Twelve people were selected to become Lean Champions. And they went into six months of full-time training and became Lean Champions in January 2008. So since that time, they've been out in each of our factories implementing Lean, growing as teams and learning how to divide and conquer sometimes, and also sometimes working as a group. And they've trained many, many, many more people in the organization. In New York here, we manufacture our musical instrument strings for guitars and violins and all instruments except piano. And we also manufacture our Evans drumheads, which is one of our second, another one of our lines. That's a significant volume for us. We also have a factory out in California, Rico, that manufactures saxophone and clarinet reeds. And we've trained two people out there to be Lean Champions. And our director out there has experience from the automotive industry with Lean. So all three of our American factories are now deeply involved with Lean.
Mark Graban:
That's great. How would you describe at this point, two and a half years in, the benefits and what you've been able to accomplish with Lean?
Jim D'Addario:
Well, you know, this started as a pretty small company. In 1905, my grandfather came to America. It was a tiny company in their home for many, many years. In 1973, my brother, my father, and I expanded the… and it began to grow because we began to market our own brand of product. And back then we were a very small company. We were out on the factory floor and we were very, very familiar with what goes on to manufacture our strings. So we were naturally kind of Lean thinkers. A lot of things that we had going on in our organization were pretty lean, just, you know, by accident. And when I started reading a bit about Lean about four years ago, it was when Rick Drumm, who is our president now, joined the organization. And he had just finished getting his MBA at Babson and he was at the time, I don't know, 48 or 50-year-old middle-aged guy. But he had gone back to school to get his MBA, and one of the things that he was impressed with was the case studies and the success stories with Lean in manufacturing in the USA. In fact, at his previous job, he had had implemented a few kaizens at Vic Firth drumsticks with some success. So when he came here, he kind of rekindled my interest in it. I had looked at it on several occasions, but most of my people kind of poo-poohed it and I didn't see the benefit of it. We never went forward, but now with a little more energetic champion. I read a couple of books and I got excited about it because it seemed to be a perfect fit for D'Addario. We have, I think, the perfect set of opportunities in that we make thousands and thousands of the same things over and over and over again. So when you do figure out a workflow improvement or a quality improvement, there are significant benefits very quickly. So right away I got excited about it. We interviewed several firms to help train our people and so on. Selected one from Puerto Rico, Primex, who came here for six months and did the training and the certifying, testing and certifying of our 12 champions. And then we were off and running. So what we tackled initially was immediately all 12 were put in our distribution center, which was a relatively new distribution center where we put some automation in. And between the misanalysis from the beginning of the scope of the project by us and our consultants, the warehouse was not running very well. And we had put a lot of money into automation. We had put a couple of million bucks into conveyor systems and automation and carousels and so on. And we just weren't giving our customers the service we needed, and we weren't getting the return on the investment that we had made. So we put them all there as a learning experience. For 30 days they were all there and they value stream mapped everything. And then they started to split off into teams. And we moved four of them into the drumheads and four into the fretted string area, and four remained at the distribution center. So just to give you an example of the distribution center achievements, we had two warehouses, one in California with 12 people and one here with about 40. And we were giving to our domestic retailers, which are your music store that you would go to. We were giving 24 to 48 hour service on their orders, which was pretty standard in the industry and acceptable as a good benchmark for service. Our backorders were very high. Our systems for replenishing were late all the time. So we had a lot of backorders and a lot of unhappy customers. In 2008, we had a million and a half dollars worth of backorders on the book. To date, we have under $50,000. Yeah, it's amazing. Absolutely amazing. Even more amazing is we improved our service to if the order is in by 5 p.m. Eastern time, it goes out the same day instead of 48 hours. So that enabled us to be much more important to our customers. They know they can rely on us. They keep a little less inventory, they order more frequent, more contact with them. While it's a little more busy work for us because we're probably picking more lines and filling more orders to do the same or a little bit more volume. We have a better relationship with the customer and he's far more satisfied. So what we realized after we started getting good in this warehouse, we started shedding people. We didn't need that many. Once we started getting the systems to really work and those extra people were able to be redeployed in other areas in the company. It also freed up a lot of space in the warehouse. About 20% of the space at least has been able to be reutilized. So we kept improving and improving with this thing over the last two years, we were able to shut down our warehouse completely in California and that saves us about a million two a year. And we've reduced the overall headcount from 52 people between the two warehouses to 26 and improved the service dramatically. So now those other people have been, you know, we've been able to redeploy people here in New York in other capacities. So we started to look at things like sewing our guitar straps again, which we were sewing in China. We built the Lean work cell. We studied it. It cost us a few pennies more to make it here, but we don't have 110 day lead time. We don't have large minimum order quantities. We can turn an order around in hours refilling our supermarkets. So we just kept moving more and more of it here and we're going to continue to do that. I'm in the middle of a project that has my involvement. It's called Make It Here. And I'm creating a blog looking for vendors for certain parts and so on. And I'm studying right now what items that we are importing that we could possibly make here or what new items we're making that we can maybe make here. And when I say make here, we might have to subcontract on injection molding or something we don't do. But we can assemble and we can package and we could shorten those lead times and the order quantities, the lot sizes and so on. So there's been so many areas where we've improved. Another great example is in our guitar string Area, we make almost 600,000 strings a day. We're the largest manufacturer of strings in the world. We got about 32 to 35% of the worldwide market share in our own brand name. And then we also make many private label brands that I can't mention. So there's a lot of strings being made here in New York. And we've always been good at designing our own equipment and building automation and being productive on a work center level. But we've never really been as efficient as we are now in terms of a workflow. So what we've accomplished is we've taken our high runners, 80% of our volume, and they're made on four out of the seven lines that we have. We took those four lines, they were packaging to work backwards. There's six, let's say six strings in a guitar set. You've got to package them. So people coil them and they put them on a conveyor each note. So all six get accumulated and then the person at the end inserts them into envelopes and final packaging. And that was the packaging center. Well, in order for a set of strings to be made previously, someone else would have had to wind the wound strings, make the cores so that the wound strings could be made. And there were three steps and three levels on the bill of material and huge work in process inventories. In the wound string area. We were making 300,000 plus wound strings a day. We had over a million dollars worth of inventory, huge amount of space tied up just in wound strings. And we had a huge amount of space, about $600,000 worth of inventory in subassembly cores. What we did is we put all those machines into one work cell and made four work cells where they make the entire product from start to finish. Filling certain predetermined supermarket bags. So it's all visual. We cut all the work in process. We have four hours worth now. So we cut all that work in process, inventory out, and improved the time from when the warehouse needs it to the moment they get it. On many of the high runners, we are making them every day in a very similar quantity. If they need a little more, we add to it. If they need a little less, take away. But we pretty much have balanced it. Now where those high runners, we have such a good history on them. We know what to make every day and it's dramatically improved the workflow.
Mark Graban:
Yeah, well, it sounds like you've gotten great results. And like you were saying, even though you've been working with Lean formally for two and a half years, you certainly can hear a lot of elements of Lean thinking where I believe it when you say we just are naturally lean thinkers. And I think a big part of that is the commitment to people. And something that came out strongly in the CNN piece was, I think you're saying even back to the 1970s, having the commitment to not laying people off, to redeploying people into other work, that six-month full-time training commitment is quite an investment in your people. So I was wondering if you could share some of your thoughts on how that philosophy ties in with Lean and how important you think it is to have that no layoff philosophy and commitment to people.
Jim D'Addario:
Yeah, well, laying off people is not something that we've done very much of. In the entire 40 years of my career on I'd say three or four occasions, we've had to lay people off. And of course, one of them has been this year because of the economy, not because of Lean, but just because of lack of demand. We utilized work share programs in New York and California to go to four-day workweeks in a lot of areas. But there were just some areas where we had a cutback and we probably laid off 45 to 60 people. 45 people. And then we lost 15 or 20 in attrition because of the economy. But now we're back up to the same levels we were before October of last year because we actually had to rehire people because of the new work that we've gotten, which is great. So we've always been very, very hesitant to lay people off. We're very sensitive to that. We would rather actually build a product, finished goods inventory, borrow money and invest in building inventory that we know we're going to sell eventually. Because a lot of our products are staples in the music business. And it's pretty safe to make a coated snare head or a set of acoustic light gauge strings. If you had to make three months or six months worth of inventory to keep people busy and you can afford to do it. We've done that in the past. It's not really a Lean principle, but we have to do that sometimes so we don't lay people off. So when we got involved with Lean, and then we're very sensitive to the fact that people are not going to embrace Lean and accept it if they know by doing something Lean, they might lose their job or somebody else might lose their job. So we are very, very sensitive to that. We've been able to move people around and cross-train them and it's been fantastic. For instance, we had a little lull in our drumhead sales in 2008 and early 2009 to the point where we would have had to lay off another 30 or so people. But because we brought more string business in, we cross-trained those people to be string makers and now they could go back and forth. So we've been cross-training as much of the staff as possible. We're trying to get to the point, and we're almost there, where everyone in a work cell knows how to do every job in the work cell so that they can pinch-hit for each other. So the more valuable you make the employees to you, the less chance you're going to have to lay them off. Because if they have more skills and you can use those skills, then their jobs are more secure as well. So I think Lean actually helps is going to create a lot of jobs here at D'Addario. I'm excited about it. And we're not just going to create jobs to have people on the payroll. We're going to create jobs where we create new business.
Mark Graban:
Yeah. And you know, you tell that story about building up inventory to keep people working. I mean, I wouldn't criticize you for that because even you look at Toyota or other Lean companies, there's something to be said for choosing as a strategy to level out your production and allowing inventory to fluctuate for the sake of stability of the workforce and stability of your process.
Jim D'Addario:
The first seven months of this year were horrific for our business. We were down 17% in demand and sales. Even though we were given better service and improving quality, we still were off because of the economy. So we knew we had to do something. I also felt that we were talking to our customers. We get sell-through reports from a lot of our larger customers and our product was selling through. They were just letting their inventories dwindle, which to me meant at some point that pipe is going to be empty and they're going to demand quantities we won't be able to make. So I made a bold decision with the group in the early summer was to bolster the a high-runner inventory by 30 or 40%. And thank God we did it because we were right. When the business had to come back a little bit or people's inventories were depleted, they had to order. So you've got to be careful because sometimes if you cut it back too much those inventory levels, you might lose sales opportunities if your capacity isn't big enough to cover spikes that appear. Yeah.
Mark Graban:
Well, final question for you maybe to talk about Lean and your role as a CEO, I'm curious your thoughts on how Lean ties into the company strategy and what your role is as the CEO in terms of leading the effort or helping educate people or create an environment where Lean can be successful for you.
Jim D'Addario:
Well, I'm always involved. I'm one of those hands-on guys in terms of the technical aspect of the business. So I'm out with factory floor a lot. I know what's going on with the machinery. I design machinery myself. So I help my engineers now design the machines we're working on and the products we're making. So I am intimately involved with what's going on. So the same thing happens when we get involved in Lean. I don't intimately get involved with a kaizen event, but I know what they're doing when, what results we're getting. I ask for certain metrics and goals and they know I'm fully supportive of the effort. And I think that that's the most important thing. I think that any CEO or anybody in upper management has to get some training to fully understand Lean, what it's going to do for them. Set some goals, define some metrics that people report back to you, watch them, celebrate the victories together, help them when they're stuck on something, and then more people join the effort voluntarily and it becomes more and more successful. That's essentially what I do. I think I might actually try to lead one kaizen in the first or second quarter in an area I'm pretty familiar with and I have a lot of ideas on. So they're saying, well, why don't you lead that kaizen? I said, well, maybe I will, but that requires me to stop doing everything else I do. So that can be difficult. But it's fun to watch these things take place. I can tell you it's exciting.
Mark Graban:
Well, it's great to hear about the progress that you've made. I really admire the commitment that you have for manufacturing, keeping that here in the US. And I want to thank you for sharing the story not only in that great CNN piece that aired, but for taking time. Share a little bit more detail about the work you're doing and your role here on the podcast. I really appreciate you doing that.
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