Thanks again to Jim Womack for his participation. In the next few installments, we’ll move into questions about America’s manufacturing competitiveness, Dell Computer, and opportunities for entrepreneurs through Lean Thinking. Be sure to check back again for future installments.
The concepts are very simple but very challenging. They suggest that just about everything is being done wrong once society moves beyond the factory and that’s not what most folks are expecting to hear. Indeed, the common view in the U.S. seems to be that we are really good at services (wrong!) but just no good at manufacturing (wrong again!) So lean consumption, lean provision, and lean solutions require a bit of brain rotation and it too early to tell how many brains we are going to be able to reorient in the right direction. Let’s just say that we are optimistic, based on our early interactions with providers.
Q: How hopeful are you that the total cost perspective, described as “lean location logic” in your book, can help stem the outflow of American manufacturing jobs? Can it stem the outflow of jobs from other “high labor cost” countries such as Germany?
First, I should say that I’m agnostic on where things should be made. I just want people to do more intelligent math than they seem to have been doing. Lean thinkers need to understand that with the extraordinary wage gradients across the world today in combination with very low trade barriers in manufactured goods, there is going to be continuing drift to lower wage areas. When touch labor costs $2.00 an hour in Mexico and $15.00 an hour in the US, when a engineer with a few years experience costs an employer $100,000 a year in the U.S. and $20,000 in Mexico, and when there is about the same compensation differential for plant managers and other operating staff, there is going to be continuing drift out of the U.S. to Mexico for commodity items, no matter how lean manufacturers here may become, even if China disappears from the earth.
But we think that doing the math correctly would cause a lot of companies to think a lot more carefully about moving, particularly if they can really get lean where they are. And we think that manufacturers who decide that they still need to move would not move nearly as far. For example, Mexico seems like an awful lot more sensible destination for serving the North American market than China, as does Turkey for Europe. (If you really want to sell in volume in China and India, however, new capacity to serve those markets with commodity goods will almost certainly need to be located inside those markets.)
Let me give an example: We have had a favorite manufacturer in the Boston area for many years. The firm designs and builds a very high tech item for sale to the electronics manufacturing industry and is the world technology and market-share leader. However, we’ve not been interested in them for their product technology but because of their lean production process that has permitted them to build to order for shipment the same day with practically no inventories of components or finished goods. (They were one of the first American firms to hire ex-Toyota Japanese advisors in the mid-1980s.)
So they were the best in technology and the best in production. Plus, most of their customers are in the U.S. No need to even think about alternative locations. Right? Wrong, once their largest customer called, explained that they wanted the “China Price”, and that they had found a competitor who would get it for them.
So they set out to look at the world and do some lean math. They started with “mass production” math by calculating factory production costs in China versus the logical alternative, Mexico. The plant they considered building in China could reduce the cost of the activities going on inside the factory by 40 percent compared to the existing Boston facility, even with a lot of American ex-pats in the early years to get the plant running. The same plant, when constructed in Monterrey, Mexico, could also reduce factory costs but only by 30 percent. So, they should go to China. Right?
Wrong, once they did lean math. They added in the cost of supplied parts for the Chinese plant – some of which could be obtained locally for less than in the U.S. but many of which required more sophisticated process technologies than are currently available in China and which would have to be imported from high-wage countries with high freight costs or large just-in-case stocks. Then they added the extra cost of guaranteeing their traditional quality level, the cost of extra inventories of finished goods in transit to support their customers in the U.S., and the very high likelihood of expedited air freight because their customer schedules are pretty much worthless. Finally, they looked at the currency risks and country risks and judged that the peso is much less likely to rise against the dollar compared with the yuan and that they would have an easier time controlling their technology and avoiding trade barriers if they went to Mexico.
So…they recently announced that they will move their major production operations to Mexico while retaining a prototype and new product launch capability at their existing U.S. site. And, because they anticipate that their customer base will move to East Asia over time, they also set up a maintenance and repair operation in China to fix products in the field. The idea is to learn the ropes and began to attract good staff in case the need emerges to serve new Chinese or East Asian customers from a Chinese production location.
On one level, this outcome is disheartening to lean thinkers in U.S. operations. This company did everything right and it wasn’t enough. On the other hand they at least did the most cost-effective thing (as they discovered that total cost from China was substantially more than total cost for the same product supplied to U.S. customers from Mexico) and guaranteed that the company will not be wiped out altogether along with its U.S. based engineers and managers.
If the American or European public wants to change the rules of the game by erecting trade barriers, the answer could be different and some more calculations would be needed. But the basic approach, using total-cost (lean) math versus point-cost math would be the same.
Q: How can we get companies to quit “wasting our time” as consumers? The economic incentives for those companies aren’t obvious or directly correlated. What steps or approaches do you think are practical over the short-term for companies to address this issue?
The big hurdle to get over, and a key objective of the book, is to show providers that if they quit wasting consumers’ time they will save themselves money. We are convinced that most companies mess around with consumer time, fail to get them what they want where they want, don’t even think about when consumers want things, and fail to reduce the number of problems consumers must solve because they think all of these innovations would cost more and cut into their margins. And…they are wrong.
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