Moving a Factory to Mexico

How I Helped Move a Factory to Mexico - Business Week

Hat tip to Jennifer in Washington state for pointing this article out to me. It's the tale of an idealistic college grad whose temp job involves gathering data that will help facilitate the move of a factory from New York to Mexico.

Larry Sills, the company's chairman and CEO, says he decided to relocate the
bulk of the plant's operations to Reynosa, Mexico, because of reduced demand for
the plant's main product line (distributor caps and rotors) and competition from
China. He says the company is profitable, but not enough to justify its nearly
dozen factories in the U.S. and overseas.

It's the typical story of labor costs:

What's driving relocations like this one, of course, is the gap between the wages paid in the U.S. and elsewhere. While a line worker in a U.S. factory earns an average of about $18 an hour, the equivalent job in Reynosa, Mexico, pays up to $3 an hour, including benefits, says Ralph Biedermann, a partner with Mexico Consulting Group in San Francisco.

$3 is less than $18. End of story, right? Well, unfortunately, there's nothing in the article to say if they tried Lean methods -- attempting to eliminate waste and costs first. What about the total system costs? What about the extra inventory in the supply chain and the border delays?

The author started asking good questions, especially after learning productivity had gone UP after the Mexico move was announced (you'd expect it to go down if employees were dejected about the news):

If it had gone up, then what were the criteria for sending the factory to Mexico? I saw highly trained, highly experienced people sitting to the right of me. How much would it cost to train workers in Reynosa? How many costly molding devices would be broken? Would this closing really help? I thought about the drawbacks of committing to a strategy that means chasing the lowest labor costs around the world.

Welcome to the real world, kid. Only an experienced businessman would throw away the accumulated skills and experiences of their people, all in the name of saving a few bucks on labor (which is typically only a small part of a product's total cost, unless it's very labor intensive, like clothing manufacturing). But even high labor cost industries have examples of companies that have used Lean to compete on other factors, such as delivery and quality.

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Lean TVs in Mexico?

Sharp takes a gamble on new TV plant in Mexico - USATODAY.com

Good article in the USA Today today. Sorry for the redundant redundancy there.

I'm reminded of an earlier post about Olevia building some TV's in the US. I'm also reminded of a comment that Jim Womack made in a podcast of mine (I think it was this one) where he asked the question, "What about Mexico?" Mexico has low wages AND close proximity to the U.S.

Sharp is starting to take advantage of that, not only doing assembly, but also doing the more intensive production of sheet glass that's used to make flat panel screens... in Mexico.

As the USA Today points out, since TV prices decline so quickly, the value drops while on the proverbial slow boat from China. By building in Mexico, they cut the lead time from 40 days to 7 days. That means more responsiveness to the market AND lower inventory. Not bad.

The downward pricing trend reminds me of the advantage Dell had when PC prices were dropping so quickly. Dell had such a tremendous supply chain advantage from buying components later than their competitors because of Dell's short response times to customers. Is Sharp poised to be the Dell of TV's? How ironic, since Dell went the traditional outsourcing route, farming out production of Dell-branded TV's to Asia, with the slow shipping times. Why didn't Dell learn from their PC success??

Is this a trend, will more companies be looking at Mexico as a "fast response" option from China? Does this work only in markets where products change quickly and/or prices fall rapidly?

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"Bubble Busters" Busted

El Paso Times - Bubble Busters say farewell

Here's what would otherwise be a nice story about employees working together on kaizen (continuous improvement). The team is being rewarded with a trip to Japan:

"In December, the group, who call themselves the Bubble Busters, will visit their parent company, Yazaki Corp. in Japan and will represent North America in the company's worldwide quality competition."

Wait, hold on.... let me go back to the first paragraph of the article.... enough skimming, did that say... oh NO!

"By the end of the year, the 200 employees of Elcom in El Paso will leave the 18-year-old plant, their company having relocated to Mexico."

Sigh (shaking head). How sad. What a ridiculous juxtaposition of ideas in the same article. On the one hand, the company talks about how professional their problem solvers are, that they didn't have to bring a team from Japan to solve their production problems. Then they are going to turn around and throw those people out into the street so they can save a few bucks on labor by moving Mexico.

They are throwing away that investment in their people. What a shame.

"We wanted to contribute as much as we can," said Xochitl Stukes, the Bubble Busters coordinator.

Thanks. Now get out.

At least Elcom is not saying that it is "Lean" to move their factory to Mexico.

What a depressing story for a Friday. Sorry. I know what will perk me up... let's all go do something productive -- who can we help today? What can we improve? What do we have control over? I'm going to be talking with hospital leaders about Lean, which is always exciting. They're not going to move their hospitals to Mexico!

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P&G and Target Pricing

P&G's Global Target: Shelves of Tiny Stores - WSJ.com:

Interesting article in the WSJ about how Proctor & Gamble has had to adapt its approach in countries like Mexico, with different types of customers and different retail models:

"In marketing goods to low-income shoppers, P&G tries to keep in mind their budget constraints and even the coins they carry. Because they are often paid a daily wage, Mexican customers generally carry five- and 10-peso coins. 'If you want to sell to low-income consumers, you have to know what's in their pockets,' Mr. Riestra says. 'It doesn't make sense to have something cost 11 or 12 pesos.'

Now the article doesn't mention "Lean," but it takes us to the Lean notion of Profit = Price - Cost, where the Price is set by the market and your job, as producer, is to get your Costs low enough to be able to hit your Profit targets. Traditional business thinking (which pretty well ignores rules of economics) takes your production cost and what might be called your "entitlement profit" (such as "I need 10% profit on this") and determines the Price as Cost + Profit.

Toyota has taken the approach of saying "Here is what the market will give us for this car, so we have to engineer our costs accordingly." They call this Target Costing and Value Engineering. I think that's the approach P&G is using, even if they get the terminology a bit wrong:

To ensure satisfactory profit margins, P&G uses what it calls 'reverse engineering.' Rather than create an item, and then assign a price to it -- as in most developed markets -- the company first considers what consumers can afford. From there, it adjusts the features and manufacturing processes to meet various pricing targets. To hold down the cost of its Ace Natural detergent, used to hand-wash clothes, P&G reduced the amount of enzymes in the product. The result: a product that costs a peso less than regular Ace and is gentler on skin. P&G says that reverse engineering helps to keep the company's after-tax margins 'comparable' to those in wealthier, developed countries."

P&G also realizes quality is important, that you can't "trick consumers" by cheapening the product in a way where the product doesn't work anymore. That's good long-term thinking.

Updated: Matthew May also has a good take from this same article

Updated: Evolving Excellence also had a different angle on this same article

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China or Mexico? Is Lean an Alternative?

Winding Road » Archive » Japan Report: Toyota To Build 8th Plant In MS, But We Hear No. 9 Is Already In The Works…

Rumors are already going around about the NEXT factory that Toyota will build in North America. The rumor is a small car factory in Mexico.

In the wake of Toyota’s announcement that it would build its eighth U.S. manufacturing plant in Mississippi to build the next generation Highlander by 2009, a Japanese newspaper is reporting that Toyota is already planning its ninth plant, this time in Mexico.

The Japanese media says Toyota will build a new 1.0-liter compact car in this plant, which could get going as soon as 2010.

There was more whining in the USA Today yesterday that Chrysler can't profitably build small cars in the U.S. because of high labor costs. So, they're looking to China.

As Jim Womack said in my podcast interview with him, "What's wrong with Mexico?" Mexico offers cheap labor AND it's closer to the U.S. than China, which would reduce supply inventory and transportation costs. Plus, there's got to be less political risk in Mexico compared to China.

Chinese carmaker, Chrysler near deal

Chrysler Group moved a step closer Tuesday to becoming first to bring Chinese-made cars to the USA.

Chrysler can't afford to build a small car in the USA, where labor and other costs are too high to make a profit.

But in China, labor rates can be as low as $1 or $2 an hour, and Cosmai says he suspects that building a modern auto plant can cost half as much as in the USA.

The adjacent USA Today article about Toyota's Mississippi plant announcement showed a box with all of the Toyota North America plants, including the plants that build the small Corolla and Matrix vehicles. Of course, maybe Toyota isn't profitable with small cars either, but they can afford to keep the production here for political reasons?

Assuming that there are about 25 labor hours in a small car (including stamping, etc.) you can do the math. Should labor costs, even on a $10,000 vehicle, be too much of a hurdle that you can't overcome with Lean?