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The Waste of Overproduction

6

by Jamie Flinchbaugh

Any growth story is eventually met wth an industry wide waste of overproduction, or glut of capacity. When this happens, plants have to shutter, jobs are lost and there is tremendous upheavel and angst in dealing with a correction. Taiichi Ohno warned that the waste of overproduction was the worst kind. He might have been more focused on the process within the company, but the same waste exists across an industry. So if growth leads to the waste of overproduction, where have we seen explosive real growth? The Chinese automotive market, up something like 40% from last year. However, the Chinese government is trying to avoid the inevitable waste the comes with chasing, or leading, demand. According to the China Daily, the government will not allow any company to build new capacity if they have a factory that is currently not selling at least 80% of its capacity. Now I'll put aside all the discussion on whether a government belongs interfering with business. But let's keep in mind this is Chinese, and they are a communist country that is very interfering. But China is evolving into a new breed of capitalism. The government could have said “we will tell you who, where and why you will build a plant, who will run it and what time your shift starts.” That's afterall what the Russians are starting to do as they nationalize business after business including the automotive industry. But instead they laid down a clear performance metric – if you can't sell cars, don't build plants.

I'm not saying this is good or bad but found the policy interesting, to say the least. Another point of fact that is important to this thread. Everyone is talking about the rising average income level in China. Note that this is AVERAGE income, not median. Yes, wages are rising across the board but the vast number of Chinese are still very, very poor and the average income increase is very disproportionately distributed towards those who already have a decent income and can already buy things. So, before you think the Chinese market is a great place to start selling – think twice.

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Jamie Flinchbaugh is an accomplished Entrepreneur, Senior Executive, and Board Member with more than 20 years of success spanning finance, manufacturing, automotive, and management consulting. Leveraging extensive operational experience, Jamie is an invaluable asset for a company seeking expert guidance with process improvements, lean strategies, and leadership coaching in order to transform operations, reduce costs, and drive profitability. His areas of expertise include continuous improvement, entrepreneurship, coaching and training, process transformation, business strategy, and organizational design.

6 Comments
  1. Bill Waddell says

    “Now I’ll put aside all the discussion on whether a government belongs interfering with business. But let’s keep in mind this is Chinese, and they are a communist country that is very interfering.”

    As opposed to the U.S., which is a democracy committed to free enterprise and capitalism and un-interfering? Our government has dicated, by law through IRS and SEC regulation, that overproduction creates an asset. In fact, the more overproduction a company is, the more profitable the government says it is.

    If government is going to interfere with business – and they are – at least the Chinese got the lean principles right by classifying inventory as waste, while we have legally classified it as an asset.

  2. chinacars says

    i dont think overproduction has anything to do with this….chinese car industry will boom at a constant speed giving it time to fall in growth and overcome other markets as well

    check China Car Industry

  3. Jamie Flinchbaugh says

    Responses:

    1. To Bill’s comments, I did not say “as opposed to the US.” But thanks for assuming so. Yes, an incentive for investment can actually encourage overproduction and massive waste. This is why I made the observation that while it is government intervention, I believe they got the incentive right.

    2. For the second writer. So you’re saying the Chinese car industry will boom at a constant pace (hope and a prayer #1) and so then everyone will behave properly and curtail their investments in time to line up evenly with demand so that you have a perfect economy (hope and a prayer #2). This all sounds good, but if you’ve ever been a part of a market before, you’ll realize that this is like a Red Sox fan (me) thinking that because the Sox are in first in July that they will win the World Series…it does happen but when it does, we appropriately call it a Miracle!

  4. Mark Graban says

    That kind of “80%” rule will inhibit growth in fast growing industries. Let’s say the lead time for a new factory is 1.5 years, you might be at 80% today when you get approval, but up to 95% capacity by the time the new factory is built (with corresponding long CT and big inventory thta results from a swamped factory). That might hurt the company, costing them market share, and reducing the need for a new factory. Probably a bad dynamic there. It’s bad to set “standard” rules that apply across all industries.

  5. Bill Waddell says

    Jamie,

    My comment was not directed to you – I am sure you see the big picture quite clearly. However, I run across quite a few people who naively assume that American regulatory accounting is the natural thing to do because it is somehow inherently correct – and therefore does not represent government intervention in business. In fact, it is by no means inherently correct and represents a huge regulatory impediment to manufacturing excellence.

    I once read that Charles Barkley said he did not want to be any kid’s role model, and that Michael Jordan replied that Barkley had no choice concerning whether to be a role model or not – his only choice was what kind of role model to be.

    In like manner, every country with a tax code imposes regulatory incentives and disincentives on manufacturing. The only variable is what sort of incentives and disincentives they impose.

    Sooner or later we will take note of the fact that all manufacturing in America is not in trouble and it is not being outsourced. It is only publicly traded manufacturers who are in trouble and bailing out as fast as they can. The privately held manufacturing community is actually doing pretty well, and making good progress toward becoming lean. The difference is the regulatory environment in which the publicly traded companies operate. It destroys manufacturing, rather than enhances it.

    I don’t know how the Chinese regulatory package will imapact their economy in the long haul, but I will be surprised if it leads to the decimation of manufacturing the way the SEC – IRS – Wall Street package has detroyed the big American manufacturers.

    I’ll get down off my soapbox now. Great posts – I enjoy reading your insights.

  6. Jamie Flinchbaugh says

    That’s correct Bill. There are some believes that US regulations must be correct and others incorrect. It’s a case by case basis, no universal truths here. But the trend is certainly that more laws, policies and regulations tend to hurt American manufacturers than help them. For example, tort reform is badly needed. On average, US companies spend a larger percentage of their revenues on litigation than they do on R&D. That’s a sure path to failure (unless you’re the lawyer).

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