A decade ago, the debate about manufacturing leaving the U.S. focused on the “giant sucking sound” of jobs being pulled into Mexico . Today, the sound is louder and more urgent than ever, but its source is no longer just south of the border. Open up the business section of any newspaper – or perhaps read your own employer’s latest press release – and you will quite likely learn about manufacturing relocating to Brazil, China, India, Bulgaria or Malaysia.
The first casualties to offshore manufacturing were high-labor, low-skill jobs in textiles, consumer electronics and similar industries. Since then, the floodgates have opened and even the most sophisticated products are fair game. Today, it seems no industry is safe from the drive to lower costs by relocating to developing countries. Even highly skilled jobs in design, research and technical development that once seemed untouchable are finding their way to the Third World , such as IBM which announced that 5,000 high-tech American jobs would be moving offshore.
It’s no secret that the powerful lure attracting manufacturing jobs is low labor costs. An hour of labor and benefits in Mexico may cost $1.50 to $3. The same hour in an area of interior China may cost less than 15 cents. While rates vary widely across the United States, even a minimum-wage contract worker costs 60 times as much. A similar ratio of salaries exists for skilled technical positions such as engineers, programmers, scientists and managers.
While lower labor costs are the most obvious reason for relocating manufacturing, other factors are at play as well. Restrictive and counter-productive government regulations, particularly in the area of environmental compliance, encourage many companies to look outside the U.S. In other cases, the lower costs of materials, generally a direct result of suppliers having lower-cost structures, as well, is the driving force.
In addition to these economic factors, technology has become a powerful enabler. The Internet and flexible communications makes coordination with offshore facilities much less intimidating today than only a few years ago. Documents, drawings, photos are only a computer click away and an online meeting can be held as easily with a production plant in Ghangzou as with a plant in Peoria.
The statistics are staggering. Since 2000, some estimates are that nearly 3 million U.S. jobs have moved overseas. Interestingly, we now seem to be in the second wave of relocations. I recently visited a manufacturer of medical devices in a low-cost labor region of Mexico . They had just finished research on emerging competitors and found that similar products were being offered for sale in China at 30 percent of their selling price. The manufacturer was convinced it had to lower its cost structure to compete in the long run and was actively working to improve productivity. Ironically, the same arguments probably were the very reason it was established decades ago.
The lean answer
Clearly, the source of the giant sucking sound is moving and growing stronger! Can anything stop or even just slow this trend?
Fortunately, the answer is “yes.” Lean manufacturing, best described as the relentless elimination of waste, has the potential to eventually stem the tide of job loss. The emphasis must be on the word “eventually” because there is no overnight or painless solution. Also, it must be recognized that valid reasons exist for offshore manufacturing other than low cost. For example, emerging consumer markets in developing countries sometimes justify manufacturing both to meet the local demand and to establish a presence near customers.
In addition, lean manufacturing principles must be aligned rigorously and thoroughly at all levels of the supply chain to make a difference. Even so, the late adopters of lean may still find it necessary to trim workforces since opportunities to grow market share through efficiency may have already been seized by more nimble competitors. However, even that is a much better alternative than the one faced by the companies waiting too long to implement lean. Jobs in those companies are ripe pickings for competitors, both domestic and foreign, that have discovered this powerful method of reducing costs.
Lean manufacturing has evolved from its roots as almost a cult-like philosophy spread by a small group of dedicated disciples. Those early advocates learned most of the techniques from the teachings of Japanese masters of the Toyota Production System. Today, virtually all major manufacturing companies have some form of lean initiative. Smaller companies and non-manufacturers have been generally slower to adopt the technology but several notable exceptions exist.
The power of lean lies in its ability to reduce costs in all areas. This is accomplished not through traditional cost reduction efforts but by challenging every activity to determine if it adds value in the eyes of the customer. This seemingly simple approach has powerful implications. Business processes that may have been taken for granted for decades are candidates for elimination. The emphasis is not on doing things more efficiently – instead, the first question is why an operation must be done at all.
A good example of this approach is the process of inspection. Not long ago, inspection was almost always assumed to be a benefit to the final customer. Companies would brag about the amount of effort spent inspecting their goods. Considerable cost and capital was invested into performing inspections completely and efficiently. After all, the argument went, what customer would not feel better about a product that was individually checked for defects?
Companies that have adopted lean manufacturing turn this logic upside down by reasoning that no rational customer wants to pay them to make a diving catch of their own mistakes. Therefore, the challenge becomes how to prevent potential defects so that the customer receives a product meeting all requirements without costly inspection and rework.
In addition to inspection, other processes that are automatically challenged include setup, packaging, equipment adjustments, material handling, inventory control, and rework. Even processes that generally add value often have individual tasks that are non-value added. Lean manufacturing uses a variety of tools and techniques to identify these areas of opportunity. Products and processes are redesigned, improved or sometimes completely eliminated to attach forms of waste.
The benefits of lean
The drive to eliminate non-value-added activities has obvious benefits. Almost invariably, preventing a defect is more efficient than finding and fixing it. Fewer errors mean less rework. More reliable processes lead to less work-in-process (WIP) inventory and reduced space requirements. As wasteful activities are eliminated, the elapsed time to manufacture a product is reduced. The bottom line is that customers receive a better product, at lower cost and in less time.
While lean technology started as a manufacturing initiative, more and more organizations are seeing its benefits in the office and service sector. The same principle applies – by examining every activity to make sure it provides value to the customer, companies are able to cut costs, improve quality and reduce the time required.
But the most powerful story behind lean technology is that by ruthlessly eliminating waste, companies are finding less need to rely solely on cheap overseas labor for cost savings.
The economics are straightforward. A manufacturer that can reduce direct labor costs by 50 percent slashes the potential benefit of lower-cost labor by half as well. Reducing defects cuts the need for generally labor-intensive rework, further reducing the attraction of low-cost labor. In many industries, the cost of direct labor is less than 15 percent even prior to lean efforts. As this number is reduced, there becomes less and less incentive to drive decisions primarily on this component of total cost.
Lean technology can also impact other factors that drive manufacturers overseas. For example, the high cost of dealing with hazardous waste products has forced some manufacturers overseas where environmental controls are less restrictive. Lean thinkers approach the problem from a different angle by questioning why they must use a process that creates waste in the first place. After all, what could have less value than a process with byproducts that cost money to dispose of? Powder paint, water-based coolants and citrus cleaners are just three examples of technologies that have reduced environmental problems. There are many other case studies about firms that have actually eliminated the need for solvents, heavy metals, degreasers, or harsh chemicals. This, in turn, has reduced the incentive to relocate to regions with less stringent environmental regulations.
The ultimate payoff of lean
As the economics of Lean Technology reduce the incentive to focus strictly on low labor and direct costs, other factor begin to become more significant. Excess inventory is another form of waste since it is expensive to store, is subject to damage and has a nasty habit of becoming obsolete. Lean companies work hard to reduce inventories to the minimum level required to meet customer demand. However, offshore manufacturing almost always adds to inventory – either because it is sitting in containers or because extra inventory is needed to meet changes in actual demand. (Those darn customers are always buying stuff different that what we made!)
By eliminating non-value-added activities, companies can make huge improvements in the time it takes to deliver products or services to their customers. Reductions in the total response time of 50 to 90 percent are common. Many companies have slashed lead times of products built to unique customer requirements from months to a matter of hours. This allows lean companies to begin using superior customer response as a competitive weapon. After the elimination of waste narrows the cost difference between a domestic manufacturer and an offshore supplier, the advantage often goes to the company that can innovate, responds and deliver in the shortest time. No current technology can overcome the fact that products built in Asia are still a 10-day boat ride from U.S. markets and incur significant costs and delays in transportation and border crossings. The concerns for international security are likely to add to this problem in the future.
Lean enterprises also find that the pace of innovation increases as they systematically attack waste in their products and processes. Many have discovered the value of making rapid and often extensive redesigns to processes as further opportunities to reduce waste are identified. While there is no geographic monopoly on innovation (in fact, “kaizen events,” which make quick, focused improvements, were invented in Japan ), experience shows the value of continuously re-engineering processes to achieve the next increment of improvement. A well-educated, flexible workforce that is in close proximity to design and engineering resources regains its status as an important asset.
The future according to lean
There is little doubt that lean technology will continue to spread in the coming years. Many manufacturing companies are just starting to see the benefits of Lean and even those that are considered leaders today realize that they have just scratched the surface of opportunities.
Toyota , the company that invented many of the concepts, has been working on its form of lean for 50 years and says it has as much work to do as when it first started. Furthermore, lean is just getting a foothold in non-manufacturing fields. The potential for applying the same principles in the service sector, health care, military, education, and government is staggering.
The lure of low-cost labor will always exist somewhere in the world, and a reasonable distribution of business investment makes economic and political sense. However, locating business based solely on finding the rock-bottom lowest price of labor (if only for the moment) is a destabilizing approach. By eliminating the waste that drives companies to low-cost regions, lean technology has the potential to stem the recent tide of job loses.
About the author:
Jack Rink is a partner in the consulting firm of R. Michael Donovan & Co. Contact him at 508-788-1100 or firstname.lastname@example.org. The firm’s Web address is www.rmdonovan.com.