A Midwestern maker of mops and brooms recently found itself in financial trouble when the company's new management team consolidated five of its production plants into one.
New York, N.Y.
The move only served to compound existing inefficiencies in its manufacturing processes. In response, management felt compelled to outsource manufacturing to China, where the savings in labor alone, they believed, would let them raise product margins and become profitable again.
Before taking the leap, however, we convinced management to first try improving the way it made products at home. We employed a proprietary Lean System that uses a series of kaizen (Japanese for "improvement") events. Over the course of thirteen weeks, facilitators conducted regular employee training sessions, and looked for ways to boost efficiency. The result: A batch process that consumed three weeks was replaced by a flexible, one-piece workflow able to churn out a single broom in 3 minutes start to finish. Inventory levels fell by over 50%, which saved the company millions of dollars annually. In sum, these initiatives saved numerous U.S. manufacturing jobs.
In a similar case, a Canadian manufacturer of fireplaces elected to move production of its wood and gas products to Mexico, another low-cost-labor region. The decision would also involve shutting down its Indiana factory in the U.S. But the application of Lean techniques turned the start-stop manufacturing process of the Indiana plant into a one-piece workflow. The changes put the operation back on track, and it is now poised to take back work from Mexico. The Mexico-based plant continues to make only those components that have low freight costs.
Are these examples anomalous, or are U.S. businesses simply overlooking cost-cutting and efficiency-boosting opportunities that make outsourcing less attractive? Before answering, consider the total cost of outsourcing to China, for example.
China's economy has grown at more than 9% annually for nearly 20 years and will soon become the world's largest marketplace. Labor rates, though still low, will continue to rise in step as money pours into its economy. That hasn't stopped large corporations including GM, Caterpillar, and Tyco from setting up operations and supplier networks there, evidently emboldened by China's entry into the World Trade Organization in 2001.
Offshore manufacturing makes financial sense for multinationals, though it may not for small-to-midsize companies. The cost of shipping product from China to the U.S. alone can offset savings from cheap labor in some cases. Further, quality of products from China manufacturers is sometimes lacking, while longer lead times force U.S. companies to carry large inventories so they can service their customers. Cash flow is another consideration. U.S. companies often pay freight for an entire shipment 15 days prior to receipt of merchandise, instead of the typical 75 to 90 days after receipt.
The message: Companies should thoroughly analyze the labor-versus-freight trade-off, indexed to a Lean-manufacturing environment. Only then can companies realistically assess outsourcing to China and other countries.
Getzler Henrich (www.getzlerhenrich.com) is a turnaround management firm.