Global Competition and Lean Manufacturing

Advanced Manufacturing has a thought-provoking article on the need to rebuild our factories if we are to compete.  The premise is that simply implementing traditional Lean in existing factories won't be enough... we must create new factories from the ground up to build in efficient layouts.  Costly, but necessary in the author's view.

Some of my colleagues and I have been discussing a similar topic... global competition and the potential of Lean to maintain the success of more mature economies.  One person in our group, a senior executive at one of the largest corporations in the world, had an excellent commentary on the article:

Once again, I think too many people are over simplifying what it takes for North American manufacturers to compete and prosper over the long haul.

"The business world is complicated ... yet in some ways inherently simple"

This author points out a real hidden nugget of truth, and a situation that is a little scary.

If you remember the US Steel industry in the 70's as an example. The infrastructure of US steel was old and tired, the companies had not invested much in new P&E, preferring to live off the gravy train of much depreciated assets. The US after World War 2 actually helped Japan invest in and build new modern steel plants, and the result was they absolutely kicked the butts of US steel, it was a total bloodletting. Now, here is the unvarnished truth. If US steel had of "Leaned" the hell out of their factories within the infrastructure they had, and the minimal P&E investments they were allowed; if they did the best lean implementation ever in the history of the planet, it would not have mattered one iota, they would still have been crucified ... this is not to say that the Japanese with new modern steel mills and the monstrous advantage that provided, should have then sat on their laurels and not also driven lean practices for a true double whammy (not that they didn't)

The author makes a similar relevant example. If a group of manual sharecroppers created the most lean manual farm operation ever designed in 5000 years by mankind, they could not come close to competing with the biggest klutz in possession of a combine ... again not that the klutz in possession of the combine should have stopped there and not also driven lean practices with his newfound tools.

The reality is many (not all by any stretch ... but many) US manufacturing enterprises are not investing a lot of P&E in their factories. In fact I'll bet the re-investment ratio of P&E to depreciation is less than 1 in most manufacturer's North American operations. Yet in the emerging markets (particularly China but not relegated only to China), there is a tremendous investment underway in new capital spending. In my view when one looks at it, if this trend sustains and grows, all of the North American lean efforts in the world won't keep the scale from tipping. In total, North American manufacturing is mostly in harvest mode with their North American operations.

You know, I have a theory about what I call "Cranes in the Sky". I believe truly that cranes are an indirect indicator of growth, prosperity, focus and success, as well as a predictor of the future. If one were to have such a simplistic measurement of say:

# of cranes in the sky to country geographic square footage

... or # of cranes in the sky to country population

... or # of cranes in the sky to GDP

... we would find today that China alone on any of these metrics would be an orders of magnitudes higher ratio that in North America. This in and of itself is creating a major advantage.

I do think though that even this author is oversimplifying the total picture. Clearly we can do more lean work over here, a lot more, and clearly he is on to something with the P&E, but the advantages moving China's way are significant, even the perceived advantages we have are minimal in my view, if one really wanted to honestly provide a realistic synopsis of the current situation:

- China (but more importantly it's fellow countries) are investing more in the plant and equipment

- China is modernizing it's supporting infrastructure a lot more than North America ... new power plants, new transmission systems, new major transport hubs and facilities, new roads, new airports and planes, etc etc

- China's management and leadership expertise's are behind, but they are gaining rapidly, they are investing much more in education, even of graduated employees

- China is beginning to invest more in acquiring companies and technologies

- China's (and in truth many developing nations), may not be lean yet, but in some of their better factories, they are on par or ahead of many of our best, and many of their mid tier ones are on their own lean journeys ... the lean advantage we might be able to get, we can't keep from them, they will achieve parity and it will not take long

- China and other emerging markets do have a significant labor advantage

... so what do we do, just roll over?

NO!!!

but we need to be open and honest and we need to play it smart!

In my view we need to:

- adopt and drive lean principles and practices in our factories

- adopt OTHER world class manufacturing best practices in our factories

- separate our products and services into ones where labor is significant and ones where it isn't

- where it is not significant, invest in our factories over here, lean them and upgrade them

- where it is significant ask if lean can offset the disadvantage then do it

- where labor is simply an advantage then do build and grow a low cost region supply chain

- support better education ... promote engineering over law (or arts)

- lobby our gov'ts to invest a bigger percentage of our money in infrastructure projects verse social and welfare initiatives ... give the bums a job building the next transmission line, don't just hand them a check ... we will be better off and so will they

Most importantly, and this is where we are not getting it, especially Canada

- We have a certain piece of the pie of the current domestic or possibly global market

- That piece of pie will come under threat from many new emerging serious competitive forces

- While maybe just maybe we can sustain our pie size, chances are we will end up giving some of it up

- In truth, we will have to share some of our slice of the current market pie with others, the laws of demographics just predict it

- At the same time what is happening is the size of the pie is increasing ... and that is where the opportunity lies

- WE NEED TO BECOME better and broader TRADERS. We need to be taking our manufacturing enterprises and making sure we command and get a share of this growing total pie.

- The trick to manufacturing success tomorrow in my view is not just in driving better operational excellence, it is in learning how to better sell into a full global market place. If one just does the former, they are destined to shrink, maybe to die.

If one had a macro long term crystal ball we might be digging our own grave and not even know it.

On the other hand, I am an optimist and believe in the strength of the US capitalist model to persevere. I do think we can make it better, I do think we should not be moving quite as many jobs as we do, and I do think we should be investing more than we are in our plant and equipment and country infrastructure ... but, I also think that the US was not going to get much more share of a fixed global pie. Investing in others (a bit like spending on R&D or adding new sales channels), and helping to maybe double or triple the global economy over the next 20-25 years, so that there is more available market to go after, could prove prescient. However, the US companies need to be aggressive at building relationships and a market presence in these growing economies, we have got to become even better global traders.

Perhaps having a 50% share of a 100 unit equivalent global market may prove to be less valuable than a 30% share of a 200 unit equivalent market. Of course, ending up losing half of your share of the current market and gaining minimal share of an emerging new growth economy, is not a good scenario either.

If we aren't willing to let small market economies grow and compete and even import to us, the biggest world market, that global pie size may never grow significantly.

It sure is complicated, there are few rules, some untread paths, no guarantees, opportunities abounding for growth, risks permeating for disaster ... then again, seems like a typical day in the office.

Really something to think about, and like he mentions, it can be a bit scary.  How much can Lean help a mature operation, especially when compared with an operation designed with Lean in mind?

You may have also noticed a few sideline comments on Lean and "other manufacturing best practices."  This is really the root of our ongoing discussion... can there be best practices that aren't part of, or even contract, Lean?  But more on that in a future post.

Comments

[Bill Waddell]

Comment #1
I was in a plant in southern China a few years ago and came across a sight that has stayed with me ever since. There was a young guy sitting in front of a small, old stamping press. It literally had a manual feed - the guy was using his hands to pull steel from a coil hanging on a wooden rack and positioning it under the tool, then bringing the press down with a foot pedal. There were no safety guards, no feed mechanisms - nothing. Just a 40 year old stamping press chunking out small parts. Not more than forty feet away was a brand new, state of the art, fully automated RAM EDM machine - $400K at the very least. After seeing these two pieces of equipment almost side by side in the same plant I was struck by the fact that the Chinese are very, very good at using the appropriate level of technology for the job. American plants I know tend to be either over-automated or under-automated. The trick is to use just the right amount of technology, as the Chinese seem to do so well.

Observation #2
Roger Smith spent billions at GM for automation - all for naught. Investment and lean are, in fact, closely tied. Investing solely for the sake of reducing direct labor costs, as American manufacturers have done for years does not accomplish much. Our engineers have to be unleashed to invest in technology that improves quality and reduces cycle time. Investments in flexibility are very much in keeping with lean manufacturing. Investing in labor saving robots is the same old ineffective approach that has proven not to work.

[John Collins]

The U.S. automotive industry demonstrates this issue as well: very efficient, lean manufacturing making vehicles using an outmoded business model. They are finding it difficult to lowe rtheir costs another 25% to match offshore competition but persist in continuing to use "efficient mass production" methods instead of flexible, highly responsive operating systems that leverage the proximity-to-market advantages they currently enjoy. There's too much inventory in the current operating system and the discounts and rebates to sell the inventory are killing the profitability of a large number of tier I suppliers. Being lean in the wrong operating system is a recipe for disaster. The example of the steel industry is a good one. So is furniture, textiles, automotives, the list can go on.