Evolving Excellence

Fleeing China

It's been eighteen months since we predicted that companies chasing low labor costs to China would eventually have to strap on the sneakers and globetrot to another part of the world.  Perhaps we should have been oracles instead of bloggers.

Ahh... to be a world tourist.  Globetrotting from country to country in search of lower direct labor costs to help offset unrecognized internal process waste cost.  The first stop was Mexico, then on to Honduras or the Dominican Republic.  After a while there were too many gringos there as well, so how about a nice cruise over to Asia. China's pretty nice... lots of cheap labor... that should do just fine for a while.

No longer, as the latest issue of Business Week confirms our prediction.

Since then the [Guangdong] region has grown into the largest manufacturing base in the world for a host of industries, including electronics, shoes, toys, furniture, and lighting. The combination of low wages, minimal regulation, and a cheap currency was unbeatable. Now many of China's manufacturers—including Shan Hsing—are undergoing the kind of restructuring that tore through America's heartland a generation ago.

What's causing this?

A new Chinese labor law that took effect on Jan. 1 has significantly raised costs in an already tight labor market. Soaring commodity and energy prices, as well as Beijing's cancellation of preferential policies for exporters, have hammered manufacturers. The appreciation of the Chinese currency has shrunk already razor-thin margins, pushed thousands of manufacturers to the edge of bankruptcy, and threatened China's role as the preeminent exporter of low-priced goods.

And the impact?

Comprehensive statistics on shutdowns are hard to come by. But the Federation of Hong Kong Industries predicts that 10% of an estimated 60,000 to 70,000 Hong Kong-run factories in the Pearl River Delta will close this year. In the past 12 months, 150 factories making shoes or supplying shoemakers have closed in Dongguan, says the Asia Footwear Assn. More plants will disappear as demand slows: UBS analyst Jonathan Anderson expects overall export growth of just 5% or less for China this year.

5% export growth for China in 2008; that's less than what is predicted for the United States.  That should give the "China is stealing all our jobs" crowd something to chew on.  Actually probably not, as facts are usually irrelevant in that discussion.

Is the Chinese government going to do something about the crisis?  Nope, in fact they almost encourage it as a way to increase their industrial capability, similar to what Japan did in the 70s and 80s.

Chinese policymakers so far profess little concern. The closures are mainly hitting lower-value, labor-intensive exporters that pollute heavily and use energy inefficiently. Beijing now wants cleaner industries that produce higher-quality items for the local market, from cars and planes to biotech products and software. That emphasis not only helps boost domestic consumption—a key national goal—but also reduces frictions internationally from the ever-swelling trade surplus.

Which in itself should give the rest of the world something to be concerned about in the upcoming decade or two.  Is the next Toyota, the next competitive benchmark powerhouse, going to come from China?  Some multinationals are waking up to the new reality, but instead of focusing internally they are still chasing simple direct labor cost.

The bigger multinationals may be having second thoughts, too. A report by the American Chamber of Commerce in Shanghai found that more than half of foreign manufacturers in China believe the mainland is losing its competitive advantage over countries like Vietnam and India. Almost a fifth of the companies surveyed are considering relocating out of China. "The big story here is that globalization is for real—and China is no longer what it was," says Ronald Haddock, a vice-president at consultant Booz Allen Hamilton, which wrote the report.

No, the real story is the failure of many manufacturers to realize that internal process waste generally costs more than actual direct labor.  Especially when you account for the creative value of the experienced brains providing that labor. 

Therefore instead of chasing cheap labor around the world, continually investing in new factories and new supply chains while re-hiring inexperienced workers, wouldn't it make a lot more sense to look inward?  Figure out how to reduce internal waste and also leverage the knowledge, creativity, and experience of your employees.

Transtemporal Outsourcing

Sometimes my fellow bloggers have just a little too much time on their hands.  A hat tip to Tyler Cowen over at Marginal Revolution for this mind-bending speculation, which actually references an original post by Tyler again, who references a piece on interstellar travel by none other than Paul "Trust Me" Krugman.  Don't worry, you don't need to follow all of that.

Tyler Cowen considers the economics of time travel. Actually, he starts with the economics of interstellar travel, but if you take relativity seriously, it’s the same thing. Tyler is most interested in how time travel in the presence of time dilation would affect interest rates.

I’m more interested in the effect of time travel on migration and trade. If wages are expected to be higher in the future, then once the cost of time travel falls low enough, we can expect people to start migrating in large numbers into the future.

Ok, whatever.  But then he gets into the effect of time travel on outsourcing.

If backward time travel is also somehow possible, maybe firms in the future will choose to outsource some of their operations to the past, locating their manufacturing and other services in lower-wage time periods. This opens the possibility of transtemporal gains from trade... assuming, of course, that governments don’t implement effective trade barriers. Would America-3000 place tariffs on goods from America-2000? Would temporal nativists call for the construction of a time-wall to keep out the trans-temporal immigrants -- even if those immigrants were, in fact, their own ancestors?

And pretty soon we'd have a whole group of companies that chase low labor costs further and further back into time, preferring to deal with cavemen instead of looking inside their operations to remove costly waste and leverage the value of their employees.  But more on those types of companies tomorrow...

Survey: 3 Respondents Required

11:48am - My email software, configured to check email every 5 minutes, receives the following:

United Airlines - As one of our best customers, your opinion is always appreciated.  Please click on the following link to visit our survey.

11:49am - With nothing better to do for the moment, I immediately click on the link.  And I get the following:

Thank you for trying to participate in our survey.  However, the survey has achieved its desired number of completions.  Thank you for participating!

I don't think any further commentary is necessary.  If you're going to use a survey to better understand the opinions of your customers, at least be serious about it. 

Massachusetts' Manufacturing Conundrum

The jobs are leaving!  The jobs are leaving!  Sounds like something Paul Revere might once have uttered, or more likely he was too smart.  But that's the battle cry from Massachusetts, at least until they looked at all the facts.

Brian R. Gilmore, executive vice president at Associated Industries of Massachusetts, said more efficient production methods have the state’s manufacturers making the same amount of merchandise as 10 years ago, with 200,000 fewer manufacturing workers.

Massachusetts manufacturing exports exceeded $25 billion in 2007, a 47 percent increase over 2001, led by optical and medical instruments, electrical machinery and parts and pharmaceutical products.

Not too shabby, especially for a state like Massachusetts that isn't exactly the most friendly to business.   We've poked at the productivity question for years and came to the same conclusion: improvements in efficiency have led to far more job losses than companies that follow the lemmings to offshore locations in search of cheap labor.  That doesn't mean we don't have a responsibility to the employees displaced by productivity improvements.  In a perfect world businesses would leverage improved productivity to be more competitive, thereby increasing sales and absorbing displaced workers.  In the real world many companies rely on productivity improvements just to remain cost neutral with their competitors, and the top line stays flat.

Some companies are doing an exceptional job of looking inward and improving, as opposed to simply complaining about supposed competitive barriers.

During his talk at WPI, Mr. Healy cited Mar-Lee, Quabaug and Checkerboard Ltd. of West Boylston as manufacturers that have made changes to keep themselves competitive. Each company was a MassMEP client and used state workforce training grants to initiate lean manufacturing and develop strategic growth plans.

Let's take a deeper look at Mar-Lee.

John H. Gravelle, president and owner of Mar-Lee, said his company had many purchase order jobs as a custom molder in the late 1990s, but wasn’t making money. “We were struggling like other molders — lots of work, but no bottom line,” he said.

So they got to work and changed their organization for the new economy.

After analyzing the company’s strengths, he decided to abandon custom molding and get into packing and medical devices, which were not at such a high volume, but paid better. He required customers to contract for a set amount of product. Then, the company invested in technology and automation, and reduced its labor costs.

The changes appear to be working.

Mar-Lee had more than $20 million in sales last year, and revenue growth of 15 to 20 percent over the last few years.

Not too shabby.  Hats off to Mar-Lee.

Nike - Lean in China?

Nike has deservedly received a lot of flack for sweatshop factories, but it appears they are making major efforts to improve. In China alone they have a supply chain of almost 180 factories employing 210,000 people, making almost one out of every three pairs of Nike shoes.  Perhaps even more remarkable is how they are inoculating themselves against wage inflation by recognizing the value of people.

In Dongguan, a south China manufacturing town where the average shoe industry wage is Rmb960 ($145) a month, one of Nike’s largest contract factories now pays its workers Rmb1,472.  Such a differential should spell trouble in an industry where many are struggling with rising costs. But Yue Yuen Industrial is thriving – a fact that could hold lessons for manufacturers far beyond Dongguan and the Pearl River Delta region in southern Guangdong province.

Nike is beginning to understand the power of people, even along the lines of the "respect for people" second pillar of lean manufacturing.  For starters, they are reducing overtime to avoid burning out their employees.

Yue Yuen’s relatively dear labour costs, which are more than 50 per cent higher than the industry average, also mask productivity incentives. At most shoe factories in Dongguan, the average monthly wage is largely determined by working hours and overtime, often in excess of statutory limits. But at Yue Yuen, only about two-thirds of the average salary is attributable to hours worked. “If you have overtime problems you will also have quality and delivery issues,” says Hannah Jones, Nike’s vice-president for corporate responsibility.

The incentive program isn't based purely on unit output, but on a variety of continuous improvement metrics.

The remaining third of Yue Yuen’s average salary is derived from productivity and quality targets achieved by team-based assembly lines modelled on the “lean” manufacturing principles pioneered by Toyota. “[Workers] can’t hand off a bad piece [to another team member] and kiss it goodbye,” says Sonya Durkin-Jones, Nike’s compliance director for North Asia. Each of Nike’s lean manufacturing lines is branded with the acronym “NOS” – for the Latin novus ordo seclorum, or “a new order for the ages”. The phrase is also emblazoned on the back of US dollar bills, which perhaps explains how it came to be ingrained in Nike’s institutional memory.

The employees are being respected, rewarded for their brainpower in addition to their pair of hands.  Productivity isn't just a function of driving people to work harder, it's a function of how smart people work.  Companies invest considerable time in training new employees, and that investment needs to be recognized as part of the value of employees.

Yue Yuen’s wage premium pays for itself in terms of increased productivity and quality; another benefit is that the company faces fewer of the recruitment headaches afflicting cheaper rivals in an environment where the balance between demand and supply has swung in labour’s favour recently. “We have been constantly challenged by the environment – by all the overtime offered by some of our competitors,” says Johnson Tong, a manager at Pou Chen. “But workers want to make money, not [rack up] hours.”

“In this environment you want to reduce your turnover,” adds Ms Jones. “Time to market is much more of a driver for us. How do you achieve that if you are jumping from one factory to another? It’s not about chasing labour costs. It’s about stability and innovation.”

Exactly.  One last point: remember that this change in mindset is happening at Chinese factories which already have cheap (although inflating rather rapidly) labor costs.  To compete globally basic lean manufacturing is simply no longer enough; you must continually improve and push the envelope.

The Quandary of Sales Incentives

I’ve always questioned the efficacy of sales incentives.  Why are they needed?  Why does Sales get them and generally not Engineering, Manufacturing, Quality Assurance, and the like?  Is there truly a difference in how the different mentalities are driven? This has been a minor thorn in my side for a long time, but from different perspectives. 

Two decades ago when I was a pilot line engineer for a Fortune-20 medical device company, my roommate was a sales and marketing grunt for the same company.  “Grunt” is perhaps a bit rough, as although our ages were similar his job was not exactly in the trenches. You see, his sole responsibility was to identify and coordinate the location for the annual sales meeting.  Each Sunday evening as I began to contemplate another week of trying to figure out some product assembly defect or another, he was hopping on a plane to be lavishly wined and dined by yet another resort in places like Cancun or Hawaii.  Even “lavish” is an understatement… those resorts were hungry for meetings with hundreds of freewheeling sales guys on expense accounts, and my roommate returned with stories of suites and upgrades and lobster.  Every friggin’ week.  Tough job, eh?

All the hundreds of sales guys got a trip to some resort and the best got bonuses beyond my wildest dreams at the time.  Meanwhile I slaved away on the production floor hoping for a 3% raise.  If I did well I might get 4%, if I failed miserably I’d still probably get 2%.  What was the point?

Fast-forward about twenty years and a couple of companies, to when I took a big gamble with a couple other engineering and manufacturing guys.  We thought there would be a market for a wicked quick-turn high tech assembly operation, so we started a company.  Built on a lean foundation, using supplier and secondary op partnerships we had forged over several years we were ready to go.

But we needed sales.  How hard could that be?  Have some logo pens made up, make some phone calls, troll a couple shows.  Well after a while of realizing that didn’t work, and burning through quite a bit of cash, we decided to go out and pound on some doors.  No, no, no… and then a very rare “yes.”  Brutal.  But eventually we made enough money to pay our operators.  And after realizing that’s probably all it would be, we ended up selling the company to one of those few customers.

Sales, we realized, was tough tough business.  I hadn’t heard “no” that many times since I was a young single guy, and it was even more aggravating and depressing.  It takes a certain kind of personality to deal with that much rejection.

Fast forward again a few more years to now, when I’m running another company with multiple sites and a bunch of smart sales people who sell a very technology-intensive product.  I’ve seen sales from the outside, I’ve experienced sales directly, now I’m ultimately responsible for a sales force.  How should I motivate them?  Treat them like all other employees and expect them to meet goals but reward them when the teams and company does well?  Or have direct incentives?  It’s my quandary.

As a last point of reference, and what got me to thinking about this post, was last night here at my hotel on the Big Island.  A medium-sized company was having a rather lavish dinner for their “top 5% sales people.”  The praise was being piled on, cheers for sales numbers, and the mai tai’s were flowing.  I observed for quite a while, and determined the following: For starters, their salespeople were far more attractive than those at my company, perhaps because of a stark difference in gender balance.  I’ll have to do something about that, and perhaps it’s a goal for next year’s strategic plan.  But more importantly, these people looked like they had earned it.  One after another they took the mike to describe stories of long-fought sales conquests that stretched them, and their families, to the edge.  Weeks spent on the road just to hear “no.”  Losing a job when a mixup occurs at the factory.

One side note: be careful with what you say at these types of events.  This particular company happened to be one I do business with, and I was “intrigued” with their sales and profit numbers, and especially the growth.  I’ve already sent some emails back to my staff to take action.

So am I favorable toward commission-based sales?  No, not yet.  Sales is still part of the team like everyone else, and should be rewarded when their team and the company do well.  But the last several years has given me new and different perspectives on sales. But I still think my old roommate had a pretty cushy job.

If Only Boeing Still Had Employees

Hindsight can be 20:20, even if you don't know it.  Earlier this month a group of Boeing "officials" visited a Lexus dealership in Richmond, VA to see how the Toyota Production System works... at Toyota.

Changing the oil on a 2005 Lexus GX 470 is not quite the same as building a 306,500-pound 777 transatlantic airliner.  Yet that didn't stop a group of The Boeing Co. officials from visiting the Lexus of Richmond dealership yesterday to see efficiency practices firsthand.

Then comes the delusion part.

The aerospace manufacturer and the Chesterfield County car dealer practice the Toyota Production System, a bottom-up management philosophy.

In reality, Toyota practices TPS but Boeing practices a few of the tools.  As apparent from the tens of thousands of workers they've laid off... with their knowledge, experience, creativity and ideas... Boeing has no concept of the "respect for people" second pillar of lean manufacturing.  This is why we continually rant on the company, while at the same time admiring their gambles with leading edge technology and hoping they pull if off.

But maybe I should give them more credit.  Perhaps they are recognizing this, which is why they are visiting Lexus in the first place.  As the article's subtitle states,

Boeing officials visit local Lexus dealership to see system that involves workers in decisions.

And they did get to witness how employees are the core of the organization.

Employees in companies that practice the process are involved in decision making. Meeting customer needs drives production and sales goals. David M. Watts, vice president and director of fixed operations at Lexus of Richmond, walked the officials through the dealership and showed how the dealer had applied employee ideas and suggestions. From parking a row of cars used for test drives in easy view of the showroom to car-wash protocol, Watts said, each procedure was designed to make the job easier and the customer happier.

It remains to be seen if Boeing learned something from the experience.

While Boeing builds planes inside a 98-acre factory in Everett, Wash., and the Lexus dealership operates from a 15-acre lot shared with Whitlow Chevrolet in Midlothian, the goals are similar, said Douglas A. Crabb of Boeing's Lean Benchmarking & Collaboration, Lean Enterprise Office.

"We have to make sure our employees feel they are a part of the process, because they are the ones that know best what goes into a job and what it takes to work the best way," Crabb said.  He said the company has changed several of its parts-making processes to ease the burden on individual employees.

Too bad tens of thousands no longer have an opportunity to be part of the process, perhaps because in Boeing's eyes "easing the burden on individual employees" means moving the job overseas.

Don't Forget Rule #1

There are a small number of cardinal rules for an effective lean transformation.  One of them is "lean initiatives will not result in laying off people."  There's a reason for this: real lean requires the knowledge, creativity, ideas, and commitment of the entire workforce.  People are no longer just a set of hands bought for a few bucks an hour.  They hold value in their brains.  Yes, lean dramatically improves efficiency which results in a requirement for fewer people... but if it is done right it also creates a competitive advantage that increases sales which then employs those people... and hopefully more.

It was from this frame of reference that I was just about to jump all over Sauder Woodworking, which just announced that 80 jobs would be going away.

About 80 jobs are planned to be cut from ready-to-assemble manufacturer Sauder Woodworking later this year in an accort to streamline company production.  The company plans to focus on its core customers; eliminate slow selling and niche items; and transform the operation into a "lean enterprise", which will mean some restructuring in its management and staff areas, resulting in 70-80 positions being eliminated plus a number of internal transfers and reassignments.

I despise seeing "lean" and "positions being eliminated" in the same article.  It simply doesn't have to happen.  Yes the furniture business is fighting incredible competitive pressure from abroad.  But as we mentioned last year, there are several furniture companies that are looking inward to improve instead of just whining and complaining. 

So I also need to give Sauder credit.  Instead of capitulating and closing or offshoring, they are trying to make things work.  They are willing to transform their business and know that the top line may suffer in the interim.

Sauder's new sustainable business plan involves three components: customer portfolio, product portfolio, and business simplification.  Production levels have remained steady in the first quarter of 2008 and sales are up slightly over 2007. With this new strategy and the sluggish economy, Sauder anticipates some reduction in overall production levels in the last half of 2008.

If sales are up and production levels are steady, presumably that means that the bottom line is already growing.  So why didn't I jump on Sauder concerning the elimination of 80 jobs?  Because they are managing it instead of whacking heads.

While the overall employee count will decrease to align with production requirements, Sauder anticipates that most of the downsizing will be covered through the normal rate of employee turnover and Sauder's use of temporary employees.

Hopefully this was communicated to the workforce.  But I also wish they'd have the guts to take the next step: drive home the competitive advantage that real lean will give them so they can grow the company enough to keep those 80 positions, even if attrition means they're different people. 

Who knows... if the company is growing and respecting people as part of its lean transformation, perhaps those people, and their knowledge and experience, won't want to leave after all. 

Last Year a Day, This Year 30 Minutes

Regular readers may recall that last July a combination of several factors drove me to take a last minute vacation to Maui.  Actually not quite last minute... I planned it about 24 hours in advance.  Coincidentally it was at that time that I introduced co-author Craig Woll, along with Paris Hilton and Oprah.

Craig has generously written several posts this past week while I've been buried in a myriad of operational, customer, pricing, and personal issues.   So buried that when my head resurfaced yesterday it was literally spinning and simply could not focus.  Not a good sign.  Since my wife had just left for a 9-day medical relief mission to Nicaragua, I thought perhaps I should go somewhere for a few days of R&R.  So I started looking... and found a decent deal on airfare, hotel, and car. 

Leaving in two hours.

Which meant I had an hour to pack and get to the airport... a half hour drive away.  A half hour.  Could it be done?  Well, think about what needs to be packed for five days at a hotel on the Big Island of Hawaii.  Uh... swimsuit, shorts, and a few shirts.  Five minutes later I was done, leaving time to arrange for someone to give the cat her insulin shots, stop the paper, and shoot a quick email to some friends and co-workers.   Seven hours later, including a connection in SFO, I was landing in Kona.  Eight hours after thinking perhaps I needed to go somewhere, I was feeling the warm sand between my white toes. 

I don't know about you, but to me there is something special about the ocean, and especially an ocean that surrounds an island, and especially a Pacific island.  Somehow it immediately sucks the stress out of me, recalibrates me, and helps me regain my true north.   It's as if the ocean is saying "even when you think life sucks, life definitely does not suck, so get over it."  Or perhaps it's the smell of ginger and hibiscus, the sound of the wind through the palms and the gentle waves on the beach, or most likely a couple of unusually strong margaritas.  Now you understand this meandering post.  You ain't seen nothing yet...

But let me take a lame stab at something that might be of at least oblique interest to our readers.  Just in time.  We know the value that JIT creates for lean manufacturing operations and many other aspects of the extended lean enterprise.  Less inventory, less risk of error, quick response to customer demand.

Is there an analogous value in "just in time vacations?"  I propose there is.  From a mental standpoint, there is something liberating and exhilarating with a last minute vacation.  Especially when it is truly last minute, and in a few hours you are literally on the other side of the globe.  You can't spend weeks agonizing and over-planning what to wear and what to take.  You are forced to think very quickly and methodically.  Waste is not created.  Less is taken instead of more, knowing that if you really need it you can buy it (albeit for a rather inflated price).

Most of us have witnessed a similar principle in manufacturing.  Not "traditional" planned JIT, but unexpected "forced" JIT.  The JIT that happens when your most important customer calls and desperately needs you to make some product and ship it... today.  Not after the three weeks of your standard lead time, which you are already proud of because it is down from nine weeks only a year ago.

And since they are your most important customer, you do it.  Somehow you move mountains and part seas.  There may be a few bodies along the side of the road, but you get the product out and your company has just created even more value from the perspective of the customer.   Most of us have been there, done that.  But how many of us take a time out afterwards to learn instead of just to recover?  Learn how we can do one day turns each and every day, to every customer?  Imagine the value that could create.  I know a company that did that, began charging double for one day turns, and a year later over 60% of their business is quick turn.  That's a chunk 'o change straight to the bottom line.

But wait a minute... I'm supposed to be on vacation.  Time for another margarita. 

Standard Work, Safety, and Audits

One of the problems we consistently run into in our factories is the deviation from standard work by our equipment technicians. I don’t think the problem is all that unusual. The technician feels that he/she has a better way to do the work and begins doing it. This occurs across shifts and at that point the various shifts begin showing deviations from the standard. The supervisors and managers are busy putting out fires throughout the factory and are unaware of the deviation for some time. Sound familiar?

In the Toyota Culture book pages 273-274 Liker and Hoseus discuss the Toyota model for standard work. One thing that was mentioned was the safety risks associated with deviating from standard work. Especially if the standard work has taken into account ergonomic factors.

A second area that interested me was the audit process that Toyota uses to ensure that standard work is being followed.

At Toyota it is expected that team leaders, group leaders, and even assistant managers audit jobs daily. In the group leader’s domain of about 20 team members, one job per day is observed so each job is observed each month.

One area that has been a constant struggle has been the accountability to follow standard work. The auditor at Toyota uses the standard work sheet and sometimes the job breakdown sheet to perform the audit. They then take note of any deviation from the standard. The deviations lead to either coaching or change in the physical setup of the work.

I like the fact that Toyota respects people by holding them accountable. All too often we are tempted to say we respect someone’s work but then we never show any interest in it. How long does a standard get followed if nobody is watching? How often do the improvements get documented and standard work updated if nobody cares?