Evolving Excellence

Leaving Oz for Kansas Technology

Lately we've been telling you about all the companies that are waking up to the unexpected costs of outsourcing, especially due to rising fuel costs increasing the cost of shipping, and are returning operations back to North America. 

The rising cost of shipping everything from industrial-pump parts to lawn-mower batteries to living-room sofas is forcing some manufacturers to bring production back to North America and freeze plans to send even more work overseas.

But fuel costs aren't the only reason.

There’s no place like home. Dorothy Gale learned this valuable lesson at the end of the timeless film classic, The Wizard of Oz, as she returns to her Kansas farmhouse from the magical land of witches, talking apple trees and munchkins.

Molding service providers see business booming as more device firms move overseas work back to their homeland and benefit from increasingly sophisticated technology offerings here.  One of the ways molding companies are containing costs and maintaining quality in their products is by cutting back on the amount of work that is outsourced overseas.

Containing costs by cutting back on outsourcing.  What a concept!

 

It's Global, Baby

Let's review some recent statements on the manufacturing economy:

Now many exporters and workshops here have shut their doors. Others, their work floors partly idle, are cutting costs. Some of the migrant workers who came here for jobs are returning home.

Manufacturers say their profits have dwindled as they pay out more for raw materials and energy.

Companies say the government's tougher protection for workers and the environment has made it more expensive to do business.

Pretty dire, eh?  If only we'd stop outsourcing to China and sending jobs overseas to chase cheap labor, right?

Except it is China.

China's strengthening currency has made Honghe's products more expensive for important markets such as the U.S., where the price of Chinese goods surged a record 4.6% in May from the previous year, according to the U.S. Commerce Department. Foreign buyers, used to inexpensive Chinese products and nervous about economic weakness at home, are often refusing to pay more.

China, of course, is sure to remain an export powerhouse for many years. Export figures from China remain strong because the country also supplies industrial machinery and other higher-value products that are less vulnerable to factors such as rising wages.

There is still a real, valid reason for moving manufacturing to China.  Yes, I really said that.

China's domestic market of 1.3 billion people is attractive for companies that want to both export and sell within China.

But many other companies, even after being stung by the rising costs of doing business in China, still don't get it.

With rising costs weakening China's appeal as a manufacturing location, some 17% said they would shift at least some operations to other low-cost countries, like India and Vietnam.

Let the globetrotting begin. 

Too Bad, So Sad

I guess you could say the lemmings are coming home to roost, or some such disjointed metaphor.  A few weeks ago we told you how high fuel costs are driving some outsourcers to return to North America, where they now have to compete with companies that focused inward and reduced costs to be globally competitive.  Now comes another story along similar lines, except the outsourcers are a bit more panicked.

China's cost advantage is being eroded by soaring oil prices, rising wages and an appreciating currency. Canadian companies that outsource their manufacturing to China are already feeling the pinch and some are even bringing production closer to home.

Such as,

Levon Afeyan flew to China this week to find out the answer to these questions for his mid-size Montreal company. He's the president of Seatply Products Inc., a manufacturer of molded plywood for use in commercial seating.

About half of Seatply's products originate in China and Malaysia and he's becoming increasingly uneasy about soaring freight costs that have seen the price of a shipping a standard container from China hit as much as $6,000  from $4,000 a year ago.

"People are taking a second look at everything because the costs are becoming prohibitive," said Afeyan, whose company's efforts to cut costs through lean manufacturing techniques were featured in The Gazette in 2006. "It goes right to the bottom line."

On his trip, Afeyan will try to get price concessions from his Asian suppliers to help cover his rocketing freight costs.

Sorry Mr. Afeyan, I'm not overly sympathetic.  I dug up that article from 2006 and it talks about all kinds of lean manufacturing efforts, but all focused on machines and layouts.  People are still referred to as "costs" and while you were implementing lean you were laying off and spending decent sums training new people at outsourced operations in Malaysia.  Like most companies that try to implement lean, it appears that the second pillar, respect for people, was forgotten.  Therefore most of the potential benefit was lost.

Jayson Myers, president of Canadian Manufacturers and Exporters, said the cost of producing goods in China has risen 30 to 40 per cent for many Canadian companies over the last couple of years.

"A lot of Canadian manufacturers are going to have to reassess their outsourcing strategies," Myers said. "What we may be seeing for some industries and companies is a contraction of supply chains back to North America."

But Myers added many companies will just have to find ways of absorbing the cost increases because they have no immediate alternative to Asian factories. That's a bitter pill to swallow at a time when raw material prices are also soaring and the economy is slowing.

"There's been a rapid swing in prices around the world," he said. "When you're a business, you can't move that quickly."

Which is fundamentally why chasing cheap labor around the world just creates more cost in the long term.  Hindsight is 20:20, but still provides a lesson.  What would have happened... and what could happen... if you just focus on radically improving existing domestic factories?  You might not be in such a pickle.

The Dreamliner Follies Continue

Today's NYTimes unknowingly threw into stark relief the consequences of the different paths taken by Boeing and Brazil's Embraer. Boeing, of course, claims that the outsourcing of the 787 Dreamliner is the epitome of lean manufacturing, even when its many problems point clearly to the folly of  off creating a complex, globe-girdling supply chain. (This blog has covered the 787 fiasco many times.  Read all about it here.)

The latest news, in what has become a grimly comical production saga, is the possibility of further delays due to fuselage damage:

Boeing, already facing a delay of at least 14 months on its new 787 Dreamliner aircraft, has not yet determined if damage to the fourth of six test planes will have an effect on the full program.

The midbody fuselage section built by Global Aeronautica, a Boeing venture with Alenia North America, a unit of Finmeccanica, was damaged in Charleston, S.C., “by an Alenia employee not following proper work procedures,” a Boeing spokeswoman, Yvonne Leach, said Monday night.

You can't blame Boeing for all problems, of course.  They're inevitable, especially when building something as complicated as a plane with an entirely new structure. But it's significant that this particular error occurred with a part that had been outsourced to another company, not at Boeing itself. And although the NYTimes doesn't use lean terminology, "proper work procedures" sure sounds a lot like standard work to me.

Ironically, Boeing can't even determine the ramifications of the damage, because the part hadn't yet been shipped to Everett, where final assembly occurs. So in addition to the waste of rework, there's the waste of waiting, as they twiddle their thumbs before they can determine what course of action to take next.

The newspaper also ran an article on Brazil's challenge in finding enough skilled, educated workers -- particularly engineers. Embraer, which builds private and commercial jets that seat from six to 122 people, is one of the companies that has created its own specialized engineering program:

In 2001, company directors realized that with only three Brazilian universities offering courses in aeronautical engineering there would not be enough graduates available to help them design, build and sell planes in a rapidly growing market. So the company created a program that selects the country’s best engineering graduates and puts them through an 18-month specialization course.

They already have a base in disciplines like electronics, mechanics or design. In Embraer’s classrooms, overlooking a shop floor scattered with fuselages, they learn the skills that will help them become aeronautical engineers.

Júlio Franco, executive vice president for organizational development and personnel, said the company spends $45,000 training each student.

The results? Embraer has doubled in size since the start of the decade and currently has orders in excess of $20 billion. It expects to deliver nearly 200 aircraft to clients this year.

Okay, $20 billion is small potatoes compared to Boeing. But maybe some of the workers that Boeing laid off in years past, and who couldn't find work when Boeing farmed out the Dreamliner, could find some work with Embraer.

Welcome Home and Good Luck

Who would have thunk it.  For years we've been deriding the simple-minded companies that chase low labor costs around the globe under the mistaken traditional accounting-driven assumption that labor was a significant cost.  For years we've been pounding on companies for thinking that labor was just a cost, and not an asset comprised of the experience, creativity, and knowledge of the employees.  And lately we've even been talking about how those labor and facility costs are increasing rapidly in offshore havens like China, not to mention the cost of quality issues.

Leave it to something traditional, rising fuel costs, to be the two-by-four that knocks the outsourcing blinders off the heads of myopic company executives.  Front page, today, in the Wall Street Journal.

The rising cost of shipping everything from industrial-pump parts to lawn-mower batteries to living-room sofas is forcing some manufacturers to bring production back to North America and freeze plans to send even more work overseas.

Hurrah!  Finally.  Just sad that it took this long, and a traditional accounting metric, to open some eyes.

"My cost of getting a shipping container here from China just keeps going up -- and I don't see any end in sight," says Claude Hayes, president of the retail heating division at DESA LLC. He says that cost has jumped about 15%, to about $5,300, since January and is set to increase again next month to $5,600.

The company recently moved most of its production back to Bowling Green, Ky., from China.  Mr. Hayes says the company was lucky to have held onto its manufacturing machinery.

Yes it was lucky... perhaps.  Who will run the machinery?  New trainees?  What happened to the people, probably with decades of experience, who used to run it?  What will be the cost to retrain and over the next many years regain the knowledge and creativity assets?

They should have thought about that long ago when they decided to move production to China.  What would have happened if instead of trying to immediately capture a few bucks of savings on labor (offset by how much cash spent on inventory riding the high seas?) they had leveraged the knowledge of their employees to streamline operations using lean manufacturing methods?  It might have saved some nightmares today.

Don't get me wrong.  This is a good story.  It's always a good thing when companies wake up and realize it's better to be closer to their markets, even if it took the wrong reason to stimulate the decision.  However these companies still have a tough road ahead of them.  They've been counting on the crutch of cheap labor, and now it is gone.  Now they will have to compete with the companies that did not blindly chase low cost labor but instead focused on reducing the waste in their processes.

It won't be easy bringing all the production back.

Already congested domestic transportation systems may have difficulty handling a sudden upswing in demand from manufacturers buying and moving more raw materials and other supplies over U.S. rails and highways.

Welcome home.  Good luck competing with the more enlightened companies that stuck it out and improved internally.  You'll need it.

Painting a Clearer Picture

Sometimes the US – China relationship seems more like a Monet than a Rembrandt. The impression (no pun intended) that is most commonly portrayed is that China is stealing US jobs. However, the reality (pun intended) may not be so clear cut. Take for instance the following quote from the Wall Street Journal:

“Few politicians talk about it, but 406 out of 435 Congressional districts have seen triple-digit export growth to China from 2000-2007.”

That is pretty substantial growth in all but 29 of the Congressional districts. Some speculate that over the next few years that may increase as a result of the recent and tragic disasters in the Sichuan province.

“U.S. exports to China are growing five times faster than any other export market. This is less a function of the falling dollar and more of rising Chinese demand for U.S. products.”

Why the interest in the US? Doesn’t China have the capability to manufacture everything on its own?

“Put simply, they need what we make – from chemicals and components to turbines and telecommunications, from drugs and medical devices to sewage and sanitation equipment. If a product requires modern technology and precise engineering, chances are, China needs it.”

I guess that has to make the US feel good. Everyone likes to feel needed and US manufacturing is definitely needed. So don’t believe everything negative you hear about US manufacturing and the US economy.

“If the International Monetary Fund is right and the U.S. economy is slipping into a recession that will ripple out into the global economy, then that ripple will stop at China's shore. China's demand will help absorb the shock of our solvency crisis.”

So the reality is that we may have a friend in China.

Woes of Dream Factories

Flight Global has become one of my favorite online reads, not just because I spend an inordinate amount of time in the air, but also because it has some great in-depth reporting on the operations and manufacturing side of aircraft.  Over the past couple weeks they've detailed the headaches of the past year for Boeing's 787 Dreamliner program and the similar ongoing delays for the Airbus A380.  I guess their audience of predominantly pilots are also tech geeks and like manufacturing, as they just dived into the factory side of the 787 supply chain.

Far from the 787 final assembly line, two facilities in north Charleston, South Carolina were established to manufacture and integrate fuselage barrels for the Dreamliner. 

The Vought plant fabricates the two aft barrels of the fuselage, Sections 47 and 48. Next door, Global Aeronautica integrates structural sections from Japan and Italy. Alenia delivers sections 44 and 46 from Grottaglie, Italy, while Fuji and Kawasaki Heavy Industries deliver Section 43 and Section 45/11, the centre wing box and main landing gear wheel well. The four sections are joined, stuffed with systems, wiring and ducting then shipped to Everett.

That's a chunk of airplane, "far from the 787 final assembly line," which then needs to somehow get to Everett on that neat trick of supply "innovation" called the Dreamlifter.  If only it was assembled next door to Everett like in the old days, using those 20,000+ Boeing employees that were laid off several years ago...   But let's move on.

Each site was designed as an ultra-lean facility with a highly trained staff capable of signing off on the airworthiness of their own work. Boeing saw this as the next generation of aerospace manufacturing teams of "super mechanics" would build the 787. Each "super mechanic" would hold multiple manufacturing certifications to expedite the production process to build a greater degree of quality assurance directly into the integration of the aircraft.

 

But rather than a highly trained staff, Global Aeronautica and Vought were peopled by mechanics whose expertise lay outside aerospace. One Boeing veteran says that some staff had no manufacturing background.  The skills that staff brought to the 787 were not applicable to building aircraft. "The folks working on the floor say if we can build a fire truck or a fork lift, we can build an aircraft," says a veteran Boeing engineer in Charleston. "It doesn't work that way. It's an aerospace state of mind, and it isn't here."

Lack of expertise among the workforce caused quality workmanship to suffer, resulting in time-consuming fixes that had to be completed in Charleston, delaying delivery or slowing final assembly.

Using highly-trained staff to self-check work is definitely along lean lines, compared to the old method of using the cheapest pair of hands available and then inspecting, reworking, and reinspecting by a series of QA gates.  But "ultra lean"...?  I have no idea what that means, especially in a world of supply chain nonsense populated by Dreamlifters.  They couldn't find people with aerospace experience?  I bet there are a few thousand around Everett...  But once again, let's move on.

Global Aeronautica built in "locked steps" for assembly that must be completed before future milestones can take place. As the centre fuselage sections transition through the assembly process, each centre section must pass through assembly "cells". The first cell is where structural sections are joined and aligned and the second cell is for continued assembly and early installation of wiring and insulation.  These "locked steps' prevented the centre fuselage from being moved between assembly cells unless a certain percentage of fasteners are installed.

Cells are nice.  "Locked steps" (presumably "one piece flow" in the non- "ultra lean" world), are good.  But I'd really prefer if ALL the fasteners were installed.  I hope someone remembers to check that before I take my first ride in a 787.  But there's more!  And you don't even need to buy some ginzu knives!

During the 10 October delay announcement, Scott Carson said: "I like the Charleston factory. I like having it next to Vought. We like having Vought as a partner. If there's a lesson learned, it might be you'd start earlier and do a little more training, perhaps with our people there. But there's no fundamental flaw in Charleston."

Except that it is three thousand miles away from the final assembly operation, and three thousand miles away from thousands of people with aerospace experience.  Nothing fundamental.

Wisconsin Outsmarts China... for Now

Just last weekend we told you how Michigan was doing everything in its power to drive the few remaining manufacturers out of the state.  Would the last cell leader to leave please turn off the andon light?  We mentioned off-hand that they should be looking next door to Wisconsin to learn how to grow business, and now we have more evidence why.

Many manufacturers in southeastern Wisconsin are not only dealing with global competition, but they are they’re beating it. Select manufacturers in old-line industries such as investment casting, injection molding, precision machining and tool-and-die making are routinely taking business away from their Chinese competitors.

Good for them.  How are they doing it?

To effectively compete, many Wisconsin manufacturers have transformed their operating models using the principles of lean manufacturing, automation, quality assurance and control, just-in-time delivery, innovation and technology, said Mike Klosinski, executive director of the Wisconsin Manufacturing Extension Partnership (WMEP), a private, nonprofit organization dedicated to the growth and success of Wisconsin manufacturers.

“Many Wisconsin manufacturers have not sat still (in recent) years,” Klosinski said. “Putting in place lean (principles) has been the biggest strategy. And by taking on more services around their product, understanding their customers’ customers and being more innovative and creative about developing new products, they’ve turned into value suppliers. As a result, those companies’ large customers are electing to source with someone they can trust instead of sourcing overseas.”

An example?

Signicast [investment castings] has seen significant work increases, said Robery Schuemann, executive vice president. And much of that work is coming back from China.

“We are definitely feeling the boomerang effect,” Schuemann said. “The playing field is changing. Many of the rebates given to Chinese manufacturers have been taken away. The yuan (the Chinese dollar) has gone up, and labor costs have gone up there. You’re seeing the people that went there for price coming back for quality, delivery and price.”

Yes, price.  In the past companies have competed against supposedly lower-cost offshore manufacturers by promoting quick delivery and high quality.  Now thanks to rising foreign labor costs, a weaker dollar, and especially internal process improvements, you can compete on price from U.S. factories.

But now I'm going to shift gears and say this isn't that great of a story after all.  I do have one major drub against the various companies mentioned in the article: almost all of them have leveraged large amounts of automation.  Automation can be a good tool when applied properly, but it can also be dangerous in the long term.

Plastic Components Inc., a manufacturer of injection molded plastic components based in Germantown, competes directly with the Chinese and other emerging markets. The company produces components that are used in a wide variety of manufactured products and has customers around the globe. “We can go head-to-head with any molder in the universe with our universe,” said Thomas Duffey, president of Plastic Components.

“When we started the company in 1989, the concept was a fully automated plant. The idea was to take human involvement out, and taking cost and variability out.”

Ah yes, the dream of the "lights out" plant.  Companies have been chasing that concept for decades.  Some have woken up to the reality that it can't be done but still try to get as non-human as they can.  Humans, in their view, simply create "cost and variability."

Others, when they get their noses out of traditional P&L's and balance sheets, come to a different realization.  Humans actually add value.  Knowledge, experience, creativity, and ideas are worth something.  Processes and methods create variability, not necessarily humans.  And robots can simply "automate waste."

Last time I checked, a robot working in a lights out facility had never submitted an improvement suggestion.  Meanwhile a lot of Chinese workers, even with increasing labor rates, are working to improve their operations.  Who will be around in another ten years?

Nowhere To Run, Nowhere To Hide

Let's start right off with a quote from a recent news story.

Jim Issler, president and CEO of H.H. Brown, said the footwear industry is entering a new era, where cheaper labor will no longer be an alternative to raising wholesale prices. “It’s definitely a turning point in our industry and it’s not going to be solved easily,” he said. “We chased labor around the world. Now, we’re at the end of the maze and there is nowhere else to go.”

Funny it should be a footwear company that said that, as almost a couple years ago we predicted that would happen, using the phrase "time to strap on the sneakers again."  Chasing cheap labor can work for a while, but some competitors will be looking deeper into their organizations and creating change that saves more than cheaper labor ever can.  But this article tells a story of woe that goes beyond just rising labor costs, and basically indicts the entire offshore outsourcing mantra.

Many firms are bracing for steep increases in the costs of raw materials, labor, ocean freight and transportation. Skyrocketing petroleum prices, the weak dollar, new labor policies in China and increased competition for workers in the Guangdong region are all pinching the bottom lines of many companies.

Let's see... if you manufactured in the U.S. you could take advantage of the cheap dollar and significantly reduce transportation costs.  Which is why some foreign companies are outsourcing to America.  Now where are all the protectionists that want to erect artificial trade barriers?  In which direction?

Some companies expect the customer to just absorb the cost if their inherent inefficiency.

Skechers CEO Robert Greenberg said prices at Skechers could rise 3 percent to 8 percent. However, he won’t be looking for ways to substitute lower-cost materials. “We’re certainly not going to sacrifice our product just to make them cheaper,” he said. “[If the product is right] consumers will pay the prices and retailers will make more per pair.”

But perhaps the end of the cheap labor road is going to force some companies to see the light.

Wolverine is also reexamining its sourcing strategy and looking for savings wherever possible. “Competitively, we constantly have to try to find ways to do things better because it’s very difficult to pass it along to the consumer,” [President Ted Gedra] he said.

And some companies have already been working toward lean.  We told you about Nike's lean efforts in China just last month.  They aren't the only ones.

Adidas AG CFO Robin Stalker said the company was well situated. “We believe we are extremely well positioned competitively, vis-à-vis our competitors, in terms of lean manufacturing and engineering of our product."

Nike likewise said its efficiencies would mitigate cost increases. “Continued progress on gross margin initiatives and favorable selling currencies more than offset the impact of sourcing cost pressures such as higher oil prices, labor rates and stronger Asian currencies,” said VP and CFO Donald Blair.

I never thought I'd sound like a pompous diplomat and use the term "vis-à-vis" in this blog.  Oh well.  What's really sad is that the best option is completely outside the blinders of some of these execs.

While many footwear firms are tweaking sourcing plans for China, few plan to leave the country anytime soon.

“Going farther north may be an interim approach, but the reality is that as we see economies changing in China, it’s what the future is going to be, and we’re going to have to adapt as an industry,” said [Deckers exec Pat] Devaney. “Everybody has looked at India and talked about India, but there isn’t an infrastructure of support there to make it more cost effective. Yes, they make shoes and there are leather suppliers, but it’s not up to where it needs to be.”

At H.H. Brown, Issler said the economics of relocating manufacturing to India and Vietnam wouldn’t likely yield any significant savings.

[Sketchers CEO Robert] Greenberg agreed. “There is no moving to another country,” he said. “People talk about India, but that is light years away. There’s nowhere to hide anymore.”

Why hide?  Instead of devoting so much energy to finding the next cheap labor outpost in Timbuktu, setting up a new factory, training new people, enduring initial quality problems, and then doing it all over when labor inflation ruins your business model (again)... why don't you look internally to drive process efficiency?  You might find and remove so much waste that you could be competitive from North American factories.

New Balance and Allen-Edmonds do it.  Why can't you?

Aircraft Outsourcing Problems - With a Twist

When we talk about outsourcing problems we're generally referring to U.S. companies having problems with product outsourced to China.  When we talk more specifically about aircraft companies that are experiencing outsourcing problems, we are generally referring to the likes of Boeing's 787 nightmare, the Airbus A380, or the duel between Boeing and Northrop/Airbus for the U.S. Air Force tanker deal. 

Not this time.  Now we have the story of a Chinese aircraft manufacturer having problems with components outsourced to the United States.  Go figure.  Thanks to regular reader Peter for finding and helping translate this article from the Danish newspaper, The Engineer.

China's first commercial jet is delayed for at least six months.  China has been hit by delays at US subcontractors, and the first test flight with a regional passenger jet has been delayed until autumn.

Last year we told you about China's effort to develop its own passenger jet, and our point was that Boeing's outsourcing efforts were at least partly responsible for transferring the required knowledge... thereby creating a future competitor.  And so it has come to pass, although in reality it will still be a while before AVIC earns the reliability record required to be globally competitive.

The jet bears the official name ARJ21-700. ARJ is an abbreviation for Advanced Regional Jet and -700 means that in the standard outfit it can hold about 70 passenger, although the amount can vary between 70 and 98 depending on the configuration.  ARJ-700 is China's first attempt of producing a commercial jet. It is going to pave the way for design and manufacturing of larger aircraft. At this point ACAC has received 171 orders for the aircraft, but more are under way.   

Until this friday the official plan from the manufacturer, ACAC (AVICI Commercial Aircraft Co., Ltd.), was that the first test flight would take place before the end of march. Now the premiere is delayed, for now until autumn.

And the delay is due to...

The Chinese have been hit by the exact same problems as the heavyweights in the business, American Boeing and European Airbus: The subcontractors have trouble delivering as promised.

While the jet is produced in China, many foreign - primarily American - subcontractors deliver control systems.  According to ACAC it is these control systems in particular, being supplied by Honeywell, Rockwell Collins and United Technologies, that have yet to be delivered for testing. This is because the Chinese documentation is missing, so says the ACAC spokesman Mr. Lou.

How's that for a twist of fate?  Amazing what happens when you wrap long supply chains around a smaller and smaller world.