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This
Week’s Topic:
Lean Enterprise - China Set To Become Manufacturing Leader
A number of news services have reported this week that China will overtake the United States as the leader in production of manufactured goods.
As Lean Manufacturing Consultants to worldwide companies we are not so naive or xenophobic to believe that every product should be made in the US or even North America. There are many valid reasons for worldwide manufacturing including:
- Products with substantial foreign markets are often most efficiently served by local or regional production facilities.
- Certain parts of the world have unique economic advantages due to the proximity of raw materials, specialized skills and developed infrastructure.
- Products with short shelf lives or some that are make to order cannot tolerate long lead times that result from complicated transportation networks.
- Sometimes other countries just plain out-produce the United States. (Despite all the structural problems with the French economic system, they still manage to set the standard for fine wine.)
- There is a moral argument that companies which want to sell products in a country have some level of responsibility to provide jobs so the population can afford to buy. This is not unlike Henry Ford’s approach that if he was going to build a car for the middle class, there needed to be a middle class able to afford them. As a result, he paid rather generous wages for his era.
- And, of course there is the 300 pound gorilla in the room: Whether we like it or not, the substantial difference in wages makes it uneconomical to manufacture many labor intensive products in the US. Although wage rates in developing countries such as China are growing quickly, it will take many years or decades to equalize with the west.
As a result, we encourage world-wide operations when they are established for valid reasons. Certainly, as Lean consultants we have seen outstanding manufacturing facilities in many countries and we respect well run operations wherever they are found.
But there are also many poor reasons for manufacturing to leave North America. The most misguided one is chasing the lowest world-wide wage rate to cover-up ineffective business practices.
Consider a company that has allowed its business practices, not just its production practices, to become substantially less efficient than its competitors. The lure of quickly lowering costs by moving manufacturing to a low labor rate region of the world becomes a tempting option – particularly when the alternative is the hard work of re-engineering the business to eliminate waste and non-valued added tasks.
Of course this seemingly simple option seldom turns out well. Many companies vastly underestimate the added complexity of global supply chain management, maintaining quality, and establishing effective communications and control across many times zones and cultures. (Sign up for our related articles Offshore Outsourcing: Make Sure It's Worth It! and
Lean Manufacturing Can Save American Manufacturing.)
An even bigger problem for companies that try to overcome ineffective processes with low cost labor is they fail to realize their competitors can also relocate. And once their competition has also lowered costs an inefficient firm finds itself back at a disadvantage and the cycle can repeat itself. Firms that are forced to play that game have moved operations from high wage areas of the US to low wage areas, then to Mexico, then to Korea, then to China, and are now searching for the next untapped low cost region.
Once again, let us stress that there are some legitimate reasons for developing world-wide operations. Many companies are expanding their non-US business for some of the valid reasons listed above. But those that only try to hide waste and inefficiency are just postponing the need to step-up to their underlying problems.
Of course, the real answer to beating the competition is the hard work of defining value streams, identifying waste, eliminating non value added activity, systematically implementing Lean Six Sigma tools and developing Lean supply chain management. Most people reading this column understand that a high percentage of the activity in any company is non value added. How many of these organizations would be better off by focusing their efforts on eliminating the waste instead of chasing lower wages rates around the globe?
In an interesting commentary, Peter Marsh of the Financial Times noted that if China displaces the United States it will regain that position which it had for 1500 years prior to the 1850’s. From a historical perspective, Mr. Marsh may be correct. However, as a Lean Manufacturing consultant it’s hard to watch America’s competitive edge slip away when Lean Six Sigma techniques could save much of it.
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