Change Leadership

PRD Labor Costs Rising: Run Away, Run Away!!! Not so fast.

2
July 9, 2010
by David

Once again, the sky in the PRD seems to be falling.  The breathless reporting about labor issues in China  once again lays bare the western media’s propensity for myopia and mis-focus when it comes to reporting on China.  But this time I can’t just blame the media… lots of people who actually manage facilities here are bitching and moaning about rising labor costs and worker empowerment, describing it as an an existential threat, which for most of us, it is not.

OK, for some at the very low-end of manufacturing in the Pearl River Delta, maybe it will force a change in strategy or location, but not for all.  Actually, not for most.  Sure, if labor accounts for a large portion of your overall manufacturing costs and if there are places (like Vietnam) where manufacturing the same products are done much cheaper, then you are probably in the wrong business and/or the wrong industrial environment.  But for most in this situation, the writing has been on the wall for a long time, and the recent labor cost increases are no shock.   In fact, if you run one of of those facilities, you are probably already operating outside of the Pearl River Delta, or are planning to move.

But for those of us who have not packed up and gone home (or elsewhere) the Pearl River Delta’s shifting  away from ultra-cheap labor– a shift away from the unsustainable, which has been going on for some years now– may be less damaging than conventional wisdom holds,  and may actually be, in some ways, beneficial for our bottom lines.

Some reality checks:

Reality check #1: Rising labor costs may not be that significant to your  business.  You need to asks what percentage of your manufacturing costs are direct labor.  If it’s 10%, and your direct labor costs increase 20%, your overall cost increase is only 2%.  If you were to pass this on, in it’s entirety, to your customer, he would suffer a price  increase of UNDER 2% (since your margin is not included in the calculation).  Seems elementary, but then again, I’ve been talking to lots of people who seem surprised at this type of analysis.

Reality check #2: Whatever the cost increase, you can probably offset this increase, in whole or in part, by reducing waste and  thereby adding value to your products and/or processes.

Reality check #3: If your labor costs are rising, your competitors’ labor costs are rising at the same time.  Assuming that  China is still the only game in town (for most of us it still is– see Reality check #4)  market forces should help to ensure that rising labor costs do not squeeze profits unduly in the long run.  The sky is not falling on you, it’s lowering on everyone.

Reality check #4: Yes, Vietnam (the only serious competition to China) has lower labor costs than China and for some, manufacturing in Vietnam will be more competitive than in China.  But not for everyone .   There are other costs incurred in Vietnam that offset low labor rates, such as lower productivity and the costs associated with a relative lack of infrastructure and maturity in the supply chain.

Reality check #5: Again, with regards to Vietnam.  What will likely happen when so many manufacturers  from Taiwan, Korea, Japan and China make the move to Vietnam and start “consuming” the finite labor supply?  Won’t market forces likely increase the labor rates there?

And the following leaps of faith:

Leap of faith #1: Better compensated workers will be more stable, and more willing to contribute to the company’s bottom line.  These workers will be more likely to see a future in your facility, and will be more likely to learn how to create more value for the company in order to advance themselves.

Leap of faith #2: A better compensated workforce may become more integrated into the local community, having finally shed itself of “migrant” status (a process which has already started).   It is likely that more of  these workers will be renting their own off-site apartments, eating their own food, and enjoying entertainment of their own choosing.  If this happens manufacturers could  spend less on “lifestyle” and concentrate more on improving worker compensation, working environment, and efficient operations.

Leap of faith #3: As workers become more a part of their community, the industrial districts in which they work may see an improvement in their overall environments.  People are less likely to litter where they live, and are more likely to ensure that local governments ensure security in the areas where they live and have put down roots, especially those whose children live there also.  That will improve the working conditions for everyone.

I’m not saying that China will stay the manufacturing king-of-the-hill in perpetuity.  Of course everything changes, in ways both predictable and surprising.  I’m just saying that the there is more— a lot more– to competitive manufacturing than “cheap labor”.

For some more background and commentary, please check out this post on China Law Blog.

For a contrary view (one example of many) check this out.

: Change Leadership, Economy, Labor Issues, Southern China

About the author

Which goals are worth pursuing?

1
December 14, 2009
by David

I just answered a linkedin question. I’d like to share the question and my answer below. (The original question along with all answers can be found here.)

The question…

What goals in business are truly worth pursuing? What goals – when at the end of your career and you look back at it all – are those about which you can say, “now that was worth the fight… we changed the course of some little piece of history and left a legacy.”?

My answer…

If you want something you can look back on as a satisfying legacy, I would say improving profits is necessary but not sufficient. The business leader is actually empowered to change peoples lives.

When you’ve looked back and seen how those who were in your organization grew professionally or personally as a result of your how you mentored or how you ran the place, you will feel that satisfaction.

I like to say our organization needs to consistently strive to add value for:
-shareholders
-customers
-employees
-partners
-community

I may be writing more on this theme in the near future.    I can remember in the past that here in china,  this type of thinking was considered naive in, especially in industrial leadership circles.

When I started leading in China 10 years ago, I was too stupid to know it was a naive concept.  My experiences in the past decade have made me even stupider.  I no longer believe in this concept…. I’ve grown to love it.

: Change Leadership
:

About the author

LEAN Can Save Lives!

0
September 17, 2009
by David

I love hearing about how LEAN strategies can do more important things than just help companies make more money.  Watch this video (or read the transcript) of Bill Moyers Journal for 9/11/09 where he interviews Dr. Jim Yong Kim, a public health expert and the new president of Dartmouth College.   Without mentioning LEAN by name, Dr. Kim  explains how LEAN thinking can improve healthcare, and how it (along with other strategies normally associated with industrial efficiency) should be implemented in U.S. Hospitals.

While there are many articles and posts out there discussing LEAN in healthcare, I just like the way this explains it.

Some quotes from the transcripts, with my comments interspersed [in italics and in square brackets].

BILL MOYERS: Why are we talking about the American health care system as a crisis? What’s wrong with our health care system?

DR. JIM YONG KIM: My own particular take on it is that I think for many, many years, we’ve been working under the fantasy that if we come up with new drugs and new treatments, we’re done.

The rest of the system will take care of itself. In my view, the rocket science in health and health care is how we deliver it. And unfortunately, there’s not a single medical school that I know of that actually teaches the delivery of health care as one of the essential sciences [sic]

[in other words, Dr. Kim is saying that high-tech innovation alone is not enough to make us excellent. The same can be said for many manufacturing facilities.]

DR. JIM YONG KIM: Well, just think about a single patient. So a patient comes into the hospital. There’s a judgment made the minute that patient walks into the emergency room about how sick that person is. And then there are relays of information from the triage nurse to the physician, from the physician to the other physician, who comes on the shift.

From them to the ward team, that takes over that patient. There’s so many just transfers of information. You know, we haven’t looked at that transfer of information the way that, for example, Southwest Airlines has. Apparently they do it better than any other company in the world.

[The same way we gain efficiencies by LEANING the flow of materials and of information in our facility.]

DR. JIM YONG KIM: It means how do you evaluate clinical outcomes? How do you understand variation in doctors’ practices, for example? And ultimately, how do you fix the problems? So the group at Dartmouth Institute does all of that. We look at variation. You know, why is a Medicare reimbursement rate, you know, almost a third in the Mayo Clinic area, as opposed to Miami?

[Measure results.  Analyze variation. Improve procedure.]

DR. JIM YONG KIM: Well, I’ve noticed over the years that when it comes to our most cherished social goals, not only do we tolerate poor execution, sometimes we celebrate poor execution. Sometimes it’s part of the culture. You know, these folks are trying to solve this terrible problem. They can’t keep their books straight.

They really don’t know what they’re getting. They don’t measure anything. But they’re on the right side, so that’s okay. I think we’re in a different time.

[Tolerating waste as a cultural problem.]

: ALL, Change Leadership
: , ,

About the author

Dumping your waste upstream isn’t LEAN — another view

0
May 27, 2009
by David

Last month I wrote a post, “Dumping your waste upstream isn’t LEAN“, giving an example of how one large American company I know (and have left unnamed) has been bullying it’s vendors into accepting the costs of wasteful stocking in order to lower it’s own costs and leadtimes, while actually raising their own costs in less obvious but more significant ways.

This month, Bill Waddell of Evolving Excellence gives another example– none other than General Motors. Anyway, for another (more skillfully written) take on a similar issue, go to his post here.

: ALL, Change Leadership
: , , , ,

About the author

“Good” reasons to be wasteful!!!

0
May 12, 2009
by David

Yesterday I visited a small factory owned by a friend of mine. I had visited the facility once before, when times were good and they had more orders than they could keep up with.  As I said, business was good, but the harder they worked the more they had issues with delivery, quality and cash flow.

During that first tour, I was chatting with my friend’s production manager. Pointing at the mountains of semi-finished goods on the factory floor, I explained that in those mounds were hiding defects (later to be discovered by customers), clogging the production cycle (impacting delivery), and tying up his boss’s cash (needed for sales, marketing and other investmens).  Reducing the WIP, I argued,  would be a solid first-step in turning the place around.

To my surprise, the production manager seemed well versed in LEAN. He understood how to balance the production on both sides of the bottleneck, and how to eliminate non value-added steps in the process.  He understood the value of JIT and Jidoka.

“All good stuff”, he said.  “But we can’t implement it here.”

Why? Because they were too busy for LEAN or JIT.   If they tried he explained, it would slow the process flow, resulting in even more delivery problems.  Yes, in principle it’s a good idea.  But not here.  Not now.

That was during the good times. Yesterday’s visit showed a much slower factory, with much fewer workers and lots fewer orders. Some things, however, haven’t changed. There are still piles of WIP on the factory floor, and (not surprisingly) they are still having quality, delivery and cash-flow issues. Once again, I broached the subject of LEANing the production flow, and once again there was a “good reason” not to. Whereas before they were “too busy” for LEAN, now there was “not enough work” to go LEAN. Now the thinking, it seems, is that if they go LEAN and utilize their labor (and other resources) efficiently then some people wouldn’t have enough work to be kept busy.   (I mentioned to him that the workers who were idled by balancing the line could be employed in his factory’s 5S efforts, but that didn’t go over too well).

This I’ve heard before.  LEAN makes sense.  It’s good stuff.  But not here.  Not now!  Here are some lame excuses to maintain waste in the production cycle:

  • People need to be kept as busy as possible. That’s the only way to be efficient. (Actually, processes need to be efficient– not people)
  • It works for Japanese and westerners, but for cultural reasons, Chinese can’t understand/implement/accept it. (Total bullshit.  LEAN works just fine in China)
  • LEAN production looks less busy and active, and people will think they don’t have to work hard. (Not really.  People are smarter than that– especially the workers who can see first hand how productive their team has become).
  • You will need to hire lots of additional people to do the clerical work required for LEAN. (Not true.  And if there were “extra work” to do, it could be done by some of the people made temporarily redundant by balancing the line).
  • People want to do the same repetitive tasks over and over all day.  It makes them feel like experts. And the longer they perform that one task, the quicker and better they become.  (I doubt it.  But even if it did make them faster, it wouldn’t make production faster or any better.)
  • LEAN is great if you have large production runs, or if all of your items utilize similar process steps. But our low-volume/high-mix model can’t be LEAN. (100% wrong.  LEAN is great for low-volume/high-mix production.  LEAN makes your facility flexible and agile).
: ALL, Change Leadership, Labor Issues
: , , , , , ,

About the author

Dumping your waste upstream isn’t LEAN!

2
May 7, 2009
by David

LEAN is about reducing waste and adding value.  Adding value for shareholders and customers is important, but to be truly successful in the long run, an organization should strive to add value to all of its relationships, benefiting its employees, its community and, of course, its vendors.

Here’s an example of a “LEAN” organization that didn’t get this point:

The China manufacturing subsidiary of a Really Big Corporation  (we’ll call them “RBC” for short) purchases small volumes of manufactured components from it’s vendors.  In order to cut inventory costs and reduce lead-times to almost zero, it requires its vendors to stock both excessive amounts of raw materials  and also a fairly large quantity of it’s finished goods (which are the customer’s components).

The strategy is, in the narrowest sense, successful.   RBC holds almost no component or material stock, and yet, whenever RBC needs one or one thousand components for it’s manufacturing, they are always on-hand immediately.  Zero Stock!   Zero Leadtime! And if RBC has a spike in demand it’s no problem (for them)  because their vendors have been commanded to hold lots and lots  of raw material on-hand.  Just in case. (Better safe than sorry, I always say)

OK, they’ve added value for the shareholders; cash flow is improved and the risks associated with stocking is drastically reduced.  And they’ve added value for the customer, because lead times are reduced and flexibility  is enhanced.

The problem is that RBC has not really reduced waste, it has just dumped it upstream, which is as smart as pissing into the wind (or tugging on Superman’s cape).   Because the waste that RBC has driven out of its internal material flows has now shown up as liability on the balance sheets of its vendors.   And make no mistake, the waste is flowing back to them– as a result of waste dumping, RBC cannot command the  price reductions in might, because vendors are raising prices in an effort to  offset the cost of carrying  so much slow-moving inventory.  In some cases valuable vendor relationships, costly for RBC to initiate and develop, are in jeopardy, meaning that they will likely  spend time, money and “bandwidth” to find, qualify and train new vendors.

The sad part is, it doesn’t have to be this way.  RBC could have achieved a most of its objectives without unduly burdening its vendors by working with them to set up reasonable and fast-moving buffer stock procedures.  How this is done would vary from vendor to vendor, but to a certain extent, it can be accomplished.  An added benefit is that the vendors who were not versed in LEAN could have learned some valuable inventory management techniques.

Don’t worry too much– RBC will be just fine (they are, after all, Really Big).  In addition, I understand that they are open to learning, and may change their ways.   I write about it because I hate  to see otherwise respectable and forward-thinking companies giving LEAN a bad rap with this type of implimentation.

: ALL, Change Leadership
: , , , ,

About the author

A famous Chinese labor activist goes right to the GEMBA

0
April 18, 2009
by David

A new article in the Financial Times discusses the new face of migrant labor in Dongguan.  The article basically says that the oft-predicted worker unreast didn’t materialize because those predicting it envisioned the migrant workers of yesteryear (hordes  of rural, unsophisticated “factory  girls”) rather than the migrant workers of today (semi-urbanized, getting more sophisticated,  with more connection to the communities in which they work).

Seems accurate enough.   But what caught my eye were the last two paragraphs,  sharing the stated views of a famous Chinese labor activist:

[The activist]…once incarcerated for his efforts to establish an independent alternative to the government-sanctioned All China Federation of Trade Unions, notes that the last thing the country’s labour movement needs is more martyrs rotting away in Chinese prisons for daring to challenge the Communist party’s authority. Far better, he adds, to focus on factory-floor issues that affect workers’ daily lives. [emphasis mine]

As [he] said in an address to Hong Kong’s Foreign Correspondents’ Club earlier this year: “Why not let workers and employers settle their problems [independently] at factory level? That’s the best way to make a harmonious society.”

What does he mean by “factory-floor issues that affect workers’ daily lives”?   It looks like he’s telling us workers rights will improve not by workers banding together to cause unrest, but by going to the gemba and working together with management to ensure  that their working lives are safer, more comfortable, and more productive (with the assumption that increased productivity means increased compensation for the worker).

Not news to me… I’ve said elsewhere that LEAN, JIT, and related strategies and concepts can do more than just add value for shareholders and customers, but can add value for the workers and for the community as well.   What surprises me is hearing it from labor.

: Change Leadership, Labor Issues
: , , , ,

About the author

No, Mr. Kristof– sweatshops are NOT good things.

0
January 19, 2009
by David

Lots of China-based bloggers are talking about Nicholas Kristof ’s latest Op-Ed in the New York Times, so I thought I’d attack it from my angle.

Basically, Kristof’s argument is that Western intolerance to sweatshops lead to joblessness and misery in poor countries.  After all, a sweatshop job is better than abject poverty.

He writes:

When I defend sweatshops, people always ask me: But would you want to work in a sweatshop? No, of course not. But I would want even less to pull a rickshaw. In the hierarchy of jobs in poor countries, sweltering at a sewing machine isn’t the bottom.

My views on sweatshops are shaped by years living in East Asia, watching as living standards soared — including those in my wife’s ancestral village in southern China — because of sweatshop jobs.

Well, MY views on sweatshops are shaped by  a decade of experience running factories in Southern China and by doing business in the greater China for over two decades.

My comments:

1. If labor standards are constraining the rise of manufacturing in poor countries, and eliminating those standards would help alleviate poverty, why not take it further; why not eliminate safety  and quality standards (UL, CE, et al)  and environmental standards (RoHS, WEEE) at the same time?

2. I’ve seen a number of ugly facilities in China which I would classify as sweatshops, and have found that these factories tend to  waste big bucks through mismanagement of labor and inventory, and then try to draw it back by skimping on workers’ compensation, housing, and benefits.  Simply allowing these factories to run on as sweatshops puts no pressure on them to improve their management.  (Yes, I’m saying here that even in “low cost countries” such strategies as LEAN and JIT can work to improve results for workers, shareholders and customers alike).

: Change Leadership, Labor Issues
: , ,

About the author

“Lean” is not a good way to compete against China

4
December 11, 2008
by David

The “lean vs. China” argument presupposes a false dilemma.

In it’s most recent post, Evolving Excellence cites and agrees with a Manufacturer’s Monthly (Australia) article comparing the total costs of outsourcing to China with the total costs of purchasing from a lean local factory. The conclusion from the Manufacturer’s Monthly article is succinctly stated:

Agility is the key to beat Chinese imports and lean manufacturing the most effective tool to achieve that agility.

Lean enables suppliers to offer faster service, better quality, smaller batch sizes and a greater degree of customisation than traditional manufacturing approaches without increasing unit costs. Lean can drive down total costs for customers by reducing inventory holding and handling costs, obsolescence and the cost of poor quality.

Fair enough– lean leads to competitive and strategic  advantages in inventory costs, lead times, quality and overall operations.    But you can’t count on “lean” to be competitive against the Chinese for one simple reason… the Chinese can be as lean as you can!!

Some (corrected) excerpts from my comment on the Evolving Excellence post:

The comparison cited above (and many like it) assume that the only choices are “lean” on one side and “outsourced” on the other. This is a false dilemma. What happens when you compare “lean domestic” sourcing cost with “lean China” sourcing costs?

My experience in China tells me that the China-based factory can be operated in a lean manner, mitigating the costs of longer transportation lead times, and not incurring the prohibitive costs associated with support functions and poor quality. If that’s the case, then the cost savings associated with low-cost production will in many cases (but not always!!)  be enough to ensure profitability, even though long-distance transportation costs and transportation lead times are an offsetting factor.

By all means if you’re  a manufacturer  go lean… it’s good for you, your shareholders, your employees, your vendors and your customers.  And if you are considering outsourcing, do ensure that you are taking into account total cost when you make your decisions.   But don’t assume that going lean (or buying from lean sources) will offer you a competetive advantage against aggressive pricing in the long run, because the competition has access to the same advantages you do.

: Change Leadership
: , , , ,

About the author