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EXTREME LEAN MANUFACTURING
How to Keep Manufacturing in America
For those of us who make our living in the world of manufacturing,
the future is uncertain indeed. Countries around the world with
very low cost labor forces compete for our jobs with ever increasing
effectiveness. No one seems to know just where things will settle
out, and some of the people who influence National policy and who
could drive some solutions, don’t seem to be concerned.
For example, in his address to the Senate Banking Committee in
July of last year, Alan Greenspan, Federal Reserve Chairman, had
this to say about manufacturing and its role in the U.S. economy:
“The nature of the economy is becoming increasing conceptual,
as distinct from physical, in the sense that ideas are becoming
increasingly the predominant means by which we create wealth.
The consequence of that is that there is less physical stuff
around. I think that’s good, not bad, for the economy as
a whole. But, if you are a maker of stuff, it isn’t.”
In this paper, we will represent the people who make “stuff”.
We will assert that to let our manufacturing base erode at the current
rate will wreck economic havoc, at least in the short term, and
that the long term effects, are at best, unknown. We understand
that some global economic forces are inexorable, and that trade
balances will eventually be driven by these forces. But to capitulate
too early is to deprive ourselves of the opportunity to adjust rationally
(and more comfortably) to our long-term economic place in the world.
Our purpose, then, is to suggest an approach that will significantly
reduce manufacturing cost in an effort to ward off foreign competition.
This approach is comprehensive and challenging. However, we are
at a point where half-hearted efforts won’t do. What we propose
may be our only hope.
The Handwriting is On the Wall
In the past three years alone, 2.7 million manufacturing
jobs have left the United States to:
Eastern Europe, and
And these are just a few. Lesser-known manufacturing competitors
like Korea, Vietnam, India and Bangladesh are becoming more and
The economic pain connected with this situation is here and now.
As we emerge from a three-year-old economic downturn, it is clear
that many of the jobs lost to declining demand will not
be restored as the economy picks up. Economic theory suggests that
these lost manufacturing jobs will eventually be replaced with “knowledge”
jobs, but who knows just when and how that will happen? And how
do we explain such theory to a machinist, a press operator or a
manufacturing engineer with a need to keep food on the table in
the short term?
The implications are far-reaching. If unemployment remains high,
it is likely that growth in demand will falter or slow and the hoped-for
recovery will drag out.
Nature of the Competition. Most of the areas to
which manufacturing work is flowing are made up of poor countries
with very large populations of eager workers. These workers are
intelligent, often adequately educated and perfectly capable of
performing manual tasks at virtually any skill level. The authors
work in Taiwan, Mainland China, Mexico and South America suggests
that the work ethic and personal productivity level is excellent.
End item product quality is quite good, but it is achieved largely
by multiple inspections, sorting and rework. Material handling and
other indirect labor activities are often performed with primitive
techniques, and administrative work that was automated years ago
in the U.S. is still being performed manually. In addition, work
is often (but not always) performed with antiquated equipment, tools,
and methods. As a result, aggregate productivity is poor. For example,
researchers at a Beijing University estimated that Chinese productivity
was about one tenth of that in the U.S for a selected group of industries.
This data compares well with the author’s casual observations
in that country.
Of course, this very large disparity in productivity is offset
by this fact: labor that cost an American manufacturer $12 to $30
per hour can be purchased for less than $1 per hour in many of the
developing countries. Thus even a 10:1 productivity ratio may not
be enough to remain competitive.
It is important to note that these wage disparities apply to blue
collar and white collar workers alike. Furthermore, there is a trickle-down
affect that reduces the cost of parts and commodities all the way
down to basic raw materials (Workers who extract ore are also paid
less than $1 per hour).
That these wage differentials are no respecters of persons is evidenced
by the fact that thousands of white-collar jobs are also fleeing
the U.S., notably computer programming and call center positions.
Many of these jobs are going to India.
Global Upheaval. The problem is compounded by
the fact that manufacturing productivity is increasing everywhere
in the world. The effect of this phenomenon is that, as time goes
on, fewer and fewer people will be required to manufacture the world’s
It is clear that only the very best will survive globally, and
those who want to play while paying domestic (U.S.) labor rates
will have to be extraordinary. To survive, U.S. companies will have
to recognize, explicitly, the nature of the competition and posture
themselves to simply offer more value per dollar. It will require
an enterprise-wide overhaul of unprecedented proportions. No stone
can remain unturned. The alternative is to capitulate—to join
the ranks of those who choose “offshoring” as their
The Crux of the Problem
Simply stated, our labor rates are not competitive. We
refer here to hourly wages as well as managerial and technical-professional
pay. A highly educated, first-rate engineer in Chile can be hired
for about $10,000 per year. In China, we would pay much less than
Given our cost of labor, our collective productivity improvement
and cost reduction approach must be upgraded and intensified to
allow us to produce at a competitive piece price.
Lean/Six Sigma Not Enough. The U.S application
of Lean, Six Sigma and other improvement techniques has been very
effective over the past 20 years. This thrust, coupled with the
benefits of constant advances in information technology, has driven
the highest rate of productivity improvement anywhere in the World.
But it has not been enough to offset the rising cost of labor, material
and overhead. The result is that the landed cost of many products
delivered from a foreign source is often 50% or more beneath the
cost to produce the same items here.
What must we do then, to keep manufacturing in America? The answer
lies in a change in focus and a more determined and aggressive approach
to reducing costs. First, we have to shift our attention from merely
improving the productivity of hourly workers. We must begin to drastically
improve the output per unit of input for the entire enterprise.
We have thus far only given lip service to this notion. Second,
we had better hurry. The time for a timid, learn-as-you-go approach
to cost reduction is past. We must capitalize quickly on superior
technology, our proximity to our domestic markets, and the availability
of low cost capital to forge a compelling case for keeping manufacturing
Change of Focus. One of the first perceptions
that we have to change is that our customers are willing to pay
a significant premium for quality, delivery and unique services.
There are still some industries and some supplier/customer relationships
where superior performance remains a competitive advantage, but
in most cases superb quality, on-time delivery, and doting on the
customer are simply requirements to play. That is to say, they are
often no longer a means by which a competitor can differentiate
itself. We will always try to use these factors to set ourselves
apart from lower cost competitors, but they will only go so far
in offsetting our higher piece prices.
Everything we see in the behavior of buyers suggests that in the
end, IT’S ALL ABOUT COST. A survey by Industry Week magazine,
reported in a recent Webinar, bore out this notion, indicating that
the Nation’s CEO’s dominate focus was on 1) foreign
competition and 2) cost reduction.
Given that “cost is King,” we have to focus on where
the cost is. A typical breakdown of a manufacturers cost of goods
sold is represented by the following pie chart:
The numbers will vary slightly from company to company, but the
implications remain the same.
Lean and Six Sigma address the labor and variable overhead segments
of the cost structure, but have little or no impact on material
cost, the largest segment of the pie. For the most part, design
features of the product drive material costs, and the Lean/Six Sigma
methodology offers little in the way of a tool kit for paring these
costs. Supply chain development programs will reduce price (and
material cost) to a degree, but these efforts will always be limited
by the underlying characteristics of the product design.
Another problem with Lean and Six Sigma is that they do not even
go far enough in reducing labor requirements. We must develop flexible
automation that aims at the near elimination of labor! Why? Because,
quite simply, we can’t afford the cost of domestic labor,
as was noted above. We must substitute capital equipment for labor
if we are to remain competitive. We need a major inventive thrust
to develop effective new process technology that will support mass
customization, even in job shop operations. We have the vestiges
of these solutions. Now is the time to build on what we have to
create a powerful new competitive weapon. And yes, we may lose some
manufacturing jobs to our own productivity improvement effort, but
certainly this is better than having no manufacturing jobs at all.
Yet another shortfall is found in the historical focus of Lean
and Six Sigma. To date, most applications of the techniques have
been in the factory environment. There are thousands of documented
case histories of spectacular improvements on the shop floor, but
relatively few that address office productivity, and fewer yet that
have attacked our burgeoning managerial ranks. We see, over and
over again, finely tuned factory operations vainly attempting to
offset the waste embedded in bloated, inefficient management hierarchies.
We will begin to regain our competitiveness only when we become
fully committed to the design and execution of business processes
that maximize the productivity of every employee in the organization.
This is going to require that those who sponsor reengineering and
continuous improvement initiatives look closely at their own contributions
to adding value. We have the tools, but we haven’t begun to
address the opportunities.
A Different Direction
As noted above, some manufacturers will continue to chase
low cost labor, either by setting up operations in foreign countries
or by sourcing off shore. Carried to the extreme, this strategy
leaves a domestic operation consisting only of marketing and sales,
product development, and distribution. If you are unfortunate enough
to be a supplier to such companies, you will see your business disappear.
But for those who are determined to keep all or most of their manufacturing
in the U.S., there are alternatives. We suggest the following:
- Seek operational excellence. Employ
an aggressive Lean/Six Sigma program to develop waste-free value
streams. These programs must address front to back operations,
which will include an attack on waste in the white-collar operative
ranks. These efforts must be customer focused. We have to take
advantage of our proximity to our customers and our knowledge
of their needs. We must continue to use reliability, quality and
responsiveness to offset some cost differential, wherever it is
- Reduce the material cost embedded in the product
design. There is a highly developed, but rarely
used methodology for reducing product cost called Value Engineering
or Value Analysis. Developed in the 1950’s, Value Engineering
(VE) has never really caught on. The reasons why VE has not been
widely used are the subject for another discussion, but we believe
it is an idea whose time has come.
The VE tools differ from the Lean/Six Sigma techniques in that
they focus in a systematic way on identifying the core functions
of all of the components in a system. We then assess the value
of these functions and creatively find lower cost ways of performing
the same functions. It is a rigorous, step-wise methodology, which
often results in dramatic reductions in material costs.
To repeat, if we are to remain (or become) competitive, we cannot
just continue to source cost-laden components off shore. We will
have to design inherently lower cost products.
- Employ automated process technology. Labor intensive processes
are not an option. We must rationalize our traditional manual
processes and then replicate human intervention with hard automation,
robots, and hybrid man/machine solutions. We will need to design
flexible systems with high reliability, and we believe we can.
The technology is available, but until now, we have lacked the
mindset and the incentives to exploit it. With the future of our
manufacturing base at stake, it is surely time to automate with
- Launch an assault on administrative overhead cost. There are
variations on Value Engineering/Value Analysis techniques that
will dissect the functions of an administrative organization and
test their value. In many companies, such an exercise will reveal
enormous amounts of waste and excess cost. Here, we might also
mix and match Lean, Six Sigma and VE tools depending on the nature
of the opportunity.
The exercise might begin with some benchmarking of truly lean
administrative organizations. We will then apply target costing
for overhead that pegs it at what we can afford, where what we
can afford is defined by the landed cost of our parts or products
produced off shore. Achieving targeted costs will require reengineering
of many administrative processes and aggressive and intelligent
applications of information technology to eliminate manual work.
Addressing (and reducing) administrative costs will pose the ultimate
challenge for any management team, for it is at this point that
we look in the mirror and acknowledge that the enemy may be us.
Successfully securing a place in the global manufacturing arena
will require intelligent and aggressive work in all four of these
areas. A dogmatic dedication to one set of tools or trying to eke
out enough cost savings from one area or another will likely prove
to be inadequate. A broad-based, highly leveraged approach that
is target-cost driven offers the greatest promise of regaining a
Now or Never
The economic plight of the developed European countries
provides a glimpse of our future if we fail to preserve our manufacturing
base. Staggering under the burden of high labor costs and an entitlement
mentality, they have become hopelessly non- competitive in the global
market place. As their manufacturing jobs disappear, the unemployed
turn to the government for relief, only to find that the wealth
is running out.
If there is a substitute for the wealth-generating conversion of
raw material into useful products, we don’t think anyone really
knows what it is. It seems that if we are to maintain our standard
of living, we must continue to do manufacturing in this country.
The alternatives are not at all clear, and at best, are fraught
We are reminded of the Six Million-Dollar Man. Remember the TV
series? The doctors surround the badly damaged body of their subject
and declare: “We have the technology. We can rebuild him.
We can make him stronger and faster—much better than he was
before.” And they did. Let’s commit ourselves to the
same skillful and effective rebuilding of our nation’s manufacturing
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Technical Change Associate, Inc.
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