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:

Mexico,
Taiwan,
China,
Thailand,
Malaysia,
Eastern Europe, and
South America.

And these are just a few. Lesser-known manufacturing competitors like Korea, Vietnam, India and Bangladesh are becoming more and more significant.

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 goods.

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 strategy.

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 that.

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 at home.

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 possible.
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 a vengeance.
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 competitive posture.

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 with risk.

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 base.

Note: “Extreme Lean” is a registered trademark of Technical Change Associate, Inc.