Thu 23 Mar 2006
Taking a break with some Mexican white collar employees at a Mexico City automotive parts supplier in the late 1990’s revealed how concerned they were with India. This was an interesting conversation since, at that time, the noise in the US was still on Mexico taking US jobs (China was on the horizon but not really leveraged like it is today). The common mythical valuation by workers was that moving US jobs to Mexico was 1/10th the cost while these workers believed India was 1/10th the cost of doing equivalent activities in Mexico (they also pointed out that India had nearly the same climate they had). India also has the advantage of speaking “The Queen’s English”, encouraging the fascination for putting call centers there (Dell computer corporation made a recent announcement to expand their call centers there, again). Then, the last time I checked out the US Census Bureau statistics, India was projected to surpass China in total population by 2015. A few forward thinking companies have mostly bypassed the China market and have headed toward India - but that should be a separate post.
Chasing the lowest labor cost around the world involves significant investments (management travel, factory construction, equipment sourcing and setup/debug, infrastructure surprises, and so on). Setting up new shipping routes. Training everyone. Sleepless nights worrying if the far-flung colonies are working smoothly and won’t revolt (with a “Boston Tea Partyâ€). Then in less than ten years to “pull up the tent stakes” and move to another country - and later repeat. Sure, you recognize the risks and expense in following the herd, but can you compete any other way?
What if you stay here (in the US)? It’s not as glamorous as spending weeks away from your family, nor taking twelve to eighteen hour flights and living in taxi cabs, but there are benefits.
European corporations have realized the US can be a cheap labor pool. Toyota has realized the US can be an inexpensive labor pool - they are continuing to build US assembly plants, and have a technical center in Ann Arbor, Michigan and a design studio in California. Granted it’s easier and lower cost to assemble parts shipped in bulk from off-shore in tightly bundled packages compared to “shipping air” in finished automobiles. And while there may be some political advantage of higher “value added†actions in assembling in the US, a significant portion of Toyota’s end sales do happen here.
The US is frequently the final destination for a lot of consumer products. Rather than having a 45 to 90 day inventory risk (what’s the cost of a defect found at the store when 90 days of product sit between the store and the manufacturing plant that then corrects the problem?). If the plant were in the US there might only be a few semi-trailers of material that needs to be quickly rerouted and replaced.
There is generally an educated workforce, that if rightly motivated, can produce astounding savings. Costs can be removed from any process and effort can be reduced on current products to enable the existing workforce to increase sales productive capacity. How fast do your profits go up if you can spread existing fixed costs over 50% more sales? Once you subtract raw material expenses there will be a good amount dropping to the bottom line.
A quick example: An oil baron in the late 1800s took a tour through his oil packaging plant. There was a station that soldered the lid onto the oil can with something like 5 drops of solder. He stopped to watch the worker and the machine for several minutes. He then suggested to the worker to back off on the number of drops until the can leaked. After some iterations (some unsuccessful) the change resulted in a 40% reduction in solder usage.
Another example: An automotive bumper assembly (brackets, fascia, support structures) had around thirty fasteners. Five workers were needed to place parts and operate the screw guns to build this sub-assembly. Moving this work to Mexico/China/etc seemed to make good sense; until an enterprising engineering team figured out how to reduce component count to the point where there were less than six fasteners. Now one worker could do the activities of five (and with less effort than any of the individual five were expending before). Excited, the engineers thought they might even have a few concepts to make further improvements. The other four workers helped back-fill a couple of retirements and ease bottlenecks elsewhere in the plant - allowing the plant to produce more vehicles and support more sales, which is the only real way toward long term job security.
A final, and reverse, example that you may have experiencee at home - especially if you have recently had children under the age of five: Many plastic toys shipped in “from Chinaâ€, or other low-labor countries, have several dozen wire ties wrapped around them and twisted up tight to the packaging. Excited kids can’t play with their new gift until a handy adult finds a pair of pliers to unwind the spidery mess (and what is the choking hazard from these wires and the plastic blocks used with them?). Are the toys wired in the boxes to prevent theft at the store, to prevent the contents from shifting during transit, or for some other dastardly evil conspiracy? A lot of labor goes into that tie-down wiring project – excessive costs for the manufacturer and lost time and nerves for the parents. I expect the main reason is to ensure the toys do not migrate during shipping, but there are better “fastener†options. Maybe a reader knows the root cause and can share some background here.
Cheers!