China Outsourcing Has A Downside

November 10, 2004
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HOLLAND — Following a fact-finding mission in China, CommonSense Lean co-founders Bob Richards and Ron Kuhn believe they have the inside track on the global outsourcing situation.

But they said it is definitely not a one-size-fits-all solution.

"Quite a few companies are under the illusion that going over there is going to fix all of their ills," Richards said. "That's just not the case. It's going to create new ones. That's why you have to be smart about doing it if you are going to do it at all."

CommonSense was in China on an evaluation for Tier 1 automotive supplier Johnson Electric. Johnson, based in Hong Kong, is a global enterprise with locations in Richards said that like many companies that source in China, Johnson has experienced greater difficulties. The problem is balancing China's cheap labor against the transportation costs and time constraints found when using a supplier located half a world away.

Johnson had hoped that some improved efficiencies could help alleviate that strain.

When Richards and Kuhn arrived in China, they found many of the problems they expected, but most of the solutions would not be found on the factory floor.

"I was surprised by how efficient their manufacturing was and how much this company paid attention to detail," Richards said. "It was very surprising how disciplined they were in their implementation of lean (principles), how focused they were on improvement. The philosophy through the whole organization was to continuously get better."

Johnson had attacked efficiency issues within its production processes by a strategy almost opposite that of stateside manufacturers. Using labor as a commodity, Johnson appeared to have made attempts to lessen automation. Machines were engineered to be simpler, smaller and easier to use.

"They buy a machine, then figure out how to make it smaller so that they can integrate the work force with the machines," Richards said, "as opposed to eliminating the work force with the machine."

"Labor is so extensive, why would you invest in a machine when you've got more than enough people to throw at it?" Kuhn added.

Although philosophically backward from many conventional lean-manufacturing concepts, Johnson had already nearly maximized its efficiency within production

In the United States, companies' problems most often revolve around component costs, but for Chinese manufacturers like Johnson, logistics and transportation are the primary concerns.

"Efficiently bringing in raw materials and getting finished product out — that's what they're lacking," Richards said.

The favored solution to those problems currently is maintaining inventory. Johnson has a warehouse next to each factory from which it ships product abroad, and at least one more warehouse at the product's destination.

"You can easily eat up any kind of profit you have from sourcing there with low inventory turns," Richards said.

On top of that, the elongated supply chain becomes a strong deterrent to sourcing difficult processes overseas. Customized and complex multi-featured products become bad candidates — quality issues will take months to deal with, while long lead times turn forecasts into wild guesses.

One solution CommonSense proposed involved applying the less-than-truckload theory to shipping containers. The best way to smooth out the supply chain may be frequent, smaller shipments rather than shipping a full container at a time.

For companies back home, CommonSense hopes to use its first-hand experience to help determine sourcing strategies.

"The thing we've picked up on more than anything lately is the mentality that if we move to China it will save the company," Kuhn said.

"Now we've got a better understanding after seeing how it all operates. You can move over there and, sure, labor is cheap. But you have to evaluate how to do it right. If there is one thing we learned — and it's something we really knew all along — is that it's not one size fits all."

"Too many times management is looking for a silver bullet," Richards added. "But it's not an all-or-nothing proposition. You hear and read about it a lot — people think that if they can't compete here they need to move the whole thing to China."

Simple, repetitive processes that do not require a great deal of customization and are not likely to produce quality concerns are ideal for overseas sourcing. Other processes may be best kept at home.

According to Richards and Kuhn, overseas sourcing should be viewed as a resource, not a threat or a final solution.

"It's not going to go away," Kuhn said. "It shouldn't be how you beat them, but how you use them for your benefit. How can you use China to secure jobs in the United States?"

"It may be worthwhile to make outsourcing part of your strategy," Richards added. "But it shouldn't be your strategy."

Since its founding, CommonSense has provided process evaluations for companies, manufacturing and otherwise, and the owners say the new ability to provide sourcing evaluations and strategies will complement that original competency.

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