Outsourcing

I am going to have a very big rant and compare the poorly thought out short term strategy of outsourcing manufacturing overseas to the likes of China with what I believe are the sustainable long term gains that can be attributed to implementing lean manufacturing!

Now I am not talking about companies that outsource non-core services such as their HR and IT support, I am talking about the companies that have outsourced much if not all of their manufacturing and have become nothing more than a warehouse stocking products.

Consider what has been happening now for some time in the western world, manufacturing companies in a drive to cut costs have been out sourcing their production to China and other low cost economies in the perception that costs will be reduced. The costs are reduced for a number of reasons, the wages are lower, capital costs are lower, taxes are lower, regulatory costs are lower and in many cases incentives are offered to bring the business. Many companies seem to be doing this with little thought of the true costs, merely following the rest of the flock without any real investigation into the true costs to the business.

The reasons behind it depends on the industry and the company, for some it is a strategy for survival, their competitors are a lower cost therefore they have to take advantage of this “easy” way to reduce costs to compete, for others it is purely an opportunity to improve profit, reducing costs without reducing price to the consumer!

Companies are not moving production there to take advantage of the markets there, they are on the whole moving production there to have it exported back to us here, our countries losing the wages and the jobs, our countries losing the taxes earned, our countries having to pick up the social costs for the now unemployed. So instead of these companies contributing to our economy they contribute to the economies overseas at our expense. How will this increase in social costs and reduction in earning be met, through higher taxes both personal and business and governmental borrowing costs?

Consider comparing what is being done here on a large scale to the principles of lean; how does this mass outsourcing of the western worlds manufacturing capability compare to lean? Let us just consider what we are doing purely to start with against some of the “seven wastes”.

Let us firstly consider the kings of all the wastes Overproduction and Inventory; we are moving production so far away from the customer that the company cannot produce using Just In Time principles, they can only forecast and push production in large batches through the facilities overseas. This overproduction is now vastly more exaggerated due to the longer time scales involved and the greater distances and greater number of variables that could impact on the supply. This leads to the company having to invest greater levels of cash into a vastly increased inventory, either from it’s own reserves or through borrowing, either way it is costing the company extra money which may not be factored directly in comparing the costs. In addition to this there will be the insurance costs for this when shipping, and possible losses due to currency fluctuations.

Transportation, an obvious waste in this situation, we now have to transport these goods, generally by sea for the bulk of the journey and truck and rail between the ports. Most companies feel that this cost is covered by the reduction in production costs, but what is the effect of the ever increasing fuel costs? How much does fuel have to increase by to make the cost of transportation too great to make the manufacturing cost cuts viable? Added to that the increasing costs of insurance and other taxes, all of which are rising. Plus the impact on the environment, all of this transportation generates good old carbon dioxide to add to global warming (or maybe not depending on your viewpoint) as well as releasing other pollutants to our atmosphere. There are many taxes and other costs associated with these pollutions including health care costs.

The waste of waiting also becomes an issue, how many businesses do you know of that have outsourced to china that suffer delays, delays in delivery, delays in getting information back and forth, delays due to misunderstanding of language and distance. How many times have you heard about products being held up in customs for weeks, delayed due to bad weather out at sea? There are so many things that can cause delays to you receiving goods, either for sale or for further assembly. Hence the reasons for increases in inventory to overcome these possible delays! Lean manufacturing is generally more about reducing the time line, if you implement lean you will be reducing your lead times and removing these delays.

Defects, a problem that I hear about frequently, outsourced products are produced on the whole by inexperienced, poorly paid, poorly motivated workers using basic simple processes. Defects are common, generated by both the workforce and misunderstandings in requirements due to language and distance. These defects when discovered can have a major impact, unlike a simple flow line here where a defect when discovered may impact on a handful of products, defects may impact on many months of produced product. All of which will require inspection and possible rework, a major cost and source of delay. This problem has actually become big business for a couple of engineering companies that I know of, they have lost their normal production to lower cost producers in China, but now the same customers and others pay them to rework the defective products from china at a higher rate than they originally made them! This with increasing design work generated for them due to the difficulties of prototyping over such long distances has helped them to grow!

Defects and rework does not just affect the manufacturing industry, consider the issue of Indian call centers, how many dissatisfied customers spend their time trying to find home numbers to discuss their issues with someone here rather than discussing it with the call center worker who can’t understand their issue or their accent. How much time do companies spend “reworking” these customer issues.

The defect issue is not one that will quickly go away, especially where the work force is paid very low wages and has poor conditions. I have worked for some time in Saudi Arabia and have been inside many manufacturing companies here. The workers within these companies are all overseas workers from the likes of India, Bangladesh, the Philippines etc. and are paid very low wages and kept in poor conditions. They have no loyalty for their company, no incentive to do a good job, no reason to help the company improve and grow. There is no sign of Lean Manufacturing principles in use here, if they have a problem they just throw more cheap labor at it!

The next waste that I will discuss is not one of the original seven, but it will probably have the biggest long term effect on our economies, the waste of Talent / Knowledge / Capability, call it what you will. We are losing both the knowledge and skills required to do these jobs along with the various pieces of tooling and machinery. The costs of re-entering some of these industries is becoming increasingly higher, if we want to bring the jobs home the costs will soon be beyond us! What happens as the cost of living in these countries starts to rise, as peoples wages increase close to ours in the west as they will. It may take a “few” years but the costs will rise and the savings will disappear and we will all either be looking to bring production home to cut out the transportation costs or transfer it to the next low cost economy, maybe Africa? If we are constantly sending our production overseas how long will it be before we are the next low cost economy?

As to moving production to the next low cost economy, why do you think China is now spending so much money helping various African countries develop infrastructure and opening new companies and joint ventures to exploit various natural resources. When it becomes time to move to a lower cost economy, it will already be controlled by China!

Maybe I am getting away from lean a little here and getting a bit political but we need to consider the full impact on our costs, if we damage our society and our economy the costs get passed to each and every tax payer and business. If we had managed these businesses on lean principles rather than going after the short term gain in profit then we could have kept these industries and jobs here by making improvements in our productivity and so on to reduce costs. Manufacturing creates wealth, you export a product overseas and you earn money to the economy, if you import a product you deduct from our economy and add to the other. Service on the whole is just recycling the available money in the economy.

We must maintain our manufacturing to survive, outsourcing our production wholly or partly overseas is a short term profit strategy that will eventually cost more than it saved to both the business involved and the economy as a whole.
I am going to repeat what I said, Cost savings through outsourcing is a short term saving! Implementing Lean manufacturing principles is a long term approach to the problem that will satisfy the customers not just the share holders, lean is the long term sustainable approach that we need! So go implement lean, tell your friends, lobby your politicians, do it yourself, but do it!