Just outside of Stuttgart lives a guy named Josef Horber who has been a thorn in my side for several months. He is a nice guy, very bright and energetic. What is irritating is that he pays very close attention to what I write, gives it thoughtful consideration, then writes to me to tell me where he agrees and disagrees. The problem is that he is always making me think way too hard, and occasionally forcing me to backtrack and change my position. My life would be much easier if he would let me live in my lazy ignorance.
He nailed me pretty well about a month ago, jabbing me for the intellectual laziness behind my across the board criticism of every manufacturer which moves work outside of the U.S. In particular he accused me of taking a pretty dull witted approach, failing to recognize that "job transfer will not affect all companies like the lawn mower cuts all grass at a certain height" I have blogged countless times on the subject, blasting companies for not staying here and becoming leaner. Josef pointed out that there are often good reasons for manufacturing somewhere besides the home country – like being close to the customer. I am forced to plead guilty to having taken a lawnmower approach to the subject.
He wrote to me in part, "… lean also means to produce Your goods as close to the customer markets, as possible. If You sell or plan to sell Your products abroad, then a lean supply chain would benefit from colocating your production to where the demand is. Caterpillar (my former company) are worldwide no. 1 in their market segment, but make half of their turnover outside the US. Building a huge excavator in the US in order to ship it to China does not make much sense, just as building one in China and ship it to the US does not make sense either."
Note that the Germans know a little bit about the matter. The shambles the Soviets left behind in Eastern Europe have created some pretty desperate folks willing to work cheap. German manufacturers outsourcing and relocating to the east are having a serious impact.
If every one in the world followed my simple minded thinking, Toyota would not be in Kentucky and Honda would not be in Ohio. They would have stayed at home in Japan. My previous blog posts praising Pella for building a plant in Arizona to be near the Lowes regional operation, coupled with posts slamming everyone and anyone who manufacturers in India or in China (where billions of customers live) are hypocritical, to say the least.
Josef is absolutely right, of course. Being lean does mean being close to your customers. In fact, one of Toyota’s many moves that have been smarter than their American competition has been to do just that. Ford and GM have massive operations in Mexico not because they think they are ever going to sell that many cars to Mexicans, but because labor is cheap. So while they have scoured the globe for cheap labor, Toyota has scoured the globe looking for large concentrations of customers. If, as in Josef’s example, Caterpillar has a good market for earth moving equipment in China, they would be a poorly managed outfit to make then in the United States. And he is also right in pointing out that a company with its primary market in the United States would be poorly run to manufacture in China.
Josef’s lesson in the fundamentals of the economics of geography bring to mind another harsh reality many manufacturers must face. Consider the case of K.O. Lee, a small grinder manufacturer in Aberdeen, South Dakota. It is a good plant, run by good people with a long history of being good employers and good neighbors in their community. America is full of similar companies.
K.O. Lee began its life as an all around manufacturer of things South Dakota farmers and ranchers need, including small grinders when automobiles and mechanized farm equipment came to the prairie in the early part of the century. When World War II broke out, they, like the rest of American industry, converted almost entirely to war production. By the end of the War, almost every ship in the US Navy was equipped with K.O. Lee grinders. They had made it to the big time. For the next thirty years or so, K.O. Lee rode on the wave of success with no global competition, while Asia and Europe dug themselves out of the rubble. For the last thirty years, however, K.O. Lee has slowly died, battling for every order, trying any number of innovations in the face of stiff foreign competition.
The point is that K.O. Lee never should have been more than a local farm equipment shop in the first place. It was the forty year anomaly of war that artificially created an economy in which they could temporarily be a big time manufacturer. They are 70 miles from the nearest interstate highway, and 300 miles from Minneapolis – the closest major city. Logistically, they make no sense and they are not remotely close to any customers.
Will lean manufacturing help them? Certainly. Will lean manufacturing save them? Not hardly, at least not as long as they remain where they are. Being lean and being close to their customers – or if their customers are geographically diverse, then being at a good logistical crossroads – is the key to their survival. That reality exists for a lot of manufacturers, and not just in the U.S.
I am unrepentant in my criticism of those who run off to China, India or anywhere else for the sake of cheap labor. That is being neither lean nor close to the customer – it is nothing more than substituting bad accounting theories for thinking. But I am grateful for Josef’s observations and for taking the time to force me to think a little more.