It’s rare that I feel I need to bang my head against the wall first thing in the morning, but it happened today. I grabbed my coffee and opened the local San Luis Obispo Tribune to find a large article titled Outsourcing Has Risks But Lets Businesses Grow with stories of wonder and excitement on how some local small-town companies are "enjoying the benefits of outsourcing."
To add to my morning joy, embedded in the article was a second article on lean manufacturing titled Improving Production While Cutting Waste. Coincidentally this article was primarily about the consultants from Venture Outsource, who claim to meld lean manufacturing and outsourcing into supposed "lean outsourcing." We told you about this quackery a few months ago. In our opinion this is just another example of some consultants who don’t truly understand lean trying to make a buck off of the outsourcing craze by differentiating themselves from all the other two-bit "kaizen-in-a-box" consultants.
The article on lean actually does a fairly good job of explaining the basics, but then goes off into left field when it begins to discuss how outsourcing fits in.
"Outsourcing helps companies work with cheaper labor. Lean manufacturing makes the production process even better. They can happen simultaneously to achieve a real reduction in cost," explained [Eric] Olsen. "Lean outsourcing is about getting the benefit of outsourcing while maintaining many lean manufacturing principles like keeping inventories low, communications with suppliers high and keeping delivery times tight."
That’s a pretty neat trick. Outsourcing to a manufacturer a few thousand miles away, shipping components on huge slow-moving cargo ships, dealing with language barriers… but keeping inventories low, communications with suppliers high and keeping delivery times tight.
The main article profiles one local company that I have a lot of respect for, Next Intent run by Rodney Babcock. Even in our small town he has created a very high-end machine shop that builds parts for critical satellites and spacecraft such as the Mars Rover, for customers ranging from JPL, Raytheon, and the Stanford Linear Accelerator. They outsource to other companies within the U.S. for good reasons: to access specialized talent and capability. Not to chase low labor costs.
There’s another great machine shop in this town that has also developed a nation-wide customer base by focusing on creating customer value: Top Precision run by Dan Grasseschi. You have never seen a shop and owner more focused on quality and delivery. That’s why they’re also growing… while operating in a what NAM calls "the most unfriendly state for business." If you want 100% assurance that your parts will be perfect and on-time, try them.
One of the companies profiled in a half-hearted counterpoint attempt is The Spice Hunter, which makes… spices. They built a new 116,000 square foot local facility a few years back to make all their products in-house. Their controller, Karen Woodling, says "We’ve really concentrated on keeping our operations efficent. It works better for the company and for the employees to make our product here." A financial person in the low-tech manufacturing world that gets it.
But the other companies in the article simply don’t. Wilkins, a manufacturer of water control products, is chasing low labor cost to China and Taiwan. Dioptics, which makes sunglasses, also globetrots to those same countries. Another local company, Auspient, actually helps companies find outsourcing partners. As their president, Helio Fialho, comments,
"We bring tremendous value through economies of scale."
What a crock of… well, you know. Anyone who understands even the basics of lean manufacturing knows that "economies of scale" are a myth in the lean world. Bill had a great blog five months ago on A Stake in the Heart of Economy of Scale to help others better understand why.
But the bottom line is that there are really only two justifiable reasons to outsource, especially globally: to access unique capabilities and to be closer to the customer. Labor cost is not one of them. In the traditional financial world, labor cost happens to be one of the most controllable, therefore it’s easy to go a few thousand miles away to save a few bucks an hour. But what about the total supply chain cost? How much cash is being chewed up in inventory on the high seas? What happens if a quality problem is found after a boatload of parts has already set sail? What is your new customer lead time? Not to mention intellectual property issues and the rapidly-rising labor costs in some outsourcing havens like China that is already forcing some companies to globetrot to another low labor cost location.
A 20% "labor penalty" is nothing compared to the internal process and methods waste at most manufacturing companies. Take the time to really use lean methods to streamline how the operation runs. Focus on one piece flow, respect your employees, and develop a high performance workforce… you usually get what you pay for. The savings from even a first-pass lean waste reduction kaizen or value stream mapping exercise will often be twice the cost of the labor of the process.
It works. That’s why truly lean companies, such as Danaher, Parker-Hannifin, American Apparel, and others are building more plants in the U.S., to compete globally.