AJ Sweat is a long time reader who often sends me interesting, and occasionally outrageous blog fodder – I sincerely appreciate it AJ! – and he recently enlightened me with the results of a survey on global supply chain issues from The Economist. I read it several times, struggling to put my finger on the lesson to be learned and finally it struck me – the average executive has not only completely missed the lean point, but is blinded by arrogance when it comes to his ignorance of the world beyond his own back yard.
As far as lean goes, one has only to note that 62% of the execs responding to the survey identified "Unpredictability of Demand" as a major problem, and 33% are working on improving forecasting, while only 12% are working on lead times. The same guys who claim to be putting their highest priority on 'Improving Collaboration With Suppliers', identify 'Negotiating Lower Prices From Suppliers' as their primary activity. These guys might be collaborating with their 1960's edition business school text books, but I don't think there is much collaborating with the suppliers on how to beat down prices. Not too surpising, but 60% of the execs believe that they – the executive team, not the supply chain people - are the most knowledgeable folks in their companies when it comes to managing global supply chains.
So lean still has a ways to go to enlighten the leadership, but the more appalling stats are those related to how they have been taken by surprise by fluctuating exchange rates, political and social unrest, weather problems, higher costs of regulatory compliance, theft and suppliers going bankrupt. How much do you suppose these guys actually know about the countries they have poured their company's treasury into – the countries upon which they have bet the ranch? My guess is that they know very, very little to have been surprised by much of this stuff. If they actually spent some time in the 'low labor cost' countries, maybe they would realize that there is a lot more to a country than its average hourly labor cost, its tax tables and the duty rates.
I travel the globe pretty widely and I run into people everywhere who think they 'know the USA' because they have been to New York or L.A., Las Vegas or Disney World a time or two. I met a guy just a month ago who had traveled to Houston several times from Australia because his company was headquartered there, but had never been anywhere else in the USA, yet still beleieved that he had a solid handle on American culture, economics and politics. This is no different from Americans who believe they 'know' China because they have been to Shanghai or to a trade show in Hong Kong a couple of times, or claim to 'know' Brazil inside and out because they gawked at the women in their thongs for a week on the Copacabana in Rio.
If these guys actually went to the places they believe to be great sources of manufacturing, a little common sense might kick in and they would not be taken quite so much by surprise. If you go hang around the places in China where the factories are, or India, or Honduras or just about anywhere else where people work for chicken feed they would realize that (1) people who work long hours for next to nothing under corrupt and out of control governments are pretty likely to stir up a little "political and social unrest". I would be stirring up a lot of it – and they would too – if we had to work 10 or 12 hours a day in miserable conditions making stuff for a dollar a day, working for a boss who can (and often does) fire people on a whim.
The Brazilian port of Itajai is perhaps the most economical point of entry into that country, all of the Brazilian regulatory and tax schemes considered. It is a pretty nice place all the way around – but it gets hammered by devastating hurricanes about every 10 or 15 years that pretty well put it out of business for a couple of months while the locals get things cobbled back together. That is not a surprise to anyone who has been there and seen the local obsession with hurricane-proof architecture. You are not likely to hear that from the Brazilian Chamber of Commerce, or read about it in the McKinsey study, but if you go there and look at the ocean, and look at the buildings, the idea just might cross your mind.
There are reasons why labor is cheap in third world countries, and those reasons pretty much mirror the issues that too the execs by surprise – unstable governments, oppressed people, crazy weather, erratic economic policies. All of the unpleasant surprises were very easily predictable, and not because I have superior knowledge of global issues, but because of some very basic rules of business – stuff you shouldn't have to go to Harvard to learn:
You can't get something for nothing in this world – there is a fundamental relationship between risk and return. All of those great savings resulting from bailing out of manufacturing and running off to China or wherever folks could be found to sell on the cheap carry a high risk. To expect anything else is very naive. The non-lean solutions, such as more clever and sophisticated forecasting and incredibly complicated and expensive computer systems will not reduce the risks – the risks are built into the equation and they are unavoidable laws of economics.
The only way to get rid of the risk inherent in off-shoring to cheap labor places is to not do it – to find a lean supplier in your own country. You are apt to pay a little more per piece, but all of the costs resulting from all of the unpleasant surpises go away. At the very least, you ought to visit the places you think are the sources of such economic boondoggles and know what you are getting yourself into.