Many companies pursue a cost reduction strategy based on chasing lower labor costs all over the globe. As we’ve pointed out several times, this only leads to becoming a global tourist and no long-term or fundamental competitive advantage.
Other companies try to remain competitive by hiding behind the illusion of automation-based cost reductions. Larger, faster, 24/7 equipment that doesn’t have to stay home with a sick kid must be more efficient, right? As long as the depreciation is fully absorbed by keeping it running full-time, whether the product is needed or not, right? Anyone who has spent more than an hour learning about the fundamentals of lean knows the real answer.
Medical Product Outsourcing, a freebie trade magazine I subscribe to just to see how ignorant some people and companies can be, has an article that could strike fear into domestic companies that rely on automation for a cost advantage. Low labor cost areas, such as China and India, are becoming lucrative customers to suppliers of automated equipment.
Julie Logothetis, president of Kahle USA, notes that India has a particular hunger for sophisticated manufacturing equipment. James of Kasprzyk of Machine Solutions says that 50% of his customers are now from outside the United States. We joked about Africa becoming the new outsourcing mecca, but perhaps it’s no longer that funny. Kahle USA has received several inquiries from Africa, and expects to receive orders shortly from Nigeria. Presumably this opportunity is better qualified than typical emailed financial requests from that country.
So now we’ll be seeing countries with low labor cost… and automated equipment. A double whammy for companies that have such a lack of understanding of their true product costs that they believe labor is their primary controllable cost component. What will they do? Perhaps scurry to their representatives and NAM to complain about unfair trade practices… while many companies, domestic and foreign, compete very effectively from domestic soil. Those companies understand that their primary cost driver is unnecessary waste, and reducing that waste can more than offset any difference in labor or regulatory cost. You just have to take the time to look for it.
So much for the shield of automation.