A recent McKinsey Quarterly has a book excerpt titled Bringing Best Practice to China, which describes the evolving level of management and operational competency in China. There are multiple aspects of this concept: multinational companies bringing best practices, including lean manufacturing, to China; Chinese companies developing their own best practices, and companies that don’t bother with leading edge best practices that instead leverage low labor costs to be competitive. That last aspect is unfortunately, or fortunately depending on your perspective, dominant.
Because manufacturing-labor costs in China are a fifth of their levels in Europe and the United States, for instance, many multinationals have been running plants in China less efficiently than at home, and are still coming out way ahead.
Which leaves a lot of opportunity… profit… on the table unless best practices are implemented.
A recent McKinsey study of 30 multinational-owned factories in China found that waste reduced profits by 20 to 40 percent. Similarly, though several multinational retailers that source goods in China save as much as 20 percent compared with costs elsewhere, we’ve studied many of the goods they buy and found that they could realize far greater savings—often double what they achieve today—if they managed processes as rigorously as they do in more established markets.
So why don’t more companies leverage best practices to create additional profits?
Managers don’t underperform in China intentionally. Waste is endemic to manufacturing plants there partly because some multinationals have inherited, through partnerships or acquisitions, legacy processes, employee mind-sets, and manufacturing approaches. A chaotic environment, changing regulation, and a red-hot talent market all do not help either. Waste in production plants, inefficient distribution networks, underleveraged procurement processes, and lackluster market research are hard to change, and if margins are good and business is growing, managers focus on growth, not operational improvements.
But this is changing. Partly due to that same chaotic competition, which is lessening direct labor savings and forcing competition between Chinese factories.
Companies such as Danfoss, GE, KFC, Johnson & Johnson, and Nokia are showing that execution counts in China. They took a different approach, with a far greater emphasis on high performance standards and operating rigor, and are beating domestic and global competitors in China’s smaller cities. In essence, these high-performing companies took best practices from operations elsewhere and adapted them—sometimes a little, sometimes a lot—to the realities of China.
One specific example of a company taking advantage of this opportunity is Alcoa.
Alcoa, for instance, introduced its highly successful Alcoa Business System at its Shanghai manufacturing plant in 1998. Modeled on Toyota’s integrated lean operations, the system helped boost the company to a global leadership position in its sector during the 1990s. This approach to lean operations, with some adaptations, is working in China. Within six years of beginning to transform the Shanghai plant, Alcoa shortened lead times by 30 to 50 percent, doubled sales volumes (for domestic sales and exports alike), and greatly reduced inventories.
Several other companies are similarly profiled, with the bottom line being,
The point is that multinationals succeeding in China selectively transfer global standards, practices, and techniques, adapting them where necessary to the local context. The crux of the transformation must be importing world-class global processes and adapting them to Chinese realities when necessary or overhauling current China processes by raising performance to the level of a company’s best global processes.
Domestic Chinese companies are also taking a hard look at best practices.
Winning companies will leverage their local success by globalizing their China operations. They will rethink China’s role in worldwide strategy, organization, and operations and integrate that role globally wherever possible. As competition in China’s markets intensifies, managers at domestic companies are rapidly learning how to adopt best practices from around the world. Chinese companies recognize that they must step onto the global stage before the multinationals lock them out.
And we can soon expect new globally-competitive best practices to develop inside China and be exported to their new offshore plants… outside of China.
In such a competitive hothouse, adapted practices will evolve quickly, and as China merges into the world economy best practice there will become best practice globally. More products developed in China will become global products; more industrial processes developed in China will become global processes.
Don’t think so? Take a step back in time a few decades and look at Japan. Then think about how much faster a similar Chinese evolution will occur in an environment of high speed information transfer and multinational corporations sharing their own best practices.
So just how important is the adoption of lean manufacturing and other best practices in order to keep your factory alive in the face of this global onslaught? Why are you sitting down reading this? Get moving!