February 2004

It’s More Than Cheap Labor

by Leroy Morrow

 

Recently while in a discussion with the CEO of a major manufacturer here in Mexico, he expressed his concern regarding the Mexican manufacturing base bound for China’s inexpensive labor market.  Of particular interest is that he assessed this exodus from Mexico to China based solely on inexpensive labor.  That is an easy conclusion to draw when wages in China are 25 percent of wages in Mexico.   Given that fact, it is also easy to conclude that there is little hope in competing against such aggressive global competition. 

 

Inexpensive labor is an incentive to consider relocation, however, the final decision is based on the total bottom line.  Cheap labor is the draw to China, but all factors considered, total efficiency in operations must be included.  This sounds so logical, yet, the perception is that there is little hope in fighting this dilemma, given that we are dealing with a verifiable 75 percent labor cost reduction for Chinese manufacturers.  However, logistics costs and quality issues must be controlled or any operational cost savings from labor will be insignificant relative to the cost of additional inventories or quality fallout/defects that fill the material pipeline. 

 

Many organizations are still masking their operational weaknesses behind excess manpower, excess inventories and ineffective management.  These factors produce what is known as the “hidden factory” within an organization, and constitute a major cost far exceeding labor costs.  These factors will not allow a company to survive anywhere – not China and not Mexico, nor anywhere else in the world. 

 

How is this “hidden factory” eliminated?  Rampant waste must be eliminated and a philosophy of continuous improvement must embrace the entire organization.  The tool that is available to accomplish this is Lean Manufacturing.  Lean Manufacturing is derived from the most successful operational system that the manufacturing community has known in the last fifty years – the Toyota Production System (TPS).  Today manufacturers continue to build and expand plants to store inventories.  Considering they are the most cash-rich organization in the world, the joke is that Toyota is building warehouses to store their money.

 

TPS operational practices and philosophies are proven and are recognized as the benchmark in manufacturing operating systems.  If an organization hopes to continue and compete in today’s aggressive global marketplace, adaptation of this system is essential.  The area of “Lean Manufacturing Consulting” offers a barrage of companies willing to take your company through the lean implementation process.  A word of caution – take the time to visit facilities that these organizations have worked with and witness for yourself how successful they were in the implementation of lean manufacturing.  There are all variations of this system being marketed, but a few facts to remember:  TPS is a process.  There are no short cuts.  A TPS trained consultant organization with excellent training and implementation skills can help you achieve the level to self-sustain in two to three years.  A prerequisite for this success level requires a total commitment from the organization – top to bottom. 

 

For those companies that are satisfied with their present operations and believe that what is going on will not impact them, these companies should consider what their competition is doing.  Continuous improvement and change is necessary for any company to survive in today’s global marketplace.  We either change or we close the door and closing the door is not a result of “inexpensive labor” but a result of operational waste and ineffective leadership.