Staying Lean (and Beautiful) While Outsourcing

In the June 2010 issue of GCI magazine, David Becker, in an article titled Speed to Market: Becoming Lean Through Outsourcing, contends that although outsourcing is usually incorporated to just save costs, it actually can save time, foster creativity, and improve quality and flexibility. Becker focuses on the beauty-products industry in which "taking a product from trial to mass production" can be the most wasteful and time-consuming task in product development. As in most industries, full supply-chain development and partnership, which should be based on constant communication and realistic expectations, is crucial to any product.

An interesting quote comes from Justin Ames, director of custom manufacturing at Neways Inc. (a company that focuses on the research and development, manufacture, and fulfillment of personal care products): "Look for companies on a continuous cycle of implementing initiatives. Neways Inc. is obsessed with quality and on-time deliveries. If one of our initiatives positively affects this measurement, then we build on it. If it doesn’t, we review it, change it, or throw it out and try something else." Essentially, Lean customers can foster Lean suppliers and Lean Suppliers can enhance Lean customers.

Please feel free to comment or cite examples in which a supplier has hastened or energized a customer's Lean initiative.

What is Tecumseh Thinking?

About three years ago, the Tecumseh Products Company (best known for producing refrigeration compressors) closed a manufacturing plant in Wisconsin, and I read interesting commentary about it on Mark Graban’s blog at that time. It appeared to be yet another case of a U.S. manufacturer outsourcing its production to foreign countries with extremely low labor costs.

This month, however, I was happy to read this press release detailing Tecumseh’s recent hiring of Michael A. Noelke (as executive vice president, sales, marketing, and engineering) and James J. Connor (as vice president, treasurer, and chief financial officer). Both gentlemen have strong backgrounds in lean applications and impressive track records of performance improvement results. Noelke’s tenure at Sporlan reveals many noteworthy accomplishments – Sporlan is a division of Parker Hannifin, which embraced a quite successful lean transformation many years ago. Connor’s implementation of lean thinking at Newcor helped that organization rebound from bankruptcy.

Time will reveal the depth of Tecumseh’s commitment to cultivating a lean culture, but a general question to all U.S. manufacturers remains: Is any lean overhaul powerful enough to challenge the lure of outsourcing production and competing primarily on the basis of low labor costs?

A New Year Brings "Old" News but New Questions

Shortly before the Christmas holiday, Reuters published an article explaining how U.S. manufacturing companies are discovering and adopting lean methods to compete with plants based in China:

http://www.reuters.com/article/idUSN1817274520091218?type=marketsNews

To many of the long-time proponents and advocates of lean initiatives, this article’s headline most likely elicits a sigh and a “So, what else is new? We’ve known that for years!” response. In addition, most would agree that truly incorporating lean methodology transcends a mere “fix” because it should ultimately result in a cultural transformation.

One aspect of outsourced manufacturing that is hardly addressed is the future sustainability and profitably of these specific plants located in China. U.S. manufacturing companies might be outsourcing work and jobs to China, but are any lean principles being outsourced as well? The benefits of outsourcing currently rest solely on very low labor costs – but how long can this situation last? If low labor costs drive the profitably, are these companies not on the road to evolving into the wasteful mass-production facilities like many U.S. plants of the 20th century?

I always enjoy reading about an organization’s adoption of lean principles and the results gained, but, unfortunately, most of these initiatives in the U.S. are reactive responses to a downturn or crisis. Methods and techniques are implemented and initial results can be compelling, but often these initiatives plateau with measurable decreases in waste and never reach the level of a companywide transformation. In China, it appears these plants are perfect greenfields for lean culture, but will the leaders of these companies take heed? Should they? Please share your perspective.

Finally, I would like to thank my colleague Ralph Bernstein for the outstanding work he’s done writing and steering this blog for more than three years. His entries were not only insightful, but quite thought-provoking and entertaining. I wish him the best in his pursuits.

How Outsourcing Undermines U.S. Industry

I recently made fun of a couple of articles on the Harvard Business Review website. So it seems only fair that now I want to praise a different one of their articles.

This one has to do with outsourcing, which lean advocates have long criticized. We argue that outsourcing in search of cheap manufacturing often ends up not saving money because of additional costs and problems it creates. We also contend that a total commitment to a lean strategy can streamline your company to the point where you can compete effectively with cheap overseas competitors.

But there is another, possibly more important argument against outsourcing – that it undermines a company’s – and an industry’s – strengths and core essence. That argument is articulated extremely well in an HBR article by Gary P. Pisano.

The culprit is the outsourcing of development and manufacturing work to specialists abroad. The result: a damaging deterioration in the collective capabilities that serve high tech. This industrial commons includes not just suppliers of advanced materials, production equipment, and components, but also R&D know-how, advanced process development and engineering skills, and manufacturing competencies.

Making matters even worse is something that has been largely ignored: In addition to undermining the ability of the U.S. to manufacture high tech products, the erosion of the industrial commons has seriously damaged the country's ability to invent new ones (original emphasis).

The prevailing view of the past 25 years has been that the U.S. can thrive as a center of innovation and leave the manufacturing of the products it invents and designs to others. Nothing could be further from the truth.

This logic is predicated on utterly false assumptions about the divisibility of R&D and manufacturing and basic competitive dynamics.

In many cases, R&D and manufacturing are tightly intertwined. Unless you know how to manufacture a product, you often cannot design it. And, to understand how to manufacture it, you have to have manufacturing competencies and experience. The notion that you can design a product in the serene world of the R&D laboratory without any knowledge of the rough and tumble world of production is ridiculous.

To innovate, you need great two-way feedback. You need to transfer knowledge from R&D into production, but you also need to move knowledge from production back to R&D. The act of production creates knowledge about the process and the product design.

I agree completely.

However, if you’d like to read a different point of view, check out another HBR article, this one by David B. Yoffie.