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U.S. Manufacturers’ Dilemma

Outsourcing, offshoring, or in-sourcing?

Published: Monday, June 30, 2008 - 21:00

In September 2007 at the QuEST Forum I had the privilege of presenting an AT&T in-house Six Sigma process-improvement success story, “Reducing NonBilled Inside Wire Dispatches,” which was selected as a best practice in the Six Sigma category. (The QuEST Forum—Quality Excellence for Suppliers of Telecommunications—was established in 1996 to bring together service providers and suppliers to create a consistent set of quality system requirements for the global telecommunications industry. QuEST is an international group with more than 150 members, including AT&T, Alcatel-Lucent, Cisco, Corning, Fujitsu, Motorola, Nortel, Sun Microsystems, and Tellabs.)

While listening to the various other presentations, I caught a glimpse into what’s happening with U.S. manufacturing in the telecommunications industry, arguably one of the largest and fastest growing sectors in America. I witnessed two dramatically different views toward manufacturing: outsourced manufacturing vs. in-house manufacturing.

Outsourcing/offshoring—the new business model
Headquartered in Naperville, Illinois, Tellabs is a leader in telecommunications networking products such as solutions for wireline and wireless transport, access networking, broadband data, optical transport, and voice-quality enhancement for business and residential customers. In 2001, Tellabs employed 7,334 workers, the majority of whom worked in several U.S. manufacturing and research and development facilities including California, Illinois, New York, Minnesota, Texas, and Virginia. Today, Tellabs employs 2,800 people in the United States and outsources 100 percent of its manufacturing to third-party electronics manufacturers—many of which are located in Taiwan, Singapore, Malaysia, and Brazil.

During the conference, Tellabs’ U.S. executive vice president of global operations described the company’s new business models, which focus primarily on the design, development, deployment, and support of their platforms and network gear. Conspicuously absent was the manufacturing piece. These executives explained the advantages of outsourced manufacturing including:

  • Lower cost (principally labor)
  • Improved, “asset-light” balance sheet
  • More variable cost structure to handle changing output volume
  • Less operations-management intensity
  • Allows for focusing on product design and deployment

During the telecommunications “winter” in the United States earlier this decade, when there was significant carrier over-capacity and a softening economy, most U.S. electronics and telecommunications manufacturers were faced with excess manufacturing capacity, excess inventories, and a cost structure that couldn’t be supported by a smaller revenue base. Their response was to close manufacturing facilities, reduce head count, and institute cost controls. A key part of this new business model involved outsourcing as a cost-cutting move. The theory was that other manufacturers could do the job for less because they handled so much volume, thus spreading out their costs.

After his presentation, I asked the executive from Tellabs, “Are there any advantages to keeping some level of manufacturing in-house?” His response, “Not really … as long as our manufacturing contractors adhere to rigorous process controls and industry standards like TL 9000, we feel comfortable letting [Jabil, Flextronics, Solectron, and Sanmina] handle the manufacturing and focusing our attention on managing the process.”

Insourcing—the old business model
Then the vice president of manufacturing for Fujitsu’s network communications spoke to the group. Fujitsu operates a large manufacturing facility in Richardson, Texas, employing 1,600 people. They build hundreds of electronic components for the telecommunications market, including printed circuit board assemblies, fiber optic transmission platforms, and shelves. The American executive’s topic, “U.S. Manufacturing: Continuous Improvement Trumps Conventional Wisdom,” described Fujitsu’s response to the telecommunications “winter” in the United States. Fujitsu opted to continue manufacturing their telecom and networking gear in Texas not out of patriotism, but for a competitive advantage. Fujitsu counters that in-house manufacturing actually allows for:

  • Lower costs through focused cost-reduction efforts (outsource firms are dealing with many customers and their varied products).
  • Any cost savings from offshore labor are generally offset by logistics, inventory, and administrative cost increases
  • Maximum responsiveness to U.S. customers
  • Improved risk management (quality, intellectual property protection, currency fluctuation)

Fujitsu’s manufacturing strategy is centered around building a culture of continuous improvement or, in Japanese, kaizen (kai meaning “change” and zen meaning “good”). A kaizen event is a dedicated and concerted effort by everyone (line supervisors, employees, and management) involved in a process to improve an area of the business. The principle of kaizen is the person doing the job has the most knowledge about the requirements and how to improve the process. Kaizen events generally last only 2 days. Fujitsu’s North American facility implements more than 4,000 kaizenseach year. Most are small in scale, low-cost, and relatively low-tech improvements such as those described below. See figures 1, 2, and 3.

  • Surface-mount technology (SMT) set-up fixture to reduce change-over intervals
  • Improved faceplate packaging to eliminate waste
  • Kanbans(Japanese word for a visual “signaling system” to trigger restocking of items in a more efficient manner) to control builds
  • Mistake-proofing (poka yoke) processes to improve quality and supply chain performance. Examples include rack assembly template, PCB test connector key and assembly fixtures (mistake-proof assembly, increases productivity)

Figure 1

Figure 2

Figure 3

The combined effect of thousands of small improvements produces impressive results. During the last 10 years:

  • Cycle times have dropped from 12 days to 1 day
  • Productivity has tripled
  • Defect rates have dropped from 350 to seven parts per million
  • Inventory turns have improved 170 percent (the last three years)

Each employee at Fujitsu has as a goal to submit seven kaizens every six months. To keep the ideas flowing, the process is kept simple with a streamlined approval process. Progress is measured and tracked through weekly meetings via a standard database. To motivate workers, Fujitsu awards $1 kaizen tokens at the company cafeteria and store for each implemented kaizen, offers gift cards for poka yokes implemented, pizza parties, and recognizes employees during quarterly kaizen awards (See figure 4). But it takes more than tokens and pizza parties. According to Fujitsu’s American executive, successful continuous improvement requires committed leadership, effective coaching, follow-up, and accountability.

Figure 4

Outsourcing, offshoring, or in-sourcing
Which approach is better in terms of profitability, consistency of quality, or customer responsiveness? There probably is no single answer for every situation. In the case of Fujitsu, it’s doubtful that kaizeninitiatives by themselves are responsible for Fujitsu’s success with keeping manufacturing jobs in Richardson, Texas. Fujitsu’s decision to continue manufacturing internally required a tremendous commitment on the part of senior management and line workers. It requires a culture of quality, a culture of continual improvement.

One fact is certain—U.S. manufacturing now represents only 12 percent of its economy; it employs 14.1 million workers, down from 16.8 million workers only seven years ago, and the cost of offshoring is more than just the loss of jobs. When products are no longer made in the United States, the skills necessary to make them disappear. Resurrecting those skills is in many cases impossible. Technological innovation springs from research, and manufacturing still supports nearly two-thirds of all research and development. Lee Iacocca once reasoned that ideas spring up from plant floor and assembly lines because, “If you don’t see things being made, you’re less likely to think up better ways to design, engineer, and manufacture them.”

Twenty-one years ago, I worked in Japan as a visiting M.I.T. scholar, and I was fortunate to meet W. Edwards Deming, Ph.D., at the annual Deming Prize ceremony in Tokyo. He talked about the customer and what happens when companies focus on improving quality. In essence, Deming was saying that when one improves quality, costs go down and productivity improves. This enables a company to capture greater market share, stay in business, and ultimately create more jobs. See figure 5.

                

Figure 5

Deming’s simple, elegant, quality “chain reaction” resonated with the Japanese audience and me, particularly the last effect—creating more jobs. As an American-history buff, I’m often reminded that the South lost the Civil War because it didn’t have an industrial base. While I know America has transitioned to a service economy, history can serve us well. We need to focus on quality and build our industrial base to provide more jobs. I hope we’re wise enough not to lose this economic “war.”

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