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Quality Digest

Six Sigma

Lean Manufacturing: The Answer to Low Offshore Wages

The right application of lean principles is the solution to avoid outsourcing.

Published: Tuesday, May 3, 2005 - 22:00

Scott Paton’s "The Chinese are Coming! The Chinese are Coming!" (Quality Digest, February 2005) describes how China’s Chery Automobile Co. plans to undercut American automakers’ prices by up to 30 percent. The article professes that neither tariffs nor layoffs are the solution to the hemorrhage of American manufacturing jobs.Outsourcing jobs to China for cheap labor is, in fact, almost always prima facie evidence of managerial incompetence—usually among executives who are trained in finance or marketing as opposed to actually making things. The United States developed an answer to cheap offshore labor a century ago. Henry Towne, a past president of the American Society of Mechanical Engineers (ASME), wrote this foreword to Frederick Winslow Taylor’s Shop Management (1903):

“We are justly proud of the high wage rates which prevail throughout our country, and jealous of any interference with them by the products of the cheaper labor of other countries. To maintain this condition… we should welcome and encourage every influence tending to increase the efficiency of our productive processes.”

Taylor’s The Principles of Scientific Management (Harper & Brothers, 1911) included motion efficiency, waste reduction, standardization and best-practice deployment. Its explicit purpose was to make the American worker more productive. Ford Motor Co. developed it to an unprecedented level during the early 20th century, and Henry Ford’s production system is now known as lean manufacturing. Taiichi Ohno found it so impressive that he adopted it as the Toyota Production System. Taiichi Ohno found it so impressive that he adopted it as the Toyota Production System. Lean manufacturing, which seeks to eliminate all nonvalue-adding activities from the manufacturing supply chain, is the best, and the only, way for high-wage American workers to compete with low-paid Chinese workers.

Finance-trained executives might ask, "How can we pay $15 or $20 an hour to make the product in the United States when the Chinese will work for practically nothing?" This simply underscores Ford’s statement that bean counters are unfit to run any enterprise because their eyes are on the money instead of the job. Americans have two insurmountable weapons to use in this battle: distance and time.

American manufacturers don’t have to get their labor costs below those of their China-based competitors. They only have to get the per-unit labor cost below the cost of shipping that product across the Pacific Ocean, and then the Chinese will have had it—even if their laborers work for nothing. This is how the distance weapon works. Furthermore, lean manufacturing doesn’t reduce labor costs by demanding wage concessions from the workers. It reduces them through productivity improvements, which can be 50-fold, or even higher, as achieved at Ford’s Highland Park plant.

Unless the product’s value-to-weight ratio is high enough to justify shipment by air freight, the Chinese manufacturer must ship it to the U.S. West Coast by container. Month-long lead times and container ship-sized deliveries are totally incompatible with just-in-time production strategies, but a United States-based company can make to order in small batches. This is how the time weapon works.

American automakers must use the time advantage to stop the invasion of low-priced Chery automobiles. I recommended explicitly in my book Henry Ford’s Lean Vision (Productivity Press, 2002) that automakers dispense with dealer showrooms full of inventory, whose carrying costs and dealer profit can add thousands of dollars to the price of a new vehicle. Ford himself stated in My Life and Work (Doubleday, Page & Co., 1922): "We make cars to sell, not to store, and a month’s unsold production would turn into a sum the interest on which alone would be enormous. …Everything has to move in and move out."

Furthermore, consumers can—and should—game the existing system by waiting until the end of the model year, when the automakers must offer incentives to clear the dealer lots for the next year’s model. The dealers should instead carry only demonstration vehicles for test drives while continuing to provide maintenance and service. Customers should be able to configure their vehicles online and take delivery within two weeks, if not sooner. Toyota, in fact, achieved one-week lead times a long time ago.

There is no way that Chery can match this make-to-order strategy unless it can get Scotty, from the original Star Trek series, to beam its cars over to the United States. The company has to ship its cars across the Pacific Ocean in large batches, which must then be placed on dealer lots to run up carrying and overhead costs. Toyota and Honda have actually built factories in the United States to eliminate trans-Pacific shipping costs and lead times. The people who run these companies know what they’re doing.

The United States invented lean manufacturing a century ago and it made us the wealthiest and most powerful nation on earth. We have only ourselves to blame if we fail to use our own tools to stop the oncoming tide of offshore competition.

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