Survival Of The Fittest

Editor's Note: This is the fifth installment of a seven-part series that details the strategic and often gut-wrenching shifts taking place in manufacturing. It appears in the October 2003 issue of IndustryWeek. IW will introduce a new installment each month throughout the remainder of 2003."We have seen that man by selection can certainly produce great results, and can adapt organic beings to his own uses, through accumulations of slight but useful variations, given to him by the hand of nature."********** Charles Darwin's take on philosopher Herbert Spencer's Survival of the Fittest theory can apply to many facets of life, including the state of manufacturing in this global economy. The hand of nature is connected to the consumer. Being able to adapt through variation in order to please the consumer is the key to growth and success. To be sure, what has been at the core of the economy for centuries must evolve. Gone are the days when consumers were content with products out of the package. Additionally, buyers of things no longer insist products be made in America (See " Bye-Bye to 'Buy American'?"). The new mantra is "What can your product and company do for me?" Indeed, manufacturing is no longer about making things; it's about customer satisfaction. It's about adaptation, anticipation and innovation. It's about using every resource available to survive or be eaten if the global shift that is taking place is ignored. How to survive? First, look to your workforce. It is the key to refocusing a company from a mere producer to a vital partner. It is also the area where lies much opportunity for improvement. According to a survey conducted in 2000 by the U.S. Census Bureau on hiring, training and management practices of American businesses, 20% of employers said workers were not fully proficient at their jobs, and 40% said that they were unable to modernize operations because their employees did not possess requisite skills. And this was at a time of record productivity in the United States. Indeed, while productivity can be the key to reducing costs, delighting customers is the key to increasing revenues -- and that can't be done without a stable, trained and enthusiastic workforce. "A major retraining and reinvestment is required on the part of industry in terms of labor," says Anand Sharma, CEO of TBM Consulting Group Inc., Durham, N.C. "Companies have to stop thinking of themselves as providers of widgets. They need to look at themselves as providers of solutions, providers of service -- where products are just a means to an end. "The most valuable asset that a manufacturing company has is customer intimacy, customer knowledge, customer connections and proximity to them. That gives them the ability to customize their products to the end customers needs." This can be a comfort to manufacturers moving parts of their businesses offshore. Manufacturers that were once afraid of losing control can find confidence in wrapping arms around something that will remain near base camp -- customers. To do so, companies need to invest in their current workforces. They need to retrain them to treat customers with kid gloves. Companies also need to rely on outsourced labor to assume responsibility for tasks that deny core employees the time it takes to make the customer No. 1. Moving operations doesn't mean losing control. "We shouldn't be thinking that we need to make everything that needs to be made," says Sharma. "Toyota does less than 10% of the value-add to the automobile. Ninety percent is coming from their partners. Some of their partners are local, some of their partners are overseas. "Another example is Dell Computers, which has been very successful in growing and making money and hiring other people. There are only two to four minutes of touch labor within the Dell factory. So what has happened is the widget making, the little modules, are being made wherever they are more cost effective. Dell is still controlling and providing service." While not every manufacturer is a Dell or a Toyota, being prepared will help other companies shift labor. "One of the ways in which companies can ramp up is to clearly define the skills necessary for them to compete," explains Michael Wootton, vice president/manufacturing practice, Celerant Consulting. "Whether that is quality, cost or service, once they understand that, [the next step is] putting a system in place that allows them to impart the tools [to] their new employees and put a framework in place so they can measure skill levels across geographies and across the business." Add to the skill set customer focus, and companies become increasingly competitive. "I have talked to companies in China that would give their right arm to have the same knowledge about the customers that many of the companies have here," says Sharma. "We have an advantage over other countries. But if we sleep at the wheel, we lose that advantage." Smart Moves Very few companies, if any, don't have some sort of foothold in a foreign country. Whether it is outsourced labor to China, Mexico or India, manufacturers are realizing that moving certain operations can help them focus on core issues. From companies such as Motorola, which is orchestrating a research and technology hub in India by adding more employees to its current 1,500 in order to take advantage of the highly skilled workforce that will work for half the salary of U.S. workers; to Delphi Automotive, which is setting up purchasing offices in Europe, South America, Asia Pacific and Central America in order to lower overall costs; to The Gillette Co., which is outsourcing packaging to the United Kingdom to improve customer service and focus on core competencies, taking advantage of cheaper labor makes sense. However, understanding what you need to send and where you need to send it is crucial to success. "I think companies need to ask the fundamental question: Is moving overseas really the answer the problem?" says Marc Bussell, vice president/marketing, Celerant. "If you take all the factors into consideration, you might be getting lower labor but is the skill set what you really need?" According to the Providence Journal-Bulletin in Rhode Island, Minneapolis-Based Jostens, maker of class rings and sports rings, "pared down its Attleboro, R.I., operations and moved much of the manufacturing to Texas and across the border into Mexico. The company said it was seeking cheaper labor. Later, however, Jostens found that it had made several wrong assumptions with the move. It didn't save the money it had hoped and it couldn't find the skilled workers it needed." This doesn't mean that Mexico isn't good for others. "We run 28 operations in Mexico," says William Lew, consultant, North American Production Sharing Inc., Del Mar, Calif. "A majority of our clients are finding that they have a better workforce, younger and more motivated. I think that if a company manages their processes well and they have good manufacturing processes, procedures, documentation and good management, they can expect equal or better productivity in Mexico." According to Lew, there are substantial cost savings in Mexico. "Versus the U.S. you could save $10,000 per worker per year after accounting for costs in Mexico." Agreeing with Lew is Luke Faulstick, vice president of operations, dj Orthopedics Inc., Vista, Calif. "I've found that it's the management team [rather than] the hourly employees [that makes a difference]. In fact, the Hispanic workforce is much better at following new concepts than some of the other work mixes that you might get in the U.S." dj Orthopedics, which makes knee braces, arm braces, slings and rib belts, started limited operations in Mexico in 1994. Two years ago it moved the majority of its soft goods line -- sewn items -- from the California plant to its Mexico plant. The company also purchases $6 million to $7 million worth of products from China, which it ships for manufacture at its Mexico plant. The cost savings for the company include a 40% reduction in indirect and direct labor and a 15% reduction in material costs. "By moving stuff we buy from China and putting it into our Mexico facility, we can get additional cost savings," explains Faulstick. "Because of the distance and politics, we never looked at doing anything in China in terms of our own facility." He further explains that the inventory costs and flexibility problems also are deterrents to simply moving manufacturing to China. "Economically, when you look at those relationships, it makes more sense for us to vertically integrate into our Mexico facility, which is about one-and-a-half hours from our corporate headquarters. It's a lot more convenient and flexible, so that more than offsets the cost differential." Additionally, what may seem to be cheaper labor initially could end up costing you more. According to Lew, "Companies I work with have studied [the costs of Mexico vs. China]. By the time they look at wages in China and start adding in all the soft costs -- bunking, food, time on the truck, time on the water -- Mexico is more competitive." While Lew is a proponent of Mexico, he knows Mexico is not always the answer. Different products, different raw materials, different needs and different delivery times all need to be part of the equation when deciding where is the best place for operations. "It's different if you are selling stuffed animals versus sewing seats for cars. For some companies the U.S. is the answer. For others Mexico is the answer. For others China and Indonesia and Thailand are the answers." Agreeing with Lew, "I think the winners, whether you are operating in the U.S. or in a developing market place, are going to be the people that actually understand the performance benefits that are appropriate to their business," says Celerant's Bussell. Outsourcing Formula There is no magic potion that will transport a company to where it needs to be. TBM Consulting's Global Triad Strategy has helped companies such as Newton, Iowa-based Maytag Corp. and Applica Inc., a small appliance maker based in Miami Lakes, Fla., define sourcing strategies. For a company to begin to understand its global presence, TBM's CEO Sharma divides the economy into three segments. The first is the consuming economy, which includes the U.S. and Western Europe. This segment has a lot of money and a lot of buying power. The second segment is Mexico and Eastern Europe, where the standard of living isn't as high as the consuming economy. The third tier is developing economies such as India and China. According the Sharma, products fall into three segments:

High cube, high value, low labor, custom design. This category involves new-product development, final assembly, customization and long-term servicing. This is a proximity-sensitive segment and should remain in the market it is serving. For the U.S. that means remaining in the U.S.
Medium cube, medium value, medium labor, medium stability. This segment involves standard modules and semi-custom items. For U.S. manufacturers, these items can be sent to Mexico or Eastern Europe.
Low cube, low value, high labor, stability. This category involves mature products and components (nuts and bolts) that are commodity nature. They are not distance sensitive and don't constitute a large part of the end product. These items can be made in China or elsewhere.

"When you put this whole thing together, you make the manufacturers the orchestrators of taking the benefits of China and Mexico," says Sharma. "They [then can] become more and more involved in providing full service to the customer." Global Labor Productivity: U.S. Is Leader

Country	Current Growth Rate
U.S.	7.1%
Germany	6.0%
France	5.8%
Japan	5.4%
UK	5.0%
Sweden	4.8%
Belgium	3.0%
Canada	1.2%
Norway	1.1%