Viewpoints: Responsiveness and Speed Trump Low Cost
By Michael Paris
We recently received a Request for Proposal from a longtime client who wanted us to help him eliminate all his manufacturing operations. Frustrated by ever-rising costs and enthralled by the siren song of offshoring, he had concluded he could no longer manufacture competitively in North America. To put it simply, he wanted us to "chop the shop" (his words).
We pointed out that his factory, which we knew well from previous jobs, was the largest and most efficient in his industry. Moving operations overseas would not solve his cost problems.
Moreover, we said that he would lose the reaction time and quick innovation that his biggest customers told us they cherished, despite his higher prices. He agreed to delay a decision until we had a chance to "run the numbers."
Critical mass, a concept borrowed from nuclear reactions, refers to the fact that once some process reaches a given size (or heat or speed), momentum takes over and the process sustains itself. So too in manufacturing. A factory that has reached critical mass is unstoppable by competition.
If your product demand can keep 50 or 100 machines running around the clock, you have the resources needed to run a factory that will match or exceed the output of any similar one in the world. The plant's volume will support investment in the best methods, tooling, and people, which will, in turn, keep the factory operations and reaction times at the forefront of the industry. If management tells you that such a factory can't be a world-class producer, it may be time for new management.
The only inherent competitive advantage left for a North American manufacturing company is reaction time, the time needed to meet a customer request for modifications or innovations. From a customer's viewpoint, reaction time is the time the manufacturer needs to comprehend the new concept, tool up, generate some products, then inspect and ship them.
These are exactly the greatest handicaps of overseas suppliers, starting with eight weeks of shipping time. Their reaction time is greatly lengthened by cultural differences (comprehension), unacknowledged assumptions, language barriers, and a preference for long runs. Not to mention a 10 or 12-hr time difference.
Far too many offshoring decisions have been made on the basis of lowering direct-labor costs. I have argued against this for years. Direct labor is rarely more than 5% of a product's costs. Whether you pay workers $0.50/hr in China or India or $15/hr in Milwaukee, for example, it doesn't matter very much.
Yes, the difference is big, but the relative weight of labor in overall costs approaches insignificance. With overseas offshoring, any savings in labor will be swallowed up by freight fees, insurance premiums, and the cost of working capital to finance additional goods in transit. Several credible studies show that the hidden costs of offshoring can add 25% to quoted labor and material costs.
In all our years of consulting, we have never uncovered a hidden Law of Transcendental Automation. A screw machine in Malaysia is no more cost-effective than its twin in Amarillo, and no less.
The point here is that nothing supports a good marketing strategy like a factory that has reached critical mass, and which responds quickly to customer requests.
More and more products or product families are being ordered and produced in ever-smaller quantities. The economic drivers behind this trend are inexorable pressures to minimize inventory risks while subdividing markets in search of new opportunities. In some industries, entire product cycles may come and go in the time it takes a container to cross the Pacific.
For a North American manufacturer, "fewer and fewer" puts a big premium on marketplace responsiveness and factory reaction time. If you get rid of machine tools and direct or "touch" labor, you cannot respond to requests for new products. When all is said and done, new products (not just low prices) are your customer's lifeblood. A continuous flow of new products is one of their few remaining sustainable competitive advantages--and perhaps your only one.
In sum, if you give away the core of the factory, you will no longer be able to respond quickly to customer needs. They will get your competitors to do it, because they have no choice. In this highly competitive world, responsiveness and speed still trump low cost. They always have. And they always will.
This article was first published in the April 2005 edition of Manufacturing Engineering magazine.