Intelligent Manufacturing € February € 1995 € Vol. 1 € No. 2
Intelligent Manufacturing € February € 1995 € Vol. 1
€ No. 2
The figures should have been comforting. The conclusion should have
been exciting. But what I read in a recent issue of World Trade
bothered me.
According to World Trade, the United States leads the world in total
productivity. We are second only to Ireland - yes, Ireland - in
per-worker productivity. Typically energetic U.S. workers averaged
$83,887 of value added by manufacturing. That means that American
workers are 26% more efficient than our Canadian neighbors. We work
three times more effectively than the Mexicans. According to the
figures, Portuguese workers require almost a week to produce what
Americans can build in a day.
The Pacific Rim nations are poor performers as well. Malaysian
workers require nearly seven days to do one day's work by U.S.
standards. Workers in Thailand require eight days; Indonesians, 15
days. The Chinese require a month plus two days.
Even the famously productive Japanese are lagging behind the U.S. by
4.3%. It is true that they are increasing productivity faster than
the U.S., but they are gaining at a snail's pace: 0.08% a year. At
that rate, it will take 54 years for them to match our competitive
position.
I wondered why. China has the technology and industry to place
satellites in orbit, as well as sophisticated military weaponry and
computer-driven machine tools. Japan provides the dominant
manufacturing tools and technologies in the U.S. We even study and
imitate Japanese manufacturing management methods, such as
Just-in-Time, Total Quality Management, and Continuous
Improvement.
My 486 computer was made in Taiwan, Canada, Mexico and China, except
for the case and motherboard - those were made in Thailand. None of
the parts were built in the U.S.
One might argue that the designs for the products came from the U.S.,
and in some cases, that is correct. However, the issue here is not
design capability. The issue is manufacturing prowess as measured by
productivity.
Our poorly productive competitors are not ignorant, nor are they
devoid of technology. They are educated and trained. They are
motivated and industrious. They not only possess sophisticated
machinery, they manufacture it and sell it to us. They are not poor;
the Japanese citizen is the biggest private investor in the American
stock market.
Furthermore, the U.S. is being trounced in the world marketplace. So,
why do the productivity figures show the U.S. to be a world
leader?
Dollars Don't Always Make Sense
The only means at our disposal to measure the total manufacturing
productivity of a nation is by using financial figures, i.e.,
value-added dollars and cents. "The worth that is added to raw
material by doing something to it." Nothing else is common to all
manufacturing operations. However, dollars are not a true measure of
productivity, as the following example illustrates:
A mom and pop screen printing shop prints designs on T-shirts. When
the shirt is placed on the platen it has a cost - a value - of $3.25.
The squeegee is pulled, the ink is cured and the shirt now has an
imprinted design. Through a simple manufacturing process, value has
been added... theoretically. The question is, how much value? The
answer is: it depends on the selling price.
Value added by manufacturing is calculated by subtracting product
cost from the selling price. Cost and price are the only things we
can report consistently.
So, if mom and pop sell their shirts for $6.50, and their total costs
are $4.00, then their value added by manufacturing is $2.50. If mom
and pop hire a super salesman who can sell their shirts for $9.00,
then their value added by manufacturing will soar to $5.00, twice the
earlier figure of $2.50.
In other words, a hot salesman just doubled mom and pop's
productivity.
Obviously, there's something wrong with this scenario; however,
that's exactly how we measure productivity. It's the only way we know
to compare nation-to-nation productivity.
Most manufacturing managers know that true productivity increases are
cases such as increasing the total units of production without
increasing the people or resources required. When you have to
escalate prices to compensate for increasing costs, then future
profits are limited. As you increase prices, you attract more players
into the game. More players force you to compete on price, or on an
ever-increasing marketing budget, new product introductions, more
options, custom configurations, etc. Sound familiar?
If you are not controlling costs - increasing real productivity -
then you will be at a potentially terminal disadvantage.
Real productivity increases allow you to be cost-competitive from Day
One. Real productivity allows management choices: you can keep prices
up and enjoy fabulous profits, or you can lower prices to shut out
the competition. If you do not have real productivity, then your
choices are restricted to the single option of working ever harder to
preserve market share. Preserving market share is always considered a
last-ditch effort. It's expensive and stressful, a high-wire act with
no net. Many companies today are perpetually in the mode of
preserving market share. Their situation is not enviable.
How did they get into such a condition?
Is Specialization Worth It?
"Do what you do best" is the admonition directed at manufacturers
these days. This rule has a predictable conclusion - We do what is
the easiest to master, the least threatening, and blessed with the
fewest problems: assembly. We like to design the product, buy the
parts from job shops, then assemble it and sell it. We can blame the
job shop if the parts fit wrong, or if they are late. We can ask
suppliers to hold inventory for us and deliver it just-in-time. We
don't have to fool with dirty fabrication shops, chemicals, messy
paints, or difficult processes.
I know manufacturers who have gone to extremes to "job out" all
processes to suppliers. Problem is, every supplier carries a
work-in-process inventory - a cost. Every supplier must receive the
component and must prepare it for transport to the next job shop -
another cost. Every supplier is set up to process multiple
configurations from multiple customers, and thus they are relatively
inefficient - leading to more costs. Every supplier has a separate
set of overhead costs. Every supplier generates purchase orders and
invoices. Costs on top of costs.
And every supplier adds a 40% markup to its total costs. It adds up
fast. But wait, there's more. The final manufacturer is responsible
for the orchestration of all the events to make certain that the
right components arrive at the right time, and that they are made to
spec. He is also responsible for communicating changes, tracking
shipments, and keeping the pipeline full. One blip in the system
results in missed schedules and late deliveries. While the processing
of parts is removed from the list of responsibilities, the logistics
of keeping parts arriving on time is a literal nightmare, unmastered
by most companies.
The trend in manufacturing in the U.S. today is toward more and more
specialization. Farming out more parts. "Focusing the factory." It is
a trend with enormous appeal because all of the apparent features are
beneficial. However, specialization is deceptive. It's costly. It's
insidious. And our worldwide competitors do it far less than we
do.
"We Don't Make Dumb Decisions!"
Before any competent manager will elect to subcontract a component, a
well thought out make-or-buy decision is rendered. In-house
production costs are compared to a supplier quotation. If the
supplier cost is lower, the component is subcontracted. If supplier
costs are higher, the component is made in-house.
So, if costs from outside suppliers are typically so much
higher...
"It would be a dumb decision to subcontract."
Right. But what if in-house costs are wrong? As in, the part really
costs $1.00, but you think it costs $3.50?
"We couldn't be that far off..."
Oh, yes you could. Here's how: What's your shop rate, the
overhead-loaded hourly rate? Let's say your rate is $60 an hour. A
dollar a minute. Your standard time to make a part is 3.5 minutes.
That equals a cost of $3.50. Your supplier bids $2.00. You use 5,000
a year and you are saving $1.50 each for a savings of $7,500.
Right?
From where? Is the employee who makes the part going home without pay
each time that the part would have been scheduled? What about
overhead? How much engineering time was saved? How much heat? How
much rent? How much depreciation? How much supervisory cost? In fact,
by subcontracting the part, you have saved nearly nothing on overhead
and nothing at all in direct labor. You have added the costs of
issuing purchase orders, receiving, scheduling your supplier and
paying invoices. Overhead per hour worked has gone up. The cost of
all remaining parts includes a small dose of extra overhead.
With subsequent higher theoretical part costs, the inclination to
subcontract is stronger. More parts are subcontracted. Per-part costs
go up again. Logistics and transportation costs go up. More parts are
subcontracted. The department that makes the parts is finally so
underutilized that you decide to sell it off and subcontract all the
remaining parts. The company makes a ton of money because the
machinery sold for $2.5 million. Time passes; the $2.5 million has
been spent. Then what?
Begin Real Productivity Now
When the business has depreciated to the condition outlined above, it
will enter the phase of market share preservation. Profits are
minimal. Stress is high. The opportunity for a terminal error in
judgment is infinite. Sooner or later, the market share goes away.
The time to get out of the terminal syndrome is before you enter it.
Now is a good time. Yesterday was even better.
Instead of "Do what you do best," our admonition should be "Do what's
hardest!" Think about it this way: For every operation brought
in-house, there is a savings in freight, administration, direct cost,
and the profit that would have been claimed by the supplier.
For each of the following questions, consider whether: A) to job out
the work, or B) to do it yourself. Which method will:
I think you know the answer by now.
Needed: Masters of Manufacturing
Our international competitors have spent a great deal of time and
energy learning manufacturing management skills. They are very good.
Ninety percent of Japanese top managers have strong manufacturing
management skills. They grow up in the manufacturing branch of the
business. They have mastered the management of a diverse firm that
builds product from raw materials to shippable condition. It's a
comprehensive task that is demanding and challenging, even for the
best. Only a few can manage the multiple and diverse disciplines
required to make manufacturing succeed. They are doing it now; we
aren't.
Ninety percent of U.S. managers are sales or finance oriented. They
do an excellent job of mastering the marketplace. That task is
indispensable and difficult. Those managers have done the best job in
the world - without qualification - of developing new markets and
increasing sales. But the U.S. needs more top managers who are
masters of manufacturing. Manufacturing - real manufacturing - is
where cost control initiates. It's where competitive products are
born. It's where the seeds of international survival are rooted.
We can do it. Start by bringing a subcontracted operation in-house
this week.
Paul Peyton is head of DynaTech Management Consulting, Colville,
Wash., (509) 732-4066.