The Wall Street Journal published a piece on the difficulties some folks are having in bringing production back to the United States from China. Most of it is fairly typical stuff, while some of it just plain silly … like the CEO of Capital Brands (the people who make the Bullet blender) who “said his Chinese partners have engineering skills and a work ethic that could be hard to match in the U.S.”. Really? The Chinese have engineering skills that can’t be matched in the United States of America? Chinese workers whose productivity levels are a pretty well documented 20% or less than that of American workers have a work ethic that can’t be found here? With a preconceived opinion that defies all common sense it is pretty clear he doesn’t really want to move much of anything from China, so the problems he has found in doing so are little more than a self-fulfilling prophecy.
Most of the folks struggling to bring production back are well intended enough, but victims of limited thinking and old school education.
”Officials at Thorley, which manufactures most of its infant-care line in China, sought to avoid for at least one product the trans-Pacific flights and language barriers that come with doing business overseas. They looked to lower shipping costs and eliminate the months long wait for supplies to arrive and clear customs. There also was the chance customers might prefer American-made.”
These folks are victims of what Tom Johnson calls “misplaced concreteness” in their understanding of the economics of the business. In short – they think unit costs are accurate and relevant. They are very unlikely to save much money, if any, by moving “at least one product” from China to the USA. The problem is “the difference between managing total cost, Toyota style, and managing unit cost, American style”.
The total cost at Thorley is driven by fundamental decisions they have made about their business model – in their case, chasing low direct product costs in backwater places. As a result of that decision they have put a cost base in place that includes engineering, supply chain, logistics, administrative and accounting resources. They can save money – lots and lots of it – by making fundamentally different business model decisions. They won’t save anything by keeping the same model, the same basic processes, but moving one product into a different flow.
That’s the problem with cost accounting. It assumes each product stands alone and can be optimized. In fact, the products have relatively little direct cost and most of the costs are “black box” costs. Costs determined by strategy and by the choice of business models and fundamental design of processes. A company will never get out of China incrementally. It is pretty much an all or none proposition.
Moving one item to a local source will probably result in increasing the direct cost of that item without reducing the structural, “black box”, non-value adding, overhead costs by a dime. Therefore, total costs will probably increase.
On the other hand, adopting a lean, short cycle time, JIT, local sourcing model with a capable supplier will enable huge reductions in those indirect costs. The basic cost structure of the business can be radically altered in a manner that more than offsets the increases in the relatively small direct costs.
The folks making Lincoln Logs who are running into similar reshoring problems should recognize that shutting down their US factory and moving production to Asia was a major, strategic decision with far ranging implications on the basic cost structure of the business. They want to reshore the product because the direct costs in China are going up. Reshoring their K’Nex product was easy – they still had a US factory and still had the old local production cost structure in place. Lincoln Logs are a different animal, however. They seem to be trying to reverse a strategic decision to alter their basic business by outsourcing with making a minor tactical change in the zip code of the source.
It doesn’t work that way. This really gets at the heart of lean as a strategy, rather than deployment of tools. “The difference between managing total cost, Toyota style, and managing unit cost, American style” is the difference between lightning and lightning bugs. It is the difference between two entirely different business model as, and two entirely different ways of looking at and optimizing the costs of the business.