It
is with significant dismay that we watch American businesses move their
companies to Mexico, China, and other foreign countries, and then ship
their products, produced by people who are paid relatively low wages,
back to the US.
We
find this disturbing on two levels. First, if we hope to have an ever-increasing
standard of living, we must continue to create wealth. Wealth is only
created when we work to increase the value of an item-changing it from
a low value item to a higher value item. For example, wealth is created
when we take a tiny seed and create a harvestable corn stalk (farming),
or when we take iron ore out of the ground (mining) so steel can be
produced, or when we cast raw material, machine it, weld it, assemble
it, or do any other of the thousands of different operations that go
into making American products.
Service
industries, such as banking and insurance, while necessary businesses
for a vibrant economy, do not produce wealth and do not increase the
standard of living.
Many
questions that can be asked here: Can farming and mining support the
growth of wealth? Will the American consumer, working in the service
industry, be able to afford products produced in foreign countries in
the future? We choose to ignore these questions since our immediate
goal is to question and stem the exodus of companies to foreign shores.
This
brings us to the second reason that we are disturbed by this business
flight to foreign shores. Our experience has been that these companies,
in general, do not have well-managed or efficient business operations,
and because they are poorly managed and inefficient, they require low
wages to keep their businesses afloat.
How
can we say this? How are we measuring?
Let's
start this discussion with the customer. In all businesses, to be profitable,
we must have satisfied customers. Ultimately, like the Japanese say,
"profits are the reward of a satisfied customer." Customer
satisfaction comes in two parts: first, we must produce products/services
that customers want, and second, we must deliver them to the customer
in a way that produces satisfaction. We will ignore the issue of producing
products that customers want, since we believe we correctly assume that
companies are not moving overseas without a market. In general then,
customer satisfaction means meeting the customer's expectations for
the quality, price, delivery, performance, and service of our products.
So,
how do you know what the customer wants? You ask them! In the global
economy we live in today, it generally means producing and selling your
product for a lower price with improved quality, reduced lead-times,
and improved delivery. Faced with this pressure, the poorly managed,
inefficient operations go after low wages.
There
is another way!
In
our discussion about wealth creation, we mentioned processes that take
a low value item and create a higher level of value (farming, mining,
manufacturing). In our businesses, customers ask us to do the same thing.
Create an item/part/product that is of value to them for which they
are willing to pay for. So any step, procedure, or process in our business
that the customer cares about or is willing to pay for is a step/procedure/process
that adds value in the eyes of the customer. To be efficient, we must
concentrate all of our administrative and manufacturing efforts on only
those things the customer will pay us to do. Any step/process/procedure
the customer is unwilling to pay for must be considered waste. An excellent
consideration in determining whether something is adding value or is
waste is this question: If I listed this step/process/procedure on the
invoice, would the customer be willing to pay for it?
Some
people will jump in at this point and say, "Some processes are
necessary even though the customer may not be willing to pay for it-for
example payroll." A concern we certainly would agree with, and
point out that since it is not value added we must try to spend very
little time doing it correctly (automate it?).
Concentrating
on only the things the customer is willing to pay for makes us more
efficient. For 95% of American companies there are huge opportunities
for productivity gains, which do not require their people to work harder-just
smarter!
Below
is a pie chart that represents videotaping a person from our administrative
areas and/or our manufacturing areas for an entire day/shift. The day
following the videotaping we sit down with these associates and segregate
their activities for the day and create Figure #1.
Figure
#1
In
Figure #1, we see that 11% of the day they spent on breaks, lunches,
5S time, and in team meetings. 5S is a World Class Manufacturing/Enterprise
(also known as Lean Enterprise) technique that keeps our work areas
safe, clean, organized, and ergonomically correct. As business mangers,
we are happy with this 11%. We want our people doing these things.
The
next part of the pie, 14% is the part of the day we spent doing things
the customer would pay us to do (adding value). If we showed this part
of the video to the customer, they would say, "Yes, we are willing
to pay that person to do that step/process/procedure."
The
remainder of the pie, 75%, was spent on items that the customer is not
willing to pay for because they do not add value and are wasteful. In
World Class Manufacturing/Enterprise, the list of wasteful activities
shown in Figure #1 is known as the Eight Types of Business Waste
. It's not that people are not working-they are. The problem is
that they are doing activities the customer will not pay them to do,
and if the customer is not paying them, the company is, and it's coming
right out of profits.
Productivity
improvements occur when we stop doing wasteful activities and substitute
value adding activities.
This
is where we believe companies' get confused about their ability to compete.
Companies have pies that look like Figure #1, and their response is
to chase low wages!
For
the purpose of analyzing our ability to compete globally, let's assume
that a company has a composite pie (administrative and manufacturing)
that looks like Figure #1, and are paying their people an average of
$15.00 per hour. If, over time, we were able to stop doing some wasteful
activities and substitute value adding activities so that our pie (Figure
#2) looks like this,
Figure #2
what
we have effectively done (besides doubling our productivity) is to reduce
our wage rate, as it appears to the competition, to $7.50 per hour.
If
we were able eliminate more waste and could get the pie (Figure #3)
to look like this,
Figure #3
what
we have effectively done is to reduce our wage rate, as it appears to
the competition, to $3.75 per hour.
Although
the Chinese are paying their people $0.40/hour, the landed cost of a
product, which includes freight, inventory carrying costs, communication
issues and other costs, is closer to $4.00/hour.
Looks
like American companies are in the ballpark!
With
the required top management leadership and support, and by implementing
World Class Manufacturing/Enterprise techniques, America can increase
productivity and effectively lower their wage rate, allowing American
companies to compete globally without chasing lower wages in foreign
countries.
Larry
Rubrich
President
WCM
Associates
