McKinsey Study: China — Cheap Labor is no Longer Enough

Late last week, Pierre Mitchell forwarded me a Supply Chain Digest piece summarizing a recent Mckinsey Quarterly article (subscription required) about applying lean manufacturing in China. The major them the article is something that I've been talking about for months. To wit, merely looking at China as a source for low-cost labor will not be enough to achieve sustainable savings and Spend Management results over time. Supply Chain Digest summarizes McKinsey's study by noting that "many Western and Japanese companies have of course outsourced production to China, but just a subset of those are gaining any real competitive advantage. This is due in part to a variety of costs (inventory, logistics) that must be incurred in synch with the move to China, but increasingly because as more and more competitors make similar moves, the industry simply move back to a steady state ... [but] companies can regain some competitive advantage by focusing on greater efficiencies in Chinese operations, and adopting many of the same Lean concepts employed in Western operations."

The problem -- one that I've seen first hand in a number of recent plant walkthroughs in China -- is that "Chinese producers generally just throw more equipment and labor at the need to expand, rather than look to generate more capacity through greater efficiencies." Lean production processes and Six Sigma programs are not something that many manufacturing operations in the region have considered until now, and for good reason: incredibly cheap, scalable labor alone has fueled China’s recent growth. In this environment, who cared if a production line sat idle for a day while waiting for a late supply shipment? Just send home the workers (unpaid) or give them their full earnings (dollars per day), if you’re feeling especially charitable. But now that wage inflation is picking up, Chinese manufacturing operations can no longer depend on inexpensive wages alone to stay competitive on the world stage.

And they're going to increasingly need to look at the cost of poor quality as well. Merely confronting quality after the production process is not enough. The article also cites a "recent McKinsey survey of 30 electronics factories found that wasteful practices and high defect rates decreased profits by 20 to 40 percent compared with returns at world class plants. If the average factory in this survey group matched the top performers, profits would rise by about $25 million a year."

As Chinese companies embark on their lean journey to reduce waste and rework and to improve quality, the article cites five key best practices to follow.

First, "Build the Know-How through recruiting talent from other Asian countries: Some companies are starting to recruit production and supply chain experts from South Korea, Japan, and Taiwan, for example, due to the scarcity of the managerial resource pool in China itself, often using recently retired engineers."

Second, "Rethink floor level training: Western approaches to training may need to be revamped. Training curriculums must be much simpler, and sessions must convene more frequently. Chinese workers tend to learn faster from hands-on shop floor exercises than from the theoretical classroom sessions typical elsewhere. There is a need for experienced instructors who can roll up their sleeves."

Third, "Create a performance culture: Chinese managers spend most of their time fighting fires and not managing overall performance, with little experience using advance management tools or analysis. It is uncomfortable for Chinese managers to talk to employees about their specific level of performance..."

Fourth, "Focus on sustainable gains: Chinese managers tend to bask in small, one-time improvements that solve an issue, but not on long-term, continuous improvement. Communication and training must be must broader than in Western operations to gain worker buy-in. Smart "pilots" should be deployed, and results widely touted..."

Fifth, "Alter traditional timelines: The pace of change in Chinese factories is often so great that traditional Western perspectives on implementing operational improvements may be too slow..."

Jason Busch

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