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Adding more labor can be beneficial to your bottom line

January 20, 2014

It’s been about eight years since I stepped into the manufacturing vertical in Kronos and I’m excited to announce that Kronos has asked me to take what I’ve learned here and apply it to a new initiative. This is a project to demonstrate that labor is not just a cost and compliance burden, but rather a strategic resource that is responsible for differentiating a company.

For those of you who have had a chance to read my book, Lean Labor, you know that I have espoused this proposition for many years. The challenge when I wrote that book is for many companies it is easy to measure the cost and compliance risk of an employee. What’s more challenging is to equate an individual’s effort to more positive outcomes such as higher quality, increased revenue or improved conformance to policies and procedures. The reason is that measuring cost can be recorded easily and accurately down to the minute. Labor’s impact to other factors can often take days or months. Additionally a single or group of employee’s impact is often mingled in with other factors such as weather, sales promotions or the performance of other downstream operations.

As any Lean follower knows, this is very similar to the Lean philosophy and I’m looking forward to sharing what I discover in the future here as well.

This initiative goes outside of Manufacturing. Healthcare organizations are evolving from measuring by activity to improving outcomes. Retailers are working to differentiate by providing the right types and levels of service to their customers just when they need it.

This is potentially valuable work for a company because when the only data driven linkage to labor is around cost, compliance and immediate output, the so called “war on labor” will continue. Once we can link the more positive outcomes experienced by a company to labor, companies will have another option to use in achieving their strategic goals. I would predict that this increases their use of labor because executives will have the metric and proof they need to feel confident in the outcomes.

Why do I have confidence in saying that? Today the only role whose performance is easily measured to a strategic goal, in this case revenue, is sales. Broadly speaking sales is always the role that is first to be grown and last to be cut. They are often the highest paid as well.

Fortunately, I’m not alone in this effort. There are examples already occurring in the market and academics who have already been proposing these ideas. A recent article in the New York Times Thinking Outside the (Big) Box provides some more specifics around the idea.

I look forward to communicating our findings and what others are doing in this area in the near future.

Those office workers have it made

December 13, 2013

How frustrating to walk off the production floor after a grueling variance meeting and see office workers surfing the web or standing around having a cup of coffee. Even worse, urgent engineering change or variance requests disappear into the ether unless they are constantly expedited. How about customers waiting for weeks to obtain an answer to why a product failed in the field? Should they change their installation practices? Was it a material problem?

Increasingly I’m being asked about back office processes. If it was just a few people causing inefficiency in a department, that’s an easy fix. But it is never quite that simple. It seems like there are waves of busy times and then periods of slow times. Depending on who does the work (we all have our goto people at corporate), the outcomes and response times can be very different.

These are typical scenarios:

Recently I was taking a plant tour with a large Auto OEM and the managing director felt that their production process was in pretty good shape. He then opened a door to a large room full of QC engineers and stated that he wasn’t sure if he had too many, too few or just the right number of engineers working.

A couple of weeks ago I was speaking at a workforce management seminar in Belgium and a manager from a large pharma manufacturer asked about improving the productivity of their QC department whose employees work in a lab environment.

I always ask the same questions. How volatile is their work? Is it slow sometimes and busy others? Are there small jobs and big jobs that flow through the department? Does work get re-prioritized based on production or customer demand? Are the people working in the department reasonably happy and skilled employees?

The answer is generally yes to all four. What I then draw is the curve described by the Kingman formula. What it shows is the relation between utilization and wait time. The drivers of the function are the variability in arrival times and variability in the cycle time.

A good introduction to the formula is available on Wikipedia.

An example of the curve is shown below. What is immediately obvious is that wait times increase dramatically as utilization approaches 100%. The result of this is that departments with little control over the variability of demand and cycle times must run at lower utilization rates in order to maintain acceptable service levels.

kingmans formula

And just because a process is documented and looks efficient doesn’t mean that the variability has been driven out of it. Just like the routing on a production floor, an office process is generally documented assuming perfect conditions…open capacity, consistent workload, fully skilled employees and no interruptions. In other words, it assumes perfect standardization.

We are all familiar where high variability in the process and the financial pressure for high utilization causes long wait times. The doctor’s office is a familiar one. For those with appointments at the end of the day, patients can be waiting for 30 minutes or more after their scheduled appointment. It’s tough for the office to schedule the right amount of time for each patient because it’s difficult to know what care each patient will require. It also has to deal with patients arriving late. But if the office doesn’t book the schedule pretty full, the office can’t be run profitably. A doctor’s office is a relatively simple example and many have implemented fixes to ensure higher levels of service while maintaining high levels of utilization. Canceling appointments for patients who arrive late, increasing flexible capacity by adding Nurse Practitioners and scheduling different amounts of time based on the predicted effort for a scheduled patient are a few examples that increase utilization and maintain service levels.

Knowing that standardizing the process and shaping the arrival times of the work will help maintain service levels while allowing for the increase in utilization, the next challenge is identifying where the variability is the greatest. I’ll assume that the first place to look for that answer is with the employees themselves. This is a good start and take what improvements can be identified. The next level gets a little harder. Workflows often cross departments where priorities change and individuals don’t have knowledge of the entire process. This is where some data is going to be required. Often this is also where the improvement efforts slow down. Collecting data around office processes can be challenging. From employee resistance to complex flows it becomes difficult to know what to track. One change in environment that seems to be going underutilized is that office employees are moving to electronic records. From Engineering Changes, to electronic lab notebooks to CAD systems to document management, employees are logging on to applications, doing their work and logging off or checking into another piece of work. As compliance around every aspect of our lives continues to increase, technology producers are tracking our every move to produce a record of what we have done and when. Often this information goes unused unless it is needed for some type of inquiry.

This information is an untapped goldmine for understanding workflow in the office. This electronic trail reconciles work and employee and time. With this you can generate metrics to understand when it is busy, when it is slow, and how long do different types of work take to traverse through a process. When this information is connected to a workforce management system you go from understanding what happened to predicting issues and being able to address them immediately by shifting capacity to where it’s needed and prioritizing work before it is late.

As with production, the idea is not to work the office staff harder. It’s to improve and standardize the workflow through the office so service levels improve without increasing capacity. Imagine lab results returning faster. Engineering requests approved on time without follow-up. Customer inquiries and complaints responded to more quickly. How would this impact your production lead times and competitive stance in the market? All with no increase in labor cost. Kingman has done the hard part by showing you how to improve utilization and service times and what the ROI will be. Now it’s your turn to drive variability out of the office.

 

There’s no skill shortage at these companies and the temps are happy too.

September 6, 2013

Two frequent challenges I hear about from manufacturers is the skills gap and the need to become more agile in an increasingly demand driven world.

These challenges are often approached as separate problems within a company. HR is working on improving the company’s recruiting and retention efforts. Operations is focused on process changes such as shrinking batch sizes and reducing changeover times to increase agility.

Recently I noticed a pattern in my customers who were experiencing above average results in both of these areas. These companies are in a perfect storm of HR and operational challenges and their only way out was to dramatically redefine how they manage their workforce.

This perfect storm of challenges consists of a customer base composed of retailers who are driving smaller, more frequent shipments to reduce their own inventory costs and risks. Secondly, these manufacturers’ products are seasonal so they have significant volume variations at different times of the year. Third, the demand for their products is driven by the weather and therefore completely unpredictable from year to year. Finally, they each face significant foreign competition keeping prices and margins low.

Let me share with you two of the many techniques they employ to stay competitive and profitable in spite of this tough environment:

One difference I noticed from the typical manufacturer was that there is an overt effort to design the process around the skills of the people rather than just production efficiency. They separate higher skill operations and lower skill operations. They do this to manage their skilled workforce challenge. The skilled employees are difficult to replace and as a result must be kept employed permanently. During the slow season these skilled employees staff both high skill and low skill positions. During the busy season the skilled lines have the ability to ramp up capacity based on the number of people on the line. The skilled employees then move to this line as required and temporary employees backfill the low skill lines. The operations on the low skill lines are designed so each can be learned in just a few hours.

But even with this ability to flex up and down, the delta in product demand is such that the company doesn’t need 40 hours a week from the skilled employees during the slow season. How does the company retain the skilled employees when there’s only 32 hours of work for months on end? One company employs banked hours. This allows the company to use overtime during the busy season without incurring increased costs. During the slow season employees take the banked overtime off. The benefit to the employees is that the company employs them full-time and pays them a steady paycheck year round. Rather than feasting during the busy season and then fasting during the slow season, the employees are paid regularly which has helped with their personal budgeting.

A second technique one company employs is to look beyond traditional temporary workers. While some companies have filled their temporary ranks with employees that have no better option, others have found a better way. One company has a plant in the Midwest. Their busy season occurs in the fall and winter. This turns out to be the same time that local farmers have some time on their hands. I don’t think anyone can argue that there are harder working and more innovative employees than farmers. The farmers also enjoy the change of pace in terms of regular hours and the ability to work indoors. This symbiotic solution has benefitted both employees and employer while controlling labor costs and inventories.

In these companies, HR and Operations work very closely together to create a blended workforce that provides for the agility to ramp up and down as demand requires but also provides a desirable workplace for both skilled and temporary employees. Manufacturing pays some of the highest wages of any industry. If you are having trouble hiring and retaining skilled or temporary employees, it might be time to rethink who you are hiring and how you are managing them.

Turning the soft term “employee engagement” into hard operational results

July 3, 2013

Last week I was in London where I participated in Works Management’s “The Great Productivity Debate” which was hosted by WM editor Max Gosney.

Max began the event with some statistics from the Office of National Statistics that rated the UK as having low productivity compared to other European nations as well as the US.

When the participants were asked the cause of this low productivity in the UK, the conversation quickly centered around employee engagement. Participants had automated what they could, outsourced where possible and were now focused on the local workforce.

How the different companies engaged their workforce varied as much as their own manufacturing processes. But there were many similarities. There were two common threads of discussion for those companies that were successful. First is management spent time listening and acting on their employees’ suggestions every day. In their facilities it wasn’t a shock or a signal of bad news when a senior manager walked the floor. The second was that employees were rewarded for participation. The value of the reward seemed to matter less than the act itself and varied in terms of peer recognition, time-off or monetary rewards.

It was fortunate that the next day I was able to visit a client, Vaillant, a manufacturer of environment control systems. A company that has thrived not only through a long-term recession but also a significant downturn in its own market (housing). Their approach to employee engagement was the definition of the items we discussed at the event day before.

I could spend several pages on the unique methods Vaillant has employed to improve productivity and quality and increase on-time delivery, but for now, I’ll focus on how it is engaging its people.

Vaillant has developed its own Vaillant Perfection System (VPS) improvement methodology. A methodology of thirteen principles that is loosely based on the Toyota Production System.

The first two principals are enjoy your work and understand your value. Vaillant understands that if you don’t enjoy what you do, you won’t do your best. It also wants its employees to understand that they are a valuable part of the company and that if they aren’t working when they should be, the rest of the company suffers. These relatively soft principals yield hard results. Turnover is 0.6% and unplanned absenteeism is down 31% to 2.8% since beginning the program.

Vaillant sets an improvement goal each year in terms of performance and expects its people to provide the ideas to achieve that goal. They have set up a lifecycle system of ideas that shows progression from suggestion through implementation so it’s clear to all where they are to achieving that goal at any point in time. Creating a company specific methodology and setting a goal is easy. The more interesting part I saw during my visit was how the company supported employees in achieving the goal. I’ll highlight a couple of examples here.

In terms of educating employees on the principles, which borrow heavily from Lean principles, they close the loop in a way I have never seen before. At the end of the class, participants go on a Photo Safari of their own department. To graduate the class, each employee must take a photograph of a principal of VPS in action and then a photograph of something that isn’t supported by one of the principles.

Vaillant also has an interesting method of justifying projects. Vaillant found that the traditional method of financial ROI can become very department centric. For them, that traditional ROI method led to reducing cost or increasing value one department only to have the opposite effect in another as costs were pushed around the plant. Instead, Vaillant looks to see if the idea supports one of the principles in its VPS methodology. If it does, they apply the iceberg principal (the financial costs are just the visible tip of the iceberg) and look more broadly at how the entire system is affected. As an example it recently justified LED lighting. At first blush, LED’s couldn’t compare to fluorescents in traditional life versus purchase and operating cost comparisons. But when it looked at the cost of change-out in terms of maintenance labor and increased safety risks associated with maneuvering on high ladders around unforgiving production equipment, Vaillant realized that LED’s do make sense and made the change.

In terms of rewarding employees, Vaillant does a number of things to demonstrate their appreciation of employees. The one that stuck out for me was how it handles doctor visits. Because its turnover is very low and its workforce is aging, Vaillant’s employees are faced with an increasing number of medical issues. To reduce the impact on their wages due to more time spent out of work due to medical appointments, Vaillant implemented the following policy: For a general medical appointment, the employee must set the appointment up on their own time since there are options to make that happen. But when the employee must see a specialist or have surgery which is most often only available during working hours, Vaillant doesn’t want to impact employee’s pay for something out of their control. Vaillant’s policy pays up to four hours for time out of work on those occasions. Of course Vaillant expects something in return. It offer this flexibility expecting that the union will be flexible in accepting changes as Vaillant’s workforce needs change. The union finds this is a beneficial compromise.

After my week in the UK and spending a significant time discussing employee engagement with a number of companies, it is clear that those who are successful have evolved from occasional bursts of engagement activity and suggestion boxes into a significant commitment from both HR and Operations into treating their employees like expert consultants. Tangible activities include setting up measurable goals (both group and individual), providing the investments in tools and training, committing management’s time to the effort and finally rewarding when appropriate.

R&D Tax Credits, are you getting your fair share?

June 14, 2013

In today’s WSJ CFO’s Journal it noted that this quarter’s corporate earnings were lifted in some cases by 10% due to the extension of the R&D Tax credit. This was based on the accumulation of last year’s entire credit, which still averages to 2.5% a quarter of earnings growth. For Boeing taking advantage of this credit led to an additional $145 Million in earnings for the quarter. In 2009 the total credit earned by all companies was $5.6 billion. Not too bad for filling out some paper work.

Of course it’s not that easy. The article goes on to say that the R&D Tax credit is taken advantage of primarily by large corporations. That leads me to believe that many smaller or mid sized companies feel that it’s too hard to earn the credit.  For those that have not explored this credit it can be a significant opportunity to counter the effects of relatively uncontrollable costs such as commodity costs or increasing healthcare costs for their employees.

Additionally more states are also enacting R&D credits to encourage companies to move high paying jobs within their borders. This is in addition to the federal credit.

Take a look at Ceradyne, a high performance ceramics company recently acquired by 3M. According to their 2011 annual report, they earned $2.9M in tax credits on revenues of $400M and earnings of $29M in 2010. That’s right, they increased their annual net income by 10% through this credit.

Why did I select Ceradyne as an example? Because I worked with them in the past and they clearly understood that in order to accurately track wages spent on qualified R&D expenditures….and keep the credit through an IRS exam…that they needed solid record keeping. In their case they extended their use of their existing timekeeping system to include their engineers.

How did they get their engineers and other employees who were working on qualified research to start accurately collecting time? They explained the value of the record keeping to them in terms of profits which directly impacted the engineer’s employment.

Sure there are other ways to collect the records, but it’s going to be a quite a negotiation when the IRS examines your records. Especially if you try and claim wages based on your general ledger’s cost centers. The first thing the IRS will do is to look at the roles allocated to that cost center and pull out the wages paid to managers and administrators. Even though in today’s flattened organizations it’s likely that many people are performing multiple roles, some of which probably are eligible for a tax credit.

Next Steps

If you are in Operations or HR, go spend a couple of minutes with your in-house finance or tax expert. There are also consultants such as Hackett or Deloitte that have specialists in this area. Ask them if collecting accurate time records would help increase your company’s credit. Discuss what activities are eligible and make sure these are all being tracked to ensure you get full credit.

If you all agree it makes sense, then you can justify increased data collection. This data will not only ease the IRS examination and likely increase your tax credit but it can also be re-used to help project performance. Would it be helpful to know on a daily basis who is (or is not) working on a project, what phase it’s in or how many dollars have been invested to date?

Before you start collecting the data, spend the time explaining the personal benefit of this tax credit to your employees (increased share price/profit sharing/bonuses, stable employment/more investment in projects that interest them) and your change management job will be a simpler too.

Want to learn more about R&D tax credits (by the way, you can claim more than wage expenditures)?

Here’s a couple of good links:

http://www.irs.gov/pub/irs-pdf/f6765.pdf

http://www.journalofaccountancy.com/issues/2010/mar/20092122

http://www.statetaxcredits.org/

The CEO’s Balancing Act

May 21, 2013

Most of us have one ultimate goal in our work. For those with a Lean bent, it might be to increase customer value. For Operations it could be to achieve the perfect order or in Payroll, deliver the perfect paycheck. The CEO however, has the objective of achieving two goals. The first is success in their customer markets. The second is success in capital markets. What makes these two goals particularly difficult is that to be judged successful, they must achieve both goals simultaneously. To achieve the first goal, the CEO must deliver more customer value than their competitors through better products, services and effective use of their channels. As a measuring stick, most of us would gauge success in the customer market by a company’s revenue or profit. For CEO’s however, they must compete in a second simultaneous competition; the capital market. This market is comprised of investors that make up hedge funds, pension funds, mutual funds, private equity and banks. These investors only interest is determining the correct valuation of a company to ensure they make wise investment.

For the capital market, absolute profits are very important, but that’s not enough. Investors want to understand how a company earned that profit. That’s because the size of the profit doesn’t provide any indication about how much effort it took to earn. For example, two companies may be generating the same amount of profit at the end of the year on the same revenue. These two companies earn the same profit, but are valued very differently. The reason for this may be that one is competing through low-cost production and has high levels of debt due to automated factories. The second may be competing on high levels of service. It has no debt but high labor costs. Even though the revenues and profits are the same, investors will value these companies differently which in turn influences the behavior of their respective CEO’s.

Fortunately for the CEO, they receive lots of help figuring out how to balance the company’s performance in each market. The CFO offers recommendations on how to make the many financial ratios, which investors use in part to judge a company’s value, look better. To improve these ratios, companies can sometimes make decisions that are hard to understand. For example, it is not uncommon to see a manufacturer spin-off a slow growth but reasonably profitable plant because it is asset intensive. Simultaneously it enters into a contract to buy the exact same materials from the new owner. One likely explanation is that the company is trying to continue making the products it needs for its customer market while increasing its return on assets (ROA) ratio to increase its valuation in the capital market. Changing how a company operates to improve its valuation is extremely difficult. While the Return on Assets ratio might improve, it could easily impact the customer market: Operations must now incorporate a longer supply chain or absorb higher costs with increased SG&A costs from its new “supplier”.

Finding the right balance between these markets is where there are often spicy debates between Finance and Engineering, Production, Services, and Sales & Marketing. These operational groups can often find themselves at odds with the CFO as they help the CEO determine what is important in customer markets by understanding how external influences such as competition and regulation are affecting the customer market.

It’s obvious that with interdependent pressures acting upon a CEO as he or she tries to increase value in both markets that a continuous stream of really good ideas is required. This observation is supported by the CEO’s polled in the Council on Competitiveness’ latest Global Manufacturing Competitiveness Index: For the second time in a row, over 400 CEO’s around the world ranked an innovative workforce as the most important competitive driver to their company.

What’s surprising though is that with all the metrics a company puts in place to measure the fiscal and operational health of a company, very few are able to overtly measure and improve their employees’ innovative ability.

Fortunately, there are lots of great examples of an engaged groups of people exhibiting exactly the type of innovative behavior that CEO’s value. The example I’ll share is of magazine subscribers. I subscribe to Cook’s Illustrated and Fine Homebuilding. Both of which provide articles to improve their subscribers’ skills and knowledge. One feature both publications have is a reader’s tips and tricks section. Every issue, each magazine publishes dozens of ideas that its subscribers submit. These ideas are exactly the kinds of ideas a business needs:

  • How to use common materials to replace expensive materials.
  • How to use leftover materials rather than discarding them.
  • Creating simple techniques that turn a hard job into an easy job.

I don’t believe cooking and building homes attract individuals with an above average ability to innovate. Rather the cross-section of individuals tells me that under the right conditions all employees have the potential to be a part of an innovative workforce. The trick is to harness that same innovative and productive energy at work that they display about their personal interests.

To achieve this for my clients, I start with organizational behavior 101, but with a twist. Using Maslow’s hierarchy of needs as a framework, I simplify it into three stages: Security, Productivity, and Engagement.

maslow's hierarchy

Secure Employee

If individuals are insecure about their jobs or feel unsafe at work, they are not likely thinking about ways to incrementally improve the company’s use of an injection molding machine. Creating security has many common themes but is different for everyone. It doesn’t mean every job has to have the same level of security. Instead it means that the employee understands and is comfortable with their environment. Most employees would feel secure in the following environment:

  • Employees are paid in accordance to their agreement with the company (presumably risk adjusted)
  • Employees receive regular communications from leadership that provides transparency as to how the company is doing and where it’s going
  • Employees understand the rules within the company
  • Employees are treated fairly and equitably relative to fellow employees
  • Employees feel safe in their work environment

Productive Employee

With security complete, individuals can be productive. Secure employees want to contribute and add value to a company. They didn’t sign up to fail. Their ability to be productive is dependent on a workplace that creates an environment and situations where they can be successful.

  • Employees know what to do to be effective in their jobs
  • Employees can measure their individual and collective contributions
  • The workplace environment and processes work with them to be productive rather than introducing obstacles.
  • The company values an employee’s personal time as much as it values work time.

Engaged Employee

When employees are secure and productive, they become engaged. Companies who have engaged employees are receiving much more value from their employees than the wages paid. Similar to magazines’ tips and tricks sections, companies have the ability to harvest the ideas created by their engaged employees. To activate this potential, companies need to create an environment where:

  • Individuals are encouraged to contribute ideas and are recognized for their work and ideas
  • Individuals can map their contributions to the success of the company
  • Reasonable failure is tolerated and even encouraged

Similar to developing the process to create a new service or product, an engaged employee can be developed. Companies that have achieved an engaged workforce have figured out how to balance the constraints of the customer, the money, and their employees. For the CEO in the middle of a balancing act, their success hinges on creating an innovative workforce and improving their ROHC – Return on Human Capital.

Outsourcing isn’t about low labor costs anymore

February 13, 2013
Jaguar Land Rover's largest market is now China

Jaguar Land Rover’s largest market is now China

Outsourcing has traditionally been the province of Purchasing and Operations. Focused on lowering costs, these departments would generally look to a small number of low wage countries.

There are two dynamics that are causing production locations decisions to change: Increasing labor costs are making outsourcing for lower labor costs less attractive. Secondly, politicians are increasingly using their power to create jobs in their own countries regardless of the cost of labor. This is going to put new pressures on Operations and HR to manage their workforce more effectively to remain globally competitive.

How do politicians wield this power? In different ways, but each reflects a need to convert regulatory authority, purchasing power or control over natural resources into quality jobs. To understand how this works, let’s take a look at a couple of examples:

United States

In the U.S. the New York Transit authority purchased $599 million worth of trains last year from Bombardier. A Canadian company. The trains they purchased are manufactured in Bombardier’s Plattsburgh, NY facility. The state government has effectively converted purchasing power (of the rail cars) into good jobs in upstate New York.

NY Congressmen Bill Owen proudly announced the benefits of the deal:

“Bombardier and our community leaders work tirelessly to ensure that the region continues to emerge as an industry leader in the assembly and manufacture of transportation equipment.”

China

Let’s go to China to see a second powerful example of government at work. In November last year, Jaguar Land Rover announced that they were partnering with Chery, a Chinese Auto manufacturer.

“The joint venture will blend together the heritage and experience of luxury premium vehicle manufacturer Jaguar Land Rover with the intricate knowledge and understanding of Chinese customers evident at Chery,” JLR said.

Interesting comments, although it seems that Jaguar Land Rover was doing a pretty good job at understanding the market on its own as The Wall Street Journal reported yesterday that sales increased by 32% over last year on the back of a soaring Chinese market.

Maybe there is more than market knowledge being sought by JLR. The auto blog provides a little more clarity. By setting up local automotive production (which requires a joint venture in China) JLR can also avoid the 25% import tariff it currently faces on its products.

Another example of how the government can use its power, in this case the ability to tax and control company formation, to encourage the increase in skilled local jobs. But like most companies, Chery has its eyes set on more than producing cars for the Chinese market. Auto Blog continues…

“The partnership with Jaguar Land Rover signals the start of international expansion and strategic development for Chery Automobile.”

India

Every effort at creating jobs does not go so smoothly. In this case we’ll move to India. There’s a pending change in India’s regulations. The Wall Street journal reported on these draft regulations a couple of weeks ago.

The draft regulations would require that a substantial percentage of technology hardware purchased by government agencies and some companies come from India-based manufacturers. Foreign players would have to swiftly set up local factories to market their products here.”

In this case the government has the power of both regulatory control and purchasing power to create local manufacturing jobs. But it hasn’t thought through the practicality of trying to stand up an industry overnight. If you look carefully at the U.S. and Chinese examples, they started small and take place over decades. This allows companies to adjust and make changes as they learn. In this case India is going to disrupt a large market. The challenge here is that the buyers of this equipment probably still need it at competitive prices. Secondly, for manufacturers, it will take time to create the infrastructure, skilled employees and a supply base.

 

So why does this change in outsourcing strategy matter for readers of Lean Labor? It signals a shift from companies making decisions about moving production and employees overseas due to cost considerations to them making production decisions based on new revenue considerations. Previously all decisions were based on cost, delivery and quality. Now the decisions will be based on revenue opportunities with the pressure on Operations to make it profitable.

This means that the workforce and its managers are going to be under the same pressure to manufacture competitively, but now they will face the added complication of managing multiple cultures, languages, time zones, exchange rates and regulations among multiple production facilities.

What can you do to get started? From a systems, measurement and policies perspective, the companies that I’m working with are putting a repeatable plan in place to get acquired companies, jv’s or start-ups on board quickly. Policies and procedures are being standardized to a practical point. Companies recognize that a one size approach doesn’t work though and enough flexibility must be left in the system to let the local employees manage the nuances of each country and situation. More teeth are being applied to standardizing all types of data so that it can be quickly rolled up, analyzed and acted upon. Automation is being implemented to ensure administration costs don’t overwhelm smaller populations of employees.

Having a solid plan in place with documented success in other locations ensures that there is less room for the local facility to negotiate a unique environment. At the same time a well crafted plan makes sure that moral, engagement and the potential for innovation aren’t crushed.

For HR and Operations this represents an opportunity to create competitive advantage through the workforce. Those companies that can master distributed manufacturing and workforce management will have access to an increasing number of growing markets. Those that don’t will be stuck servicing larger mature markets as their competitors grow around them.

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