WSJ editorial board comes out against Trump’s Carrier deal, offshoring

But most comment I read seemed to center on rhetoric about Free Trade. The commentators all blandly accept without question the premise that off-shore automatically equals cheaper than “Made in the USA”. And that is just not so, in every case. It can be true, don’t dispute that but it is not necessarily true; your company must crunch the numbers to know. Labor is not the only product cost and certainly is not the largest.

 A good mantra for moves is, “There will be costs, there may be benefits.”

 The ReShoring Initiative lists hundreds of companies (https://drive.google.com/file/d/0B6EKVqt-UZHIbFpleGM5WlBSQmc/view) who have re-shored jobs to the USA, including 3M, ABB, Alcoa, Airbus, Amway, Apple, Boeing, Bausch + Lomb one of my alma maters. Baxter, Bayer, you get the idea. The number of companies and the many locations to which the jobs returned indicates that reshoring is a common strategy, even if not well publicized. It appears that sophisticated companies are watching closely their costs by product, location, specific circumstances; good work. That is what cost control is all about, not broad-brush but targeted.

 My web site http://jacksonproductivity.com/offshore.htm is a comprehensive look at offshore cost. This blog will summarize the points, please look there for further detail.

 How much will you save?

Labor

For most manufacturers, direct labor cost is typically less than 10% of the cost of goods sold. If you move to South East Asia where labor is one–third U. S. cost, you might save 7% of the cost of goods sold.

But cost per hour is not the only consideration; there are also benefits to workers, mandated holidays, housing, meals, transportation and 13th month benefits.

Next, consider the two types of labor variance, price and usage. Although your labor price may well go down, what about the usage variation and hours worked?

Startup

Move or acquire equipment to fit into someone’s building; startup costs and perhaps a stateside write-down. Import duty on manufacturing process equipment?

What will the learning curve be like for an offshore facility with respect to labor and material losses while it is still below steady state?

Operations

What will the steady state output be? What about utilization, efficiency, productivity, material usage? Don’t forget direct to indirect labor factors, expatriate workers and their costs, turnover rates, theft and security. How well will equipment be maintained; how much down time can be anticipated?

Materials tend to be priced at a worldwide level, and so may not vary much. (There are exceptions: raw sugar is priced much higher in the U. S.)

 Will you pay import duties for raw materials? 

Shipping

Freight, insurance, product damage, obsolescence, tariffs, and brokers fees all contribute to the cost of the landed product. The cost of fuel to return the goods to the USA is low in 2016 but appears to be on the way back up.

Out of market conditions, Product recalls and Shipping Interruption

When a company has no products on the market, wage rate savings are quickly lost. Off-shore manufacturing introduces two factors that recent history tells us pull product off the market, recalls and shipping interruption.

Recalls

Regulation within the United States, and Canada, is frequently the target of criticism. But realize how many recalls the regulation prevents. Count the number of recalls from foreign sources, and realize that a recall on your product washes out any possible labor savings.

United States and Canadian regulation does not allow the use of unauthorized materials; lead based paints and industrial grade chemicals in food products, and outlawed antibiotics for instance. 

Shipping interruption

Interruption comes from production problems such as bird flu strains and SARS which have affected workers, shut plants, stopped production

Shipping just recently has been held up because of the Hanjin crisis and Long Beach labor dispute. Just-in-time factories normally operate on reduced inventories, but they don’t do well in earthquakes and epidemics.

My crystal ball is not clear enough to predict when and where in the world the next major health issue will arise, and the overall impact may well be much greater than missed shipments. But history of the first part of the 21st century indicates that North America will not be the center of the problem.

 How will your U. S. operations change?

There is a long list of overhead costs that will occur as you operate offshore.

Cost to phase out a North American facility, relocate equipment and technology.

Executive and technician travel to support the offshore location as well as special mail and priority shipments of documents, models, specs and products. Modern communications technology can only do so much to mitigate distance, language barriers and the lack of face to face meetings.

Who in the organization will perform product design, new product development and engineering; what about the model shop and pilot plant? Remember, too, that new product transition is problematic even when headquarters is in the building next door.

Who will perform Human Relations oversight. Who will exercise quality oversight and how?

What about procurement and the quality of components? Will you see the product and its components for the first time when the product is in the stores or your warehouse?

Who will provide financial oversight within the new company? How about independent auditing? Although US auditors hardly have a pristine record, they do function under a (more or less) transparent regulatory regime?

Lastly, consider the political vagaries of U. S. tax law. What happens if the deduction of expenses to transfer jobs offshore is disallowed?

Can you continue your business strategy?

Can you practice Just in Time with product on the high seas, subject to port work stoppage? (Not just Asian; Long Beach had recent problems.) Have you planned additional inventory to cover transportation lead times? With extended inventories, will scrap and obsolescence costs increase?

What is the label “Made in the USA” worth to your company and to good will?

Can the new overseas employees and vendors purchase your products on par with your former employees and former vendors who may feel disinclined to buy more?

Will you be able to integrate vertically in an offshore setting as easily as you can here in the US?

How will your Time-To-Market change? Stateside manufacture offers the shortest time-to-market, from product design to prototype to test run to manufacture to ship to customer, especially considering reaction times to changes inherent in the process. If your product depends on style and design and quick reaction to customer whims, watch out.

For a company in apparel for instance where style and change are everyday issues, the advantages of vertical integration, lower shipping costs and the ability to advertise “sweatshop free” can be decisive in choosing a manufacturing site.

Off shore legal and political considerations.

Will practices and laws in the new country limit executive actions?

Can you eliminate jobs in the future? Move plants? At what cost? Emerging nations tend to be much more protective of jobs than the U. S. Even Italy is criticized for the high cost of eliminating jobs.

How will you establish and defend your real and intellectual property rights?

Is foreign ownership possible? Are you ready to partner with a local entity? Remember, disputes will most likely be adjudicated in the offshore country.

Is the local banking system healthy and vigorous?

Is the legal system friendly to investors?

Tax and Accounting issues

What are profit repatriation tax rules in both the host country and the U. S.?

Whose rules will apply to inter-company accounts such as transfer pricing?

Has there been approval by your CPA considering the Sarbanes – Oxley Act?

  Foreign Exchange

 Are your ready and able to predict accurately and respond effectively to fluctuations in exchange rates that affect raw materials and operations? Do you plan to use common currency hedging strategies to minimize exposure? How much will it cost to be sure you obey rule #1, don’t run out of cash?

 Although JPR declines on principal to aid clients seeking to move U. S. jobs offshore, JPR is pleased to advise companies seeking to open new and / or expanded operations in North America, and to return manufacturing.

Check out recent news about other companies who are re-shoring. Companies as varied as furniture manufacturing, small appliances, batteries, and steel have brought manufacturing back to the U. S. from China. Thanks for the time. Jack Greene 843-422-1298

jack@jacksonproductivity.com

http://jacksonproductivity.com

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Tesla facilities expansion, 2016

We read about the Tesla facilities plans, for the electric car sales growth, the introduction of their self-driving auto, the giga-factory for batteries. Because of my facility planning experience, I find it fascinating, but at heart the Tesla actions apply many of the same facility planning steps that any company can use, just on a larger scale. Maybe your company can pick up a few tips from Tesla.

Tesla’s actual and expected growth sets the company apart from most of the rest of the world. The electric car volume grows rapidly, while battery production starts from zero, and self-driving cars are still in development but well on the way. But for most of us who grown and consolidate facilities, the size of the Tesla challenge is unprecedented.

 

Objectives for Tesla or anyone else.

Challenge # ! is probably “don’t run out of capacity”; booming sales forgive many sins. From press reports, Tesla understands this principle and is locking up space before it is needed.

Facility rearrangements are expensive and time consuming, but not necessarily permanent. Layouts are after all just a checker game. What you can do however is to plan sequential stages of development, to minimize lost motion and shorten the calendar.

Classic factors to justify new facilities start with the need for operations space, but they don’t end there. Location sensitive costs are paramount in a new location; real estate, utilities, unskilled labor, minimum shipping for incoming, outgoing, and in-process.

Take advantage of a short term opening, or “window of opportunity”. ( That was the title of some project folders, in my own experience, before a concept even had a name.)

To create good layouts, for short or long term use, zero in on the proven techniques:

Create smooth, direct, and short flow between departments, especially for heavy or bulky parts. Optimize relationships between functions, especially those that need to be close by for movement or cooperation reasons. Utilize space well. Leave a clear path for expansion.

 

There will be costs, there may be benefits to a facility change.

This part of facility planning needs the human touch, although later tasks of detailed layouts are much easier with computers. There may well be cost trade-offs in the options possible, short term windows of opportunity; good real estate buys but not in quite the right location. From press and blog accounts, Tesla has actively managed their opportunities.

Start with some basic corporate objectives such as make or buy. If the corporate objective is to manufacture vertically, then the facility planner has to provide space for components, whether batteries of engineers or machine centers for parts and subassemblies or storage and their movement. And facilities must be in available before the grand scheme can take place.

Throw in property complications of build or buy, and of own or lease. Buy is almost always faster in permit and construction time, and Tesla quickly obtained very suitable, and empty, facilities. Layout can usually be adapted to a building without much negative impact, so it isn’t necessary to find a perfect building. But get your hands on the square feet.

Permits take a significant part of the time to make a facility plan happen, so ease that path in advance; avoid contentious sites or conditions of ecological concern.

 

Option A or option B?

The value of location options can be measured in different ways. Tesla’s property choices were at some distance from each other so movement between locations can be expected to be slower and more costly, but they were away from the very expensive environment that is Silicon Valley. And they now have more facilities, more room.

Where are prospective employees available? Probably nowhere, in the quantities that Tesla needed; but putting plants in desirable locations attracts potential employees.

Other options can come into play in this day and age. State incentives and tax structure are significant. Can the company cash a corporate chit? Encourage a state to see an issue a company’s way? You may decide to include some “might as well” items too, in the new facility scope. And, the classic consideration, just where does management want to be?

This big picture planning is fun, but somewhere along here you will need to put in hard and less interesting work to come up with values. Just what will we put in the new facilities, now and in the future? (A layout has to include every desk and work station and CNC machine and assembly line and pallet.) What technology and equipment? What is the inventory plan? How many engineers, support, manufacturing people do we house? By the way, what is the capital budget?

Far as I know the vision for facilities and equipping them is not available on machines and computers Later steps are greatly aided by electronic programs, but start off with bright people in the conference room.

 

Good luck, to Tesla and all others who would expand..

Jack Greene

843-422-1298,  jack@jacksonproductivity.com

http://jacksonproductivity.com

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Top ten productivity tips

There are many ways to increase productivity, which is shorthand for increasing profit. Different actions are designed for different problems, but check out the following list and choose what fits best for you.

1 and 1 a. For me there are two pre-eminent concepts that seem always to work well. Nothing is more important than either, so we’ll put them at the top: Pareto’s principle (also known as ABC priority, or the 80/20 rule), and get the waste out. You will also find these two concepts woven through many of the other terrific ideas below,

Pareto Principle Vilfredo Pareto, a 19th century, Neo-Classical economist mathematically described the unequal distribution of wealth that he observed in the world around him. His observation, known as Pareto’s principle, has been profitably extended into other fields of inquiry: in business Pareto’s principle tells us that a few of the inventory items will constitute most of the value; a few processes will give most of the trouble; a few line items will generate most of the cost; a few constraints will control the entire pace of operations; a few misdirected efforts will create the most issues. Also known as ABC priority, and the 80/20 rule.

Expressed most simply, productivity focuses on those few items that influence the largest result; Show me the money.

Get the Waste Out

What is waste? A March 2009 “Business Week” article presents this test:

Will a customer pay for this activity?

Will my service fail without this activity?

Will I go to jail if I eliminate this activity?

Answer “no” to all three, and the activity can essentially be defined as waste.
Sounds good to me. Apply the test to all aspects of the organization’s overhead, especially the major cost factors using Pareto; find and cut out waste.

Removing waste is a big part of the Toyota Production System, but years ago it was equally central to Value Analysis and Value Engineering.

Other high quality tools and techniques follow, in alphabetical order. Choose what applies even if your problems are not in alphabetical order.

Activity Based Costing. ABC. ABC is designed to relate individual line items of overhead cost directly to a given product, instead of allocating costs less accurately or even smearing overhead cost across dissimilar operations. An ABC model will assign more costs previously classified as indirect (overhead) into direct costs, compared to conventional costing models.

Overhead is often considered “fixed” when nothing could be further from the truth. But unless defined by a mechanism such as ABC, overhead items may be poorly differentiated, hard to understand and manage. ABC may require more time and effort, but much more of the cost structure can be directly related to cause and effect.

Economic order quantity; EOQ. An EOQ is the level of inventory that minimizes total inventory holding costs. It is one of the oldest classical production scheduling models. It applies accurately and simply to purchases and manufacturing batch sizes, and the math relates current costs to all the factors that vary with batch size. Rather than rigidly choosing a batch size or Just In Time delivery, optimize considering the total real costs throughout the system.

Expectations  Create expectations, because everyone wants to know what they are expected to do. That is true of you and me and all the people in your organization. How specifically should expectations be expressed? Ah, that is a tricky question. I would suggest that a good estimate is better than no statement at all, and that it is possible to over-define the detail. Performance standards, quality specs, delivery schedules, standard costs, project management will be topics that a Pareto analysis says are important.

Stockholders and customers want to know what to expect from an organization, as well. The answer to them will be more accurate when internal expectations are established and met.

Flow chart. “Flow chart” may be the mechanism of graphically showing the steps of an operation or process, or it may refer to the diagram itself. For many including me the first step to understanding an operation is to flow chart it. Value chain mapping is a later term.

There are only five things that can occur during a step in a process; an operation, a move, a delay, an inspection, a storage. Note that four of these possibilities do not add value. Work of any type can be flow charted; products, paperwork, electronic documents.

Line balance, in the broad sense of balancing all the resources involved. The objective is to assign members of a working group so that production flows smoothly without constraint. The members may be equipment, or people working alone or in crews or teams. Note that optimum workloads are not necessarily equal; load the bottleneck or the primary cost / income producer, at the expense of secondary ones.

 Performance reporting. Expectations such as standards or quotas are useless without objective reporting of actual performance against the expectations, and the communication of the reports to those concerned. Is it possible to assign accountability without accurate, timely reporting? No.

Product pruning is the concept that reviews each product or output periodically to determine whether it should remain in the catalog. The judgment can relate to profitability or to a subjective measure, and absolutely requires accurate standard costing and overhead allocation. Sales may complain that customers love a product being pruned; why would they not love it if they get it below cost?

Pull system. A manufacturing planning system that loads production based on communication of actual real-time needs from downstream operations and customers, ultimately sales demand; as opposed to a push system which schedules upstream operations according to theoretical sales volumes. Don’t stop forecasting, but do set up your process to recognize real demand and react quickly.

Short Interval Scheduling; SIS. A system invented by Alexander Proudfoot to improve work assignment. First applied in warehousing, it is effective there and for management of other short interval jobs. Short interval scheduling is self-explanatory and I learned if from my wife. Take out the trash, honey, when you are done in about two minutes; then come back and I’ll give you the next chore.

This level of control may look like micromanagement, but in many circumstances it can mprove productivity and throughput. Both boss and worker get positive reinforcement from each task completed, and both know that a task is done so we can move to the next step. The actual time taken then can be entered to update the data base.

Total Productivity is the understanding that productivity is not just for the production floor, but can generate improvement throughout an organization. Indeed, following Pareto’s principle, the majority of costs will be elsewhere than on the production floor. Total productivity is near the bottom of the alphabet, but in actual practice you had better move it up the list.

Toyota Production System; TPS, often known as Just in Time, or JIT, or Lean Manufacturing, or Lean. The source of all of these was the post-war Toyota Motor Company of Japan, developed by Sakichi Toyoda and his son Kiichiro. Taiichi Ohno is widely credited with making TPS a reality. Consultant Shigeo Shingo was an important contributor as were Eiji Toyoda and Saito Naichi. Ohno said, “The most important objective of the Toyota System has been to increase production efficiency by consistently and thoroughly eliminating waste. This concept and the equally important respect for humanity … are the foundations of the Toyota production system.” Please don’t overlook the latter objective.

Search out excellent current authors on lean and TPS; Bill Waddell at Evolving Excellence; Dr. Bob Emiliani, at The Center for Lean Business Management, and Michael Baudin.

Oops, that is more than ten tips, but I am reluctant to remove any. Detail on these, and many more improvement techniques, are in the Industrial Engineering : Theory, Practice & Application book, found on http://jacksonproductivity.com.

Good luck, Jack Greene

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Cost reduction, business style

Productivity Improvement or   Cost Reduction?

Different sides of the same coin or two separate activities? Pretty much the same to me, some may call it one thing, some another.

Classically, productivity is defined as Output divided by Input.

or- A second definition is, productivity is the same as profit, selling price minus all costs

-or- Toyota sees Profit = (Price – Cost) x Volume, assuming that the manufacturer cannot dictate the sales price.

Different mathematics, same theory: To improve productivity or gain profit, raise output and / or lower input.

Now that we have the theory out of the way, let’s speak of actions to stress inexpensive and quick ways to raise output and / or lower input in your organization, whatever your line of business. Cost effectiveness is just as effective in the front office, the lab, the maintenance shop, the field, the customer service unit, and the warehouse as on a production floor.

For a deeper analysis, my Amazon book Cost Reduction: In Business Management offers actions for any phase of the economy, for all levels of the organization chart. Click https://www.createspace.com/4418145 for info.

General Cost Reduction procedure:

  1. Act to raise profits or output, to ease bottlenecks, to refine operations that have lost their sharp focus over time or start effective new ones. Operations are most profitable when they have the least waste, and that is the heart of the Toyota Production System.

    A. Raise Output Maximize capacity and equipment capability, manage constraints Match throughput to customer demand Cut cycle times for quick response to market conditions

    B. Lower input, not only direct but administrative and indirect
    Minimize facility capital and operating costs
    Optimize manufacturing and processes
    Simplify logistics, shipping, warehousing Define the process for high quality production
    Establish standard costs and measure against them
    Adapt inventory to continuous manufacturing practices Match overhead to throughput
    Balance inventory levels to output
    Get the most out of material purchases

    2. What first?
    Apply the Pareto Principle Vilfredo Pareto, a 19th century, Neo-Classical economist mathematically described the unequal distribution of wealth that he observed in the world around him. His observation, known as Pareto’s principle, has been profitably extended into other fields of inquiry: in business Pareto’s principle tells us that a few of the inventory items will constitute most of the value; a few processes will give most of the trouble; a few line items will generate most of the cost; a few constraints will control the entire pace of operations; a few misdirected efforts will create the most issues. Expressed most simply, productivity focuses on those few items that influence the largest result. You may know Pareto as the 80/20 rule, or ABC. Show me the money.

    3. Specific ideas.
    A. Management practice
    1. Product pruning A thousand years ago when I was with ITT in the Harold Geneen days, there was a practice called product pruning. Each company was required to decide annually which if any products should be eliminated, based on cost versus income. That is not as simple as it sounds because it requires an accurate knowledge of real costs and net sales prices. Many times since then I have seen individual products crying out for pruning but still in the catalogue.

    2. Overhead allocation method or absorption. Is your overhead allocation and absorption correct? If not you can’t make a sound decision about product pruning, or product profitability, or equipment justification, or department profitability. It takes some work to sort out costs and apply them correctly, but if not you will have information that is meaningless at best, and harmful at worst. Correct decisions can only be supported by correct information.

    3. Lean manufacturing, a common term for the Toyota Production System, is well applied only when it is corporation wide, encompassing admin and executives as well as the production floor. What is your manufacturing labor cost? If you cut that by a quarter, how much do you save? Compare that to an 5% improvement in the rest of the budget. Go back and look at Pareto again.

    4. Just In Time inventory control principles and MRP are mutually exclusive. You can’t enjoy the benefits of both at the same time.

    5. Economic Order Quantity is a proven benefit to operations cost. Modern systems try to improve on EOQ, but with all the expensive additions, all the buzz words, they do not improve on the basic theory, much less the simplicity. An excellent article by Dave Piasecki talks about Economic Order Quantity and it’s uses and misuse within modern inventory control systems; it will be worth your search.

    B. Operations
    1. Constraints management is perhaps the most important tool to use on the shop floor, and it usually is pretty inexpensive to correct problems quickly. Identify production constraints, manage them, and staff all other tasks according to the constrained output level. Then in order, raise the constraints. Please see my article on the subject of Capacity.

    2. Check the company’s basic outlook for production. Is equipment dedicated to one product or flexible to process many products? Does your present arrangement match you present product mix and objectives?

    3. My experience tells me that the work pace of people is pretty good while equipment is running and material available. The loss of productivity comes at changeover, down time, and when material is not available. Pay special attention to changeovers; question carefully why they occur in the first place, then study changes and speed them up.

    4. Is your materials management policy to start a product down the line even if not all components are on hand? You can prove it to yourself that is wrong, or you can take my word for it. It is costing you money, in changeovers, idle delay, bigger inventory, rework.

    Good luck. Call if you need help.

    Jack Greene, Jackson Productivity Research Inc.

jack@jacksonproductivity.com

http://jacksonproductivity.com

843-422-1298

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Productivity 101

Productivity, in the business sense, is what my consulting company is all about. Jackson Productivity Research Inc., productivity is our middle name. This is blog one, and others will follow with reference to current news and views, because there is some ingenious work being done.

It’s a fact that productivity principles can favorably affect cost, boost output and increase your organization’s outlook. The subject is broad but includes at least,

Time Study / Work Measurement;  which is the basis to improve output, utilization, and cycle times; optimize staffing levels; balance assignments; identify non-value added activity; create objective cost definition and control; lay the groundwork for incentives if desired.

Reduce Cost / Improve Productivity; to identify cost reduction opportunity in your present situation; set up continuous improvement.

Balance workloads; through objective observation and time study of people, crews, equipment, and processes; reach optimum, sustainable levels, cut lost time and resolve conflict.

Optimize Capacity and manage constraints. Sales vary, your operations should respond to meet demand efficiently. Identify and manage constraints for lower inventory, faster reaction and shorter cycle times. Adjust manning according to desired capacity.

Facility Layout
Match today’s mission to the space, in existing or new facilities; design efficient flow patterns for product and people; fit equipment, processes and people into the property; improve floor space utilization.

Relocate, merge or consolidate; position facilities to cut costs or aid customer service; integrate acquired or merged operations and facilities for efficiencies, better utilization and economies of scale; find a cost effective location using business criteria and/or quality of life factors.

After all, we wrote the book. Four books so far, on Amazon. In both print and Kindle editions. Plant layout, time study, cost reduction, facility relocation and consolidation. Click on http://jacksonproductivity.com for the Amazon link, and to learn about what my company is all about. Please let me hear from you. I can promise you there are many ways to find the productivity that we all seek.

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