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Features By: Jim Womack

The end of outsourcing: produce where it makes sense

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ARTICLE - In this essay, one of the 12 new essays written for the second edition of Gemba Walks, Jim Womack encourages firms to "do the lean math" and move production where it makes most sense.


- Move Your Operations Back From China? Consider Leanshoring Instead -

from Gemba Walks 2nd edition

What a difference a decade makes. When I prepared the essay "Move Your Operations to China? Do Some Lean Math First" in 2003, there seemed to be something approaching a panic in purchasing organizations of major companies to relocate production from the United States, Europe, and Japan to China. And, as often happens in these situations, the behavior of large, market-leader companies was being mimicked by smaller organizations, including those supplying the large organizations, without much independent analysis. 

At that point I had been going to China to look at businesses for 20 years and this whole mindset seemed strange to me. Wasn't it obvious that there were many hidden and indirect costs in obtaining goods from unknown firms or start-up operations located far away? (It took me several pages to list these in my essay.) Above all I disliked the way purchasing could order existing suppliers to move or find new suppliers or offshore work currently being done in-house near customers to new, low-wage facilities far away and do this without anyone else in these big organizations - sales, engineering, operations - having to do anything to improve their own performance. Yet this poor performance had often pushed manufacturing companies to the brink in the first place! Cutting and running therefore seemed like a great way for big companies and their smaller followers to continue to lose competitiveness. 

Today the pendulum is starting to swing back. The Chinese economy is slowing, exchange rates are shifting, energy costs are falling in the United States, Chinese wages are rising while wages in North America and Europe are stagnant, and a lot has been learned about the actual total cost of offshored items imported for sale in North America, Europe, and Japan. This last factor is another way of saying that much of the offshore "savings" proved to be pretty much imaginary, even without adjusting for the more recent trends, once senior managers looked beyond the accounts of the purchasing organization. That's the place where all of the savings showed up, but none of the extra costs. 

There is now a vigorous "reshoring" movement as a consequence of these shifts in fact and perception, although it is far from clear that much has actually been reshored yet. One highly visible examples is General Electric's decision to move its home appliances business back to Louisville, KY, from China and Mexico. However, despite GE's high visibility and the long history of other firms following its lead - for example, on modern management, Six Sigma, and being first or second in every industry where a firm chooses to compete - GE alone can't create a trend.

May I suggest that if you are thinking about reshoring (or are still thinking about offshoring), you "leanshore" instead? This approach asks a simple question: What is the leanest way to provide product X for customers in country Y over the period of time (probably a long one) your organization plans to be in this business? By lean I mean the location and production methods requiring the least effort, time, capital investment, and waste of all sorts. In my experience "lean" and "low cost" are not perfect synonyms at every point in time, but over extended periods they are very nearly identical. Creating a truly lean, rapid flow of value from producer to consumer in proximity to the consumer builds valuable capabilities for the future that endure far longer than short-term cost advantages.

Let me cite the example involving GE at Appliance Park in Louisville. (We at LEI know something about this because we have been involved in several experiments connected with this effort.) GE totally outsourced and offshored this business in the 1970s to Mexico and in the 1990s to China. It "hollowed out" the business to the point that appliances inside GE involved only marketing, sales, and advanced engineering activities.

Because appliances are largely air - bulky items without much content inside such as refrigerators, ovens, stoves - transport was always an issue for serving North American customers from the other side of the world. But for a while it appeared that the labor cost savings offset other costs of many types associated with long distance transport of white goods.

Gradually this perception changed. In addition, GE grew concerned that without engineering, production, and supplier management skills coupled tightly to production and logistics, it was increasingly disconnected from important attributes of its business that were critical to long-term success. So a decision was made in 2011 to in-house and re-shore the entire business back to Appliance Park. And in doing this GE has had a chance to totally rethink its business using lean principles.

When GE made its decision many observers questioned the wisdom of this strategy (and the move is strategic). They pointed out that all of the engineering skills and production knowledge once present at Appliance Park was gone. No one knew how to do things in the old way. But this was the very best part! GE could begin anew in what amounted to a startup and apply lean knowledge about the best way to organize and manage production. And it could combine lean production with new approaches to engineering, marketing, sales, and supplier management, all in close proximity on the same site.

Why do I call this "leanshoring" rather than "onshoring" or "reshoring"? Because the move is not primarily about short-term cost savings, although with luck there will be some. It is instead a long-term effort to create a lean enterprise that will provide the maximum value for its customers in a geographic region with the minimum waste and which can continue to create even more value with even less waste over time as its management and technical capabilities continue to improve. 

Please understand that I stand by my original essay on doing lean math before moving production to the far side of the world. (My suggestions on how to do the math have been greatly elaborated by the Onshoring Initiative with its Total Cost of Ownership calculator that any company can use. You can go to www.reshorenow.org for details.) With the concept of leanshoring I am now simply adding a time dimension that is beyond the short-term, lowest-cost mentality I was trying to counter. When companies were seemingly moving their operations as far from their customers as possible, I said, "Do lean math first. You may be imaging savings that will never materialize." And now that at least some companies are thinking of moving some operations back closer to their customers, I say, "But do lean math first. You still need to understand long-term total costs across your organization before you do anything." It may be that the lowest long-term cost location is still far from the market of sale. And it is even likely that for some products the long-term, low-cost location is in a lower-wage country on the periphery of the region of sale (e.g., Mexico and Central America for the U.S. and Canadian markets).

I am simply adding the important point that lean organizations should do long-term math, not just math for the moment based on labor, energy, transport, and other factor costs that can change in an instant while truly lean production systems must be built to last over many years.

An important aside here: Toyota was severely criticized during the recent era of the strong yen for failing to move practically all of its operations not needed to serve Japanese customers rapidly out of Japan. But Toyota has taken nearly 70 years to build those operations to their present performance in terms of value and waste. And it has learned the hard way in recent years how difficult - and sometimes impossible - it is to create new production and engineering facilities around the world that can quickly achieve and then sustain the level of performance in Toyota City. Now the yen has weakened, Toyota is headed for record profits, and all of the recent wrong-minded advice is forgotten. But lean managers should not forget: Locate for the long term, not for short-term cost savings.

The great opportunity of the present moment for many firms is to start over with leanshored, greenfield facilities in the right long-term locations and do everything the right way. By contrast, my great fear is that some companies will bring production back to North America or Europe and conduct it in the same mass production, modern management way that got them in trouble in the first place. Think instead of leanshoring as a start-over and start-up opportunity, a chance to do everything the right way the second time around.

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Jim Womack photograph


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