What Manufacturing Can Teach Us about Services Outsourcing

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    Michael Cyger, the head of lively iSixSigma.com, turned me onto a Webinar that’s now in archive form. The title: “The China Factor, Manufacturing Growth in a Global Economy.” He knew we were about to publish a report about outsourcing to China (you can read chapter 1 here…), and he thought I might like to hear the manufacturing perspective.

    Fascinating presentation by John Brandt, CEO of Manufacturing Performance Institute.

    What’s to learn from US manufacturers about outsourcing to China? Perhaps how to run your company here.

    Let’s start with some statistics. Some of the numbers that Mr. Brandt shared from research his organization has done are remarkable.

    First, forget your beliefs about China being a low-quality producer. It’s not true. The “first pass yield” median for the US was 97%. In China it was 98%. Within the next decade, I believe we can expect to see the same on the services side. China will no longer be simply a producer of the lowest-end work at the lowest possible billable rate.

    Second, Chinese firms are investing far more heavily than the US in capital equipment and especially in IT. Whereas US firms are investing about 1.4% in tech as a percent of sales, in China it’s 5% — three times as much. If you believe, as I do, that the smart application of technology is a driver for innovation, that number should shock you. If manufacturers in this country — which have lost so much to China’s manufacturing industry — don’t buy into innovation, how do they expect to stay alive? And what can other types of organizations learn from that?

    Third, market objectives aren’t the same in the US as they are in China. Quality is number 1 for both countries (70% for the US and 73% for China). (I’m delighted to hear that — though the research may have had a bias to quality-oriented operations.) The number two market objective for the US is service (53%), whereas for China, it’s innovation (54%). If service really is top priority for US manufacturers, they have odd ways of showing it. I mean, when are we going to be able to go online and order up a car like we order up a Dell computer? “I want this model in that color with these options. Now tell me how much it’ll cost — oh, wait; too much; change that option. There. That’s better. OK, so now tell me when I can expect it to arrive via a UPS driver in the next three weeks and how I can finance it through my usual credit channels.” That would be service to me. (Yes, it would also be innovative.) A Chinese firm couldn’t do that for me; an American firm could.

    As Mr. Brandt said, “Increasingly if you want to compete, you can be the commodity player or you can figure out how to do something different.”

    Another point that stayed with me: Most of us are working with “legacy dashboards… Once we went online, all that did was to increase the reports… The problem is that most of them aren’t of any real use in figuring out how to manage the business.” Mr. Brandt gave the analogy of the car dashboard. We’ve had a hundred years to refine what we really need — who cares about wind speed or temperature? — and now cars share just the information that’s really crucial to our operations. Business dashboards should be like that.

    Another myth he shattered: that China is simply a land of low-cost labor and sweatshops. Apparently, China has a leg up when it comes to human resource programs. — though he observed that they take different forms. Among the US manufacturers that have achieved world-class status, only about half train at a level of more than 20 hours per employee per year. In China, 53% trained more than 20 hours; almost a third trained 40 hours or more per year. Yes, there’s a fundamental difference in this area: Plants there need to train rural workers in some of the most fundamental tasks. But the point is that Chinese companies are developing “a commitment to being world-class going forward.”

    A final note: Mr. Brandt’s research shows that among US manufacturers, those who have the most integration with the customer base are least likely to outsource to China. “If you want to compete, you can’t just be focused on the production or product or commodity,” said Mr. Brandt. “You’ve got to be focused on how you become more to your customer than just somebody they go to for a lower price.”

    This applies to value provided by IT workers; this applies to the value added by service providers; this applies to client companies competing for attention in a flat world.

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