How the New Year in China affects supply chain reliability

An interesting story from today’s Wall Street Journal (Companies Seek to Avoid China New Year Hangover, Feb 21). Basically, the Chinese New Year is complicating supply chain management.

For toymaker The Bridge Direct, Easter now begins in August.

That is when the Boca Raton, Fla., producer of Inkoos stuffed monsters and Justin Bieber dolls has to file orders with its Chinese suppliers to ensure delivery by the spring holiday. It used to place orders closer to the key selling period, which allowed it to get a sharper sense of demand and better manage its cash. But now the greater concern is making sure it doesn’t get left shorthanded because of China’s New Year holiday.

The company is one of many from the U.S. and other countries that are closely watching China as factory workers slowly return this week from the country’s long Lunar New Year holiday. Every year, millions of China’s 250 million migrant workers leave their factories and travel across the country to visit their families at home. The problem for toy and apparel makers in particular is that fewer and fewer workers are returning to the factories when the break is over.

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Innovation and quicksourcing

Chris Anderson, the former editor of Wired and current 3D printing cheerleader, has an intriguing piece in the New York Times (Mexico: The New China, Jan 27). it deals with his experience running 3D Robotics, a maker of civilian drone aircraft. 3D Robotics competes with firms that sourcing their production in China and hence they have had to find a way to take on competitors with low labor costs. Their answer? Tiajuna, Mexico. 3D is based in San Diego so engineering is done on the north side of the border but assembly is done on the south. Labor costs may higher than in China (but, as the article notes, the gap is closing as Chinese wages rise) but Anderson sees many advantages in his firm’s “quicksourcing” model that depends as much on speed as cheap hands.

First, a shorter supply chain means that a company can make things when it wants to, instead of solely when it has to. Strange as it may seem, many small manufacturers don’t have that option. When we started 3D, we produced everything in China and needed to order in units of thousands to get good pricing. That meant that we had to write big checks to make big batches of goods — money we wouldn’t see again until all those products sold, sometimes a year or more later. Now that we carry out our production locally, we’re able to make only what we need that week.

This point obviously depends on owning one’s own facility in Mexico or having a very tight relationship with the Mexican supplier. If a small buyer doesn’t have much negotiating power with a supplier it will still likely face large minimum purchase quantities when buying from Mexico. Still it is an interesting observation and suggests that some start ups may be making ill-advised trade offs between cost savings and flexibility.

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Apple versus Samsung: Is Design or Business Model the sustainable advantage? What does that mean for Outsourcing?

Apple, the world’s highest valued company, and its relationship, both competitive and cooperative, with Samsung provide a wonderful setting to discuss some fundamental questions that relate to strategy and operations:

FIRST: Which one is the more sustainable provider of Apple’s competitive advantage: design or the business model?

• Daring Fireball’s John Gruber wrote three beautiful paragraphs to argue his view on what he termed “The New Apple Advantage“:

So let’s be lazy for a second here, and attribute all of Apple’s success over the past 15 years to two men: Steve Jobs and Tim Cook. We’ll give Jobs the credit for the adjectives beautiful, elegant, innovative, and fun. We’ll give Cook the credit for the adjectives affordable, reliable, available, and profitable. Jobs designs them, Cook makes them and sells them.

It’s the Jobs side of the equation that Apple’s rivals — phone, tablet, laptop, whatever — are able to copy. Thus the patents and the lawsuits. Design is copyable. But the Cook side of things — Apple’s economy of scale advantage — cannot be copied by any company with a complex product lineup. How could Dell, for example, possibly copy Apple’s operations when they currently classify “Design & Performance” and “Thin & Powerful” as separate laptop categories?

This realization sort of snuck up on me. I’ve always been interested in Apple’s products because of their superior design; the business side of the company was never of as much interest. But at this point, it seems clear to me that however superior Apple’s design is, it’s their business and operations strength — the Cook side of the equation — that is furthest ahead of their competition, and the more sustainable advantage. It cannot be copied without going through the same sort of decade-long process that Apple went through.

• James Allworth, co-author of How Will You Measure Your Life?, adds an important dynamic component to the argument by applying Clay Christensen’s theory to this question:

The design part of Apple’s equation is to their ability to redefine new industries as they did with the iPhone. Whether they go after the TV market next, or something else, it’s this integrated design component that will be crucial to their initial success. But compared to the business side of Apple, design actually generates much less sustained strategic advantage in any one product category, once performance in that category becomes “good enough”. The tech industry has always revolved around copying. Once folks work out how it’s done, everyone piles on. And at that point, it becomes much less about design than it does about how you operate your business.

• In summary: the answer to whether design or the operating model is the more sustainable competitive advantage is the typical MBA response to a tough question: “it depends.”  The rather sophisticated reasoning involves the fact that products and services over time improve and then become “good enough” and the dimension of competition shifts. Notice that I did not say that design is a commodity and fully copyable (my personal favorite question: why can’t Lexus designs have the timeless sophistication and elegance as Mercedes?); rather, another dimension overtakes it in importance.

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Why is GE bringing appliance manufacturing back from China?

The cover of this month’s Atlantic proclaims Comeback Why the future of industry is in America. It features two articles (The Insourcing Boom and Mr. China Comes to America) on how companies are “insourcing,” moving production back from other parts of the globe (primarily China) to the States. They make some interesting points. The Insourcing Boom focuses on General Electric’s decision decision to repatriate a significant amount of its appliance manufacturing to Louisville, Kentucky. Before you dismiss this as a bit of window dressing to provide some political cover, you should know that Jeff Immelt and company are dropping $800 million to make this happen. I’m sure Mr. Immelt likes political cover and good press as much as the next CEO, but he didn’t get to be head of GE by spending nearly a billion dollars on a whim. They really believe that they can make this work.

The article points out several factors that have come to favor producing in the US.

At Appliance Park, this model of production—designed at home, produced abroad—had been standard for years. For the GeoSpring [water heater], it seemed both a victory and a vulnerability. The GeoSpring is an innovative product in a mature category—and offshore production, from the start, appeared to provide substantial cost savings. But making it in China also meant risking that it might be knocked off. And so in 2009, even as they were rolling it out, the folks at Appliance Park were doing the math on bringing it home.

Even then, changes in the global economy were coming into focus that made this more than just an exercise—changes that have continued to this day.

• Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
• The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)
• In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
• American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.
• U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.

That’s a compelling list but all in one or another come around to saying that the US is cheaper (or China is more expensive) than you would have thought. But the article also makes the case that there are further benefits. 

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Logistics sweatshops

We have had a few posts about the reported poor working conditions in e-commerce fulfillment centers (see here and here). Now The Guardian has an article describing similar issues in distribution centers for bricks-and-mortar retailers (‘They shout at you and harass you’: how workers toil at Walmart’s US suppliers, Jul 25). Many of the complaints are similar to those heard about fulfillment centers: unrealistic quotas, poor pay and benefits, and a general disregard for worker safety. And, as with some of the earlier reports, these are being publicized by organizations tied to unions.

For my money, the most interesting part of the article is its characterization of the Wal-Mart’s supply chain in California’s Inland Empire.

While much recent attention has focused on abuses at the outsourced Chinese supply chains of companies like Apple, some experts believe Walmart’s US-based supply chain is built on a similar model, but one constructed within America US itself.

As is common in China, the supply chain is marked by layers upon layers of subcontracting. So, while every single box packed and unpacked at NFI Crossdock is destined for Walmart, the warehouse is owned, run and staffed by myriad other companies. The supply model has been dubbed “insourcing”, and experts say it is defined by ruthless cost-cutting as each layer of subcontracting seeks to eke out a profit margin.

“Walmart’s suppliers run out of places to squeeze out the costs, and they are left with the workers,” said Catherine Ruckelshaus, co-author of a recent report on the supply chain called Chain of Greed, that was produced by the National Employment Law Project.

Walmart is not the only big-box retailer supplied by the huge warehouses of the Inland Empire. Other major firms, such as K-Mart, Home Depot and Toyota, also work there. But Walmart sets the model for the others by its sheer size.

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Boeing and Airbus: Outsourcing and Managing Visibility

The Wall Street Journal ran a series of articles on the challenges Airbus is facing. I will try to cover several of these, as each highlights a different issue, and I would like to begin with the one discussing the effort made by both Airbus and Boeing to fight the delays that plagued their operations during the last several years (“Hit by Delays, Airbus Tries New Way of Building Planes“.)

Both Boeing and Airbus have outsourced, during the last few years, not only their production, but also the design of the different parts, as well as the management of the suppliers’ sub-tiers. We have documented these in the past (“Boeing Delivers First Dreamliner“,) and the article, briefly mentions these. Manufacturing problems have left Boeing with more than 40 almost-completed Dreamliners awaiting fixes. Their main customers now expect to get their planes around four years late. The project has cost Boeing billions more than its initial $10 billion budge.  The reader must recall that Boeing has embarked on this ambitious outsourcing plan to reduce investment costs, and speed R&D and production. As we all know, things have not panned well for these two goals. What were the main reasons: loss of visibility of the progress of different suppliers, as well as incentive issues.  It took Boeing quite a while to figure it out, but they finally have:

In a major retreat, it has since bought up suppliers, brought work back in-house and integrated more closely with its remaining contractors.  ”We gave away a lot of elements of work that we’d always done in the past, and then didn’t provide the kind of oversight necessary for some of the people that were doing work that they’d never done before,” said Boeing Executive Vice President Jim Albaugh, who ran its airplane division until June, at an investor conference last fall. To retrench, Boeing mobilized hundreds of engineers specialized in manufacturing and industrial issues, who have pored over every element of the program, including at suppliers. At its factory near Seattle, Boeing built a control room with video links to overseas suppliers, allowing its engineers to examine parts live on shop floors in Japan or Italy. For a second, larger version of the Dreamliner, Boeing opted to design many outsourced components itself, such as the plane’s rear section and tail wings.

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Update time! Apple & Uber

Today we’ve got a few short comments on things we have touched on over the past few months.

We have had several posts in recent months on the travails of Apple and its manufacturing partner Foxconn. Now public radio’s Marketplace has a pair of stories on Foxconn’s factories — produced with a little more cooperation on the company’s part than similar stories (The people behind your iPad: The workers, Apr 11, and The people behind your iPad: The bosses, Apr 12). They also have this video of actually making iPads.

One of the more interesting observations from these articles relates to the kind of workers Foxconn is hiring (from “The Bosses” article):

But that hasn’t stopped hundreds of migrant workers from turning up every morning at Foxconn’s doorstep in the coastal city of Shenzhen. On this day, 500 people line up to apply for jobs. …

I ask Louis Woo what Foxconn’s looking for in these applicants.

Woo: To make sure that they can articulate themselves and they can understand instructions

OK. That doesn’t seem too hard. Still, Foxconn’s HR manager tells me that 200 of these 500 people won’t make it through the application process. Louis cuts in and gives some context on the labor pool they’re dealing with here.

Woo: I was told that there are young kids coming over here that have never flushed a toilet before. They’ve never taken an elevator. So if you don’t tell them what to do, they would just wait there until the next elevator comes along. Even going inside, they don’t know which floor to go up to.

Next up a service story.

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Expected and unexpected benefits from keeping production local

Here’s a fun thing to think about: What are the supply chain benefits of keeping production in-house — and, in particular, close by? That is the topic of a recent post on the company blog at Voltaic Systems (What and Why Voltaic Insources, Feb 16). Voltaic makes solar-powered backpacks. Wonder just why one would want a solar-powered backpack? Check out this IBM podcast (from May 2009) with Jeff Crystal, the author of the blog post.

In any event, Voltaic does final assembly of their bags in the US. The original rationale for this was basically to avoid paying the US government. Apparently the US charges a 17% tariff on imported backpacks and since solar panels make a Voltaic bag a premium item, these would add up. The real interesting parts of the posts are the description of the expected and unexpected additional benefits Voltaic has received from doing assembly in the US.

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NBA, “Friends” and Hamburgers: Why Call Centers are Moving to the Philippines

One of the goals of the Operations Room is to equip its readers with the ability to converse knowledgeably on all-things operations. In our board meetings, we tend to imagine situations in which such knowledge will be of at-most importance. Thus, we were very happy to see that the NY Times (“A New Capital of Call Center“) covered a story we already covered before (“Call centers in Manila“,) so when a reader would be invited to an operations- oriented cocktail party, and confronted with the question “what’s the world capital of call centers”,  said informed reader would not be left speechless.

Over the last several years, a quiet revolution has been reshaping the call center business: the rise of the Philippines, a former United States colony that has a large population of young people who speak lightly accented English and, unlike many Indians, are steeped in American culture. More Filipinos — about 400,000 — than Indians now spend their nights talking to mostly American consumers, industry officials said, as companies like AT&T, JPMorgan Chase and Expedia have hired call centers here, or built their own. The jobs have come from the United States, Europe and, to some extent, India as outsourcers followed their clients to the Philippines.

As several observers point out, this change reflects the maturations of the outsourcing business that now focuses on more than just pure cost and a somewhat superficial view of language. In the early days of this industry, as in many other industries that attempt to outsource, firms focused on finding call centers in English speaking countries with low wages. India was a good solution, and developed a whole industry around Business Process Outsourcing in general, and call center outsourcing in particular. Wages in India are still significantly lower than in the Philippines ($250 a month in India, rather than $300, at the entry level in the Philippines).

…but executives say they are worth the extra cost because American customers find them easier to understand than they do Indian agents, who speak British-style English and use unfamiliar idioms.  “It helps that Filipinos learn American English in the first grade, eat hamburgers, follow the N.B.A. and watch the TV show “Friends” long before they enter a call center. In India, by contrast, public schools introduce British English in the third grade, only the urban elite eat American fast food, cricket is the national pastime and “Friends” is a teaching aid for Indian call center trainers. English is an official language in both countries.

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“Impact Sourcing” = outsourcing for social betterment

Impact sourcing refers to “the strategy of harnessing the Internet to bring low-cost data management jobs to remote and impoverished communities,” as David Bornstein wrote in the New York Times. He described two social enterprises that extend computer-based employment to people with modest educations in developing countries:

One of them is Digital Divide Data, a pioneering organization that employs 900 people in Cambodia, Laos and Kenya and was founded way back in 2001. The other is Samasource, a fast-growing enterprise that was established in 2008 and has already received recognition for its ability to manage “microwork” in a kind of virtual assembly line that spans 1,600 workers across Haiti, India, Kenya, Pakistan, Uganda and South Africa ― some of them living in refugee camps.

Both Digital Divide Data (DDD) and Samasource were founded by former management consultants whose experiences in the developing world led them to redeploy their skills to alleviate poverty.

Essentially, these companies help people from disadvantaged backgrounds gain a foothold in the global economy.  It is offshored outsourcing, but with an
ethical aspiration:

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