There are two sea changes going on in the world economy. The first is the
rise of the “low cost” producers in China and the second is the lean
revolution which is now gaining momentum. Although the lean revolution
began long before the recent rise of China, they go hand in hand. Lean is
as essential to Chinese firms seeking to become global as it is to western
firms responding to their challenge. All of us will be better off as a result.
No country has ever built a sustainable competitive advantage based on
low wages. Inevitably wages and other costs begin to rise, as they are
now doing in China. This is a good thing and the whole point of
development. But it means Chinese firms wanting to export more
sophisticated products to the west will have to learn that quality comes
from good design and capable lean processes from which all unnecessary
touch labour has been removed. The good news for them is that lean
processes do not necessarily require high tech equipment or expensive IT
systems.
There is also no doubt that successful Chinese firms will also establish
manufacturing operations in other regions. Indeed they have begun
buying companies in Europe and America. This will pose a major challenge
to Chinese managers, just as it did to Japanese and Korean firms moving
abroad for the first time. It takes time to build a significant cadre of
managers with experience of managing operations abroad and to integrate
foreign managers into the senior ranks of the company back home.
Toyota’s unique advantage was its ability to spread lean through its global
operations. Korean, and now Chinese firms have to learn lean as well as
how to run their global operations.
The initial reaction of western firms and policy makers to the Chinese
threat is to increase spending on technology and innovation. Nothing
wrong with that - but it can’t be the whole answer. Just consider the huge
number of engineers being educated in China and now being employed to
reverse engineer all the machines they are buying from the west. Also
remember what has happened to firms that have pursued a pure
technology strategy – like the premium car makers in Germany. They
made formidable products that were too complex and unreliable for their
customers. Technology alone is not enough.
This points to the one competitive advantage western manufacturers do
have – they are closer to their relatively affluent customers – that is you
and me! They ought to better understand their needs and ought to be
better at developing just the right new products and services to solve their
problems – managing their health, coping with congestion, seamlessly communicating etc. They also ought to be able to get these products and
related services into the hands of these customers far more quickly than
producers located half way round the globe.
This is our comparative advantage – yet we don’t recognise it - and we
are not really exploiting it very well! Manufacturers are far too removed or
even insulated from their customers. They seldom interact with the end
users of their products and their distributors, whose main role is getting
the best price for products already made to forecast, have in many cases
lost contact with customers as they outsourced customer service.
Focus groups and market research are no substitute for knowing exactly
who their most important end customers are and building intelligent
feedback loops from them on how to help them use their products to solve
their problems. This means feeding back to a highly responsive product
development process that can get the next generation product to market
in months rather than years. Toyota recently announced a target of 12
months from design freeze to launch for every new car. How long does it
take you to develop new products and how many of your new products
really succeed?
When it comes to responding to their needs more rapidly we also fail. My
rule of thumb is that if it takes less than an hour of value creating time to
make the product it should take no more than a day to go through the
factory. Likewise if it needs an hour
’s work by engineers and procurement
to draw up a quote this should take no more than a day. Every step in
each organisation through which the value stream flows should likewise
take a day and not much more than a few days to flow between
organisations. And it should not take more than a few days to reach end
customers within the region of sale, across Europe. The responsiveness of
the end-to-end value stream ought to be measured in days and not
months.
Most manufacturers are still struggling with a throughput time of weeks
and a distribution pipeline of many months. They have also saddled
themselves with a supply chain that stretches right across the world, with
the same delays as their Chinese competitors. This is not going to be
sustainable in the future and all that wasted time and effort costs far too
much and undermines the competitive advantage from being more
responsive to local customers. The benchmark is an equivalent product
made in China, shipped through several distribution points and flown to
the UK in an Airbus A380. Why can’t you beat that?
Meeting this challenge – getting closer to customers and responding to
their needs very rapidly – goes beyond continuous improvement. It entails
fundamentally rethinking your business strategy, designing responsive
and capable processes and restructuring the organisation and the supply chains to support them. Those with more responsive lean processes will
win this global competition.
Yours sincerely
Professor
Daniel T Jones
