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Lean as a Response to Global Outsourcing Challenges

Written By: Aleksey Osintsev
Published On: January 26 2011

The last few decades have witnessed dramatic changes in the manufacturing and global logistics landscape. Organizations in the highly developed and diversified manufacturing industry have shifted into a service-oriented industry, with product manufacturing becoming almost a rarity (with the exception of food processing companies, defense-oriented companies, car parts manufacturers, and a few others). Facing increasing intensity from global competition, most manufacturing companies in the West have actually gone into the design and distribution business, and many have even become brand name holders.

Global outsourcing has been instrumental in allowing these former manufacturers to skip the “anxious and unexciting matter” of manufacturing products, with its mandatory tasks of manufacturing planning, shop-floor monitoring, and managing shop-floor personnel. Information technologies have played an important role here—certainly the advent of global outsourcing could not have been possible without the explosive development and general availability of information technologies in general and enterprise resource planning (ERP) and supply chain management (CSM) software packages, and Internet-based communication tools in particular.

Many people believe this trend will lead to a better economy, with business goals achieved through the design, purchasing, and distribution of products, and with product manufacturing relegated to “fabrication-oriented” parts of the world, according to generally accepted theories of comparative advantage and division of labor.

At first glance, the idea of moving labor-intensive processes to those who can do it at lower cost seems rather attractive. However, much debate abounds on the impact of this rising global outsourcing trend, and although companies have achieved short-term profitability, this has not come without a cost. Global outsourcing has brought huge problems to both developed countries, with unbalanced trade budgets and lost manufacturing facilities and skills, and developing countries, with citizens destined to be part of a cheap labor source.

Global outsourcing has also created problems at the company level. These may include a significant reduction in the quality of outsourced goods and products, extremely cumbersome and slow supply chains preventing an immediate response to changing demand or quality issues, and difficulties in managing third-country manufacturing facilities or even aligning a third-party manufacturer’s business goals with yours, which may be polar opposites. As an example, some businesses looking to produce relatively simple consumer-oriented goods at the lowest possible cost have had to move their materials, parts, and semi-assembled components across the ocean two, three, or even four times during one production cycle. In addition to the logistical challenges and delays companies may incur, the labor costs of developing countries tend to grow over time, diminishing expected profitability margins and defeating the whole purpose of those extremely complex and overloaded exercises.

 

Looking Beyond a Conventional Mindset
As we can see, it’s all too common for manufacturers to rely on cumbersome global logistical processes to achieve a single objective: save on manufacturing labor. For many manufacturers, increased outsourcing is the only option for increasing their competitiveness. However, more and more manufacturers are coming to realize that an alternative, viable approach is available—known for many years as lean production.

Lean is an alternative business management philosophy that requires a clear understanding of the multiple coordinated efforts of a company’s stakeholders—owners, managers, and employees. Lean is a journey, rather a single time-limited project. Adoption of the lean approach is really not similar to implementing a business change or software project, for example. This is because with the lean approach, processes are continuously improved, and thus lean is not something that can be achieved by a certain date, by definition. However, when adopted properly, lean is a powerful mechanism that can bring outstanding results to a business and increase profitability over the long term. The most famous example of this is certainly Toyota, which reached the top of the automobile market by patiently and constantly improving its business using the lean concept. History shows that although immediate greater profit numbers are not within the tactical objectives of a lean-adopted company, better financial outcomes is a likely long-term consequence of adoption of the lean manufacturing model.

Although the lean manufacturing model was invented in the beginning of the 20th century by Henry Ford and has greatly evolved in the second half of the century largely through its adoption by Toyota—where the lean model is known as the Toyota Production System [TPS])—it is still not widely accepted by businesses. Reasons for this are rooted in fundamental differences between the lean methods and approaches and traditional management.

The potential difficulty in adopting the lean approach lies in the distinct nature of the lean management model. Some key differentiators between the lean and traditional management models shown in the table below would require companies choosing to go lean of having to undergo a concept review and transformation of their entire business. Imagine what a multidimensional and painful process it would be if management were then to suddenly decide that it is not ready to part with many usual and conventional business practices and procedures.

Criteria Lean Management Model Traditional Management Model
Length and vision of business goals

Long-term business objectives; strategic
vision

Short-term business goals; quarter or year
profit−based
Ultimate business success
calculation base
Maximal value created for customer;
minimal waste processes
Maximal profit margin; minimal product cost
Stance on business complexity Simplified business processes Complicated business processes
Stance on improvement Continuous improvement process Discrete improvement projects
Ultimate goal at the process level Elimination of waste and unnecessary
processes; streamlining value-adding flow
Reduction of total product cost in all
possible ways
Nature of accounting Value stream–oriented cash-based accounting Product-cost and period-end reports−
focused accounting
Stance on personnel Personnel is an asset Personnel is an expenses generator
Stance on quality Quality is an inevitable and organic result of
streamlined flow, with constant control at
each step by all employees

Quality is one of the indicators, achieved via
selective control by assigned employees

Delegation of authority Strategic decisions are made by managers,
but many responsibilities are delegated to
shop-floor employees at the operation level
Strict hierarchical pyramid, with both strategic
and operative decisions made by managers  

Compliance and legislation limitations can impede companies from fully adopting the lean business model. For example, the requirement of publicly traded companies to comply with Generally Accepted Accounting Principles (GAAP) in the United States or International Accounting Standards (IAS) in other countries is certainly a formidable barrier. Despite this, many organizations have still been able to transform their business from the conventional to the lean model.

So, what is the key to lean success? The answer is pretty obvious. It involves setting adequate priority for lean adoption that is aligned with long-term business goals, while focusing efforts on maximizing product value for customers, constantly improving initiatives at all levels, incorporating lean principles and tools, leveraging personnel as a key asset, and implementing lean accounting, among others.

 

Power of Lean
Mass acceptance of lean principles by manufacturers and logistics companies has a huge potential to reshape and improve the landscape of global business. It provides organizations with a new toolkit and opportunities for not just surviving, but also succeeding in a highly competitive and dynamic economic environment. However, there is another facet to the lean business model aside from its well known and proven advantages.

The lean business model has a big positive effect onshoring (i.e., the return of manufacturing facilities from remote countries with low labor rates). The reason for this is that a true lean philosophy treats mass item movements and transfers as non-value−added activities that must be eliminated from the process of product value creation.

Any lean manufacturing operation eventually arrives at the idea of shortening complicated and lengthy supply chains, and eliminating needless stock. Thus, the prominent feature of global logistical business, inventory movement and storage, may become less prominent under lean manufacturing principles.

Another interesting aspect of lean manufacturing is the idea of extending lean principles into the whole chain of manufacturing and logistical operations to create added value for the end product. This means that the final value of a product is based on a stream of activities that includes all internal and third-party operations, from raw materials purchasing to retail and delivery to the end user. A manufacturer is not truly lean if, for example, manufacturing facilities adopt just-in-time and no-inventory principles, while inventory is outsourced to a third-party logistics partner, in total accordance with traditional accounting principles. The traditional accounting approach overlooks many hidden inventory-related expenses, and is unable to reflect losses caused by supply chain length and the attendant inability to quickly react to product design changes and quality issues. Lean accounting must recognize and leverage these problems to provide an accurate reflection of the manufacturing scenario.

 

The Outlook
It would be exciting to see the popularization of lean principles, with the adoption of the lean management model becoming a necessity for competitive survival, and bringing home many manufacturing facilities. To provide maximum value for customers, manufacturers and other businesses must be quicker and more flexible in responding to customers’ requests and changes in demand. This flexibility would allow them to manage, produce, and deliver products of the highest quality within the shortest time. Dead-end, massive global outsourcing should become a thing of the past, as a better alternative is certainly available.

 

 
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