There is a strong connection between Bill Tobin's Perspective, “Putting business with China into context,” and Joel Shenton's Mailbag, “Patriotism is nice, but let's be realistic,” found on Page 9 in the June 7 issue.
In response to Mr. Shenton regarding TQM business techniques, I could not agree more. Those that made the commitment to total quality were those that rose above the rest in terms of profitability, competitiveness and status among suppliers within the supply chain. The same companies should be among those today that have a better survival outlook than those that chose not to make the journey. Your estimated nonvalue-added costs equating to 20-40 percent sounds very high to me unless you are speaking of many “in-house” injection molding operations that we custom processors compete with today.
The migration of manufacturing to China usually begins with the loss/reduction of business to our customers with in-house manufacturing/molding capabilities. Beginning in the 1990s, many companies expanded in-house manufacturing to include plastic processing in an effort to reduce the number of suppliers, thereby creating a new and dangerous competitor for us captive molding houses. Many custom injection molders inadvertently help train this new competition during the “partnership forming days.”
When I say, “It's easy to compete with China,” I mean when compared with in-house cost models. One can be competitive with China pricing by applying TQM, lean manufacturing or any other buzz phrase one chooses, providing the techniques are applied and providing the customer is sophisticated enough to know the difference between price and value. Most do not. I have had the privilege of reviewing in-house cost models of two companies, one with $50 million per year in sales, the other with $9 billion. They both have a common thread. The cost drivers entered in these models do not reflect anything similar to real life and, as I found out, didn't have to — mind boggling right? In both cases the manager entering/creating the cost model had little or no experience regarding the language or processing techniques required to make a injection molding cell produce positive revenue. Keep in mind that if this individual cannot show a cost savings to upper management by producing molded products in-house, the company does not need him/her either, right?
Not always, but in many cases the cost to produce a given component in-house skyrockets without notice, except for the eroding bottom line. As the erosion continues, more components are brought in-house in an attempt to save even more money, since the cost models clearly show a savings and so on. The missed shipments grow. Due to the inevitable learning curve, longer lead times take their toll, and so the snake eats its tail.
At some point the shareholders begin asking: What's the problem and how do we fix it? Upper management is not going to stand in front of the major shareholders and say, “Our cost models were wrong” — you've got to be kidding. What they are going to say is, “We need to be global and look at offshore manufacturing, and I am just the guy to lead this company into globalization.” The board then does the high-five, makes a toast to the future, the managers' breathe a sigh of relief and everyone goes home. So I believe the time to challenge offshore manufacturing is at the time one sees a trend of a customer beginning to pull manufacturing in-house. Don't be mistaken, some components should be done in-house and some should not. Be on the lookout for comments like, “Everything is coming in-house regardless of cost.” Laugh if you want, but a high-ranking executive used this exact phrase.
My results of debating the cost to produce a given group of products to two individuals were 50-50. One manager actually listened and began to outsource more work, while the other reacted as if I had kicked his dog. In support of Mr. Tobin's idea of approaching customers with true acquisition cost models is a very good idea. It is even a better idea if one can get the meeting before the China migration begins. I suspect the manager that reacted as if I kicked his dog just came from his board meeting. If one chooses to challenge a customer's upper management with in-house vs. outsourcing cost, do so with as many facts as possible, not vague comparisons.
Allen Caton is president of A&M Engineering Plastics Inc., a Largo, Fla., custom injection molder.