A key tenet of lean manufacturing, product rationalization, is the systematic review of a product line to eliminate or outsource less-profitable items in order to free up resources to increase profitability.
Rationalization between the United States and China has been happening on a national level for decades as firms outsource labor-intensive or low-margin products offshore, and the pace is accelerating.
Understanding where a firm fits within this rapidly evolving trend will have a substantial and direct impact on its future economic health.
Since China opened economically to the West in 1978, Western firms have struggled with the decision of what products China can manufacture most cost effectively.
In the early years, China possessed antiquated machine tools (mostly from Eastern Europe) and little of the engineering know-how of the West and Japan. The country's main advantage was cheap labor for noncritical machining, welding, casting and fabricating metals.
Over the years, China has progressed rapidly up the industrial food chain by investing in modern capital equipment, educating a new generation of engineers and training a skilled labor force. With each step, China has taken over another segment of industrial manufacturing.
Within a company, there are three basic categories for rationalizing outsourcing. Noncritical, low-margin parts are obvious candidates for outsourcing.
On the other hand, proprietary, high-tech products critical to a company's operations clearly should not be outsourced.
The hardest to rationalize are products in the middle area: those that are somewhat technically difficult, require high precision and are relatively important to the firm's operations. It is this area that is shifting most rapidly in China and is, therefore, the most crucial for a company to understand.
If timed correctly, getting in on a newly developed capability in China can give a Western firm a cost advantage over its competition. And the Western firm, by helping the Chinese manufacturer learn, can continue to build value-added, competitive barriers to entry.
However, if a company moves too soon, time and money can be eaten in training a Chinese firm that is not yet ready for the technology.
Plus, the associated quality problems can cause problems downstream.
The plastics sector has been a microcosm of rationalization within an industry between the West and China. From a modest beginning in the 1980s making cheap toys, sandals and other noncritical items, China has become the world's leader in the consumption of commodity-grade plastics such as ABS, and even polycarbonate, used in producing cell phones, DVDs, computer housings and a host of other end products.
Determining what stage of development China is at vis-Ã -vis your particular company and your industry is crucial.
What to do?
First, visit China.
Seeing 250 injection molding machines under one roof cranking out computer components can be a sobering experience for a U.S. manufacturer.
But, at least then, you will be making decisions based on reality, and not on the misguided notion of Chinese manufacturing being just low labor costs.
Get some quotes on higher-tech parts. Chances are your firm is already outsourcing some low-level components to China.
Test the waters with something more difficult. It is an intellectual property risk having parts made in China, but one worth taking: better to reduce your costs and compete head-on with someone that might copy your product than to have the imitator have a better cost basis than your own company.
Next, sell in China.
The thing I hear most often from American companies thinking about entering the Chinese market is that one of their major customers is pushing them to move some manufacturing to China.
Invariably these firms are reluctant to do so and are being dragged into it by the customer.
Embrace it. Get into the fray. Toyota's most efficient factory worldwide is in Alabama. If Japanese companies can manufacture successfully in the United States, why can't U.S. companies successfully manufacture in China?
Stay ahead of the curve in the Unites States. Once you have determined what China's capabilities are with regard to your industry, make the decisions necessary to continually upgrade your own capabilities, bearing in mind those in China are evolving rapidly.
Extending rationalization from an internal process to one that looks outward toward global competition will be invaluable in assessing your company's strengths and weaknesses. And, it will help establish a framework for making decisions and identifying opportunities.
Russell S. Johnson is president of China Array Group LLC, an injection molder based in Pittsfield, Mass., with a manufacturing plant in Wuhan, China.