Tag Archives: Business Process Management

BPO/IPT Forum: Total Cost of Ownership Strikes Again

I had a blast these past two days at the World Business Process Outsourcing/IT Outsourcing Forum (http://www.worldbpoforum.com).

I met some fascinating folks that have been on the bleeding edge of outsourcing.  Seems that IT has been on the forefront and consequently has taken the punches.  As outsourcing business functions/processes becomes more prevalent, those experiences will be invaluable (if they are consulted or heeded). Which leads to my first takeaway…

My favorite takeaway from the event was the story of a global energy company.  It is my favorite because it illustrates one of my passions (and peeves):  Total Cost of Ownership (TCO).  This company had operations in dozens of countries throughout the world, many in the typical “low labor cost” countries — the usual suspects.  Well, instead of jumping on the bandwagon, the CIO and his team looked at TCO which includes all costs to the company; not just labor.  Long story short, they found that it was substantially more profitable to consolidate operations in a particular Scandinavian county in lieu of a popular South East Asian one.  How?  Tax implications were one of the factors.  Counter intuitive? You bet.  But that’s TCO.  You don’t know the answer until you do your homework and look at the big picture.  Without TCO, its so easy to save a bundle in your department but cost an even bigger bundle to the company.

My second favorite takeaway — move fast.  Yep, I’m a proponent of pulling bandages off quickly.  Same goes for organizational change.  I have to admit that I did feel some sense of pleasure in hearing several highly successful leaders say the same. Their pitch to their Mgmt Committees and Boards was that moving quickly reduces flight risk of customers and suppliers. In the past, I’ve pitched for moving fast on the grounds of minimizing disruption of operations and impact on morale. For me, this is a new perspective and reason. I’ll be putting that one in my toolbox for future use.

It was reported that business process outsourcing is continuing to build momentum.  It will more than likely be as rampant as IT outsourcing; hopefully, this time with less pain and disappointment.  The danger is that these types of initiatives come into vague and become the fashion of the day.  So, every nabob that only interested in collecting a big bonus and get a juicy bullet on their resume will jump blindly onto the bandwagon.  In the end, they move on to their next job while the company and its shareholders (as well as the employees that remain) are left holding the bag and paying the price. Well, that’s why events like this one are important — so that one can see where it worked and where it didn’t and meet the players that are doing it right.

One final point… both the buyers and sellers at the forum agreed that there is a lot of work left to be done with the procurement process and governance.  So, we will all have plenty to discuss next year.

The Case for Backshoring

Finally, leaders are starting to recognize that offshoring is not “the magic pill”.  One has to look at the total cost of these offshoring efforts; not just labor cost and rent.  As a LEAN practitioner,  the wholesale transfer of just about any and every service or manufacturing effort has never made sense.  Yes, in some cases its the way to go; but, for a long time there it seemed like it was just the fashionable thing to do…it was a mantra…what all the cool kids were doing.   Whenever I would ask why are you doing that, they would at me like I had two heads. I just wanted to know the info so that I could build a model or rule of thumb for future use (the engineer in me is rearing its head).  Well, we’ll see were this goes; maybe there is hope.

The Case for Backshoring

Which manufacturing operations should return to the United States?

For years, the NCR Corporation simply followed the pack. Like many other large U.S. manufacturing companies, in the past couple of decades the maker of automated teller machines (ATMs) relied heavily on outsourcing to trim factory costs. By hiring Singapore’s Flextronics International Ltd. to make much of its equipment in cheaper offshore locations in the Asia/Pacific region and South America, NCR could slash hundreds of millions of dollars in plant expenses and be reasonably certain that its ATMs met quality standards.

But recently, NCR has rejected this strategy — at least to a degree. In 2009, the company decided to reclaim responsibility for making one of its most sophisticated lines of ATMs from Flextronics in Brazil and instead manufacture the machines in Columbus, Ga., not far from the NCR innovation center, where its new technology is on display. The reason: The company was concerned that outsourcing distanced its designers, engineers, IT experts, and customers from the manufacturing of the equipment, creating a set of silos that potentially hindered the company’s ability to turn out new models with new features fast enough to satisfy its client banks. “I think you’ll see more of this occurring,” says Peter Dorsman, NCR’s senior vice president in charge of global operations, who says he has been contacted by dozens of U.S. companies studying whether they should make similar moves. “You’ll see a lot more people returning manufacturing to America.”

NCR’s change in direction has raised the possibility that U.S. manufacturers are getting serious about “backshoring” some of the production they shifted overseas in the wholesale offshoring movement that started in earnest in the 1990s. General Electric Company Chief Executive Jeff Immelt recently attracted attention for remarks he gave to a West Point leadership conference calling for U.S. companies to make more products at home. Demonstrating Immelt’s commitment, GE announced in the summer of 2009 that it would build two new plants in the U.S. — a factory in Schenectady, N.Y., to make high-density batteries and a facility in Louisville, Ky., to produce hybrid electric water heaters currently made in China. Dow Chemical Company CEO Andrew Liveris similarly has appealed for a renewed focus on manufacturing in the United States.

Backshoring is primarily an American phenomenon, because U.S. manufacturers have been much more aggressive about outsourcing than their Asian or European counterparts. Japanese companies experimented with outsourcing high-end items to factories in Southeast Asia and China, but quickly changed course after growing concerned about the loss of intellectual property and about disrupting the link between research and manufacturing. As a result, Japanese companies generally farm out only the manufacturing of commodity products.

Cynics might conclude that pronouncements about the need for manufacturing in the U.S. are simply aimed at currying favor with the Obama administration, which is worried enough about the issue that it named former investment banker Ron Bloom as manufacturing czar. Moreover, although cases such as NCR and GE are noteworthy, many U.S. jobs are still going offshore. For example, the Whirlpool Corporation recently announced the closing of an appliance factory in Evansville, Ind., amid plans to move less-skilled jobs to Mexico. And in the financial-services and information technology sectors, there is no letup in sight in the rush toward India. IBM, for example, has more than 90,000 employees in its Indian outsourcing operations.

But the logic behind backshoring is compelling enough that it cannot be easily dismissed as a mere short-term aberration. Higher transportation costs as well as rising wages and raw materials prices in China, inevitable by-products of the huge gains that the developing country’s GDP has made despite the global recession, have frightened some U.S. companies away from Asia. An apt illustration: Wright Engineered Plastics Inc., a Santa Rosa, Calif.–based maker of injection molds, has expanded its West Coast plants and decreased its use of Asian facilities because many of its key customers have shifted their own manufacturing operations back to the U.S. in light of prohibitive increases in the prices for raw plastic in China.

Moreover, some companies are amplifying materials and logistics savings from backshoring by modernizing their U.S. plants to outpace Chinese facilities. Such is the case with Diagnostic Devices Inc., a maker of blood glucose monitoring systems. In August 2009, the privately held company based in Charlotte, N.C., announced that it was moving the manufacturing of its Prodigy line of audible glucose monitors to North Carolina, ending a five-year agreement with a contract manufacturer in China under which Diagnostic Devices sent components overseas and then had the finished devices shipped back to the United States. By automating its U.S. factory with robots and other high-tech hardware and software, and by taking advantage of lower shipping fees for a mostly local customer base, Diagnostic Devices reduced its production budget by 40 percent. And there is an added bonus, according to a company spokesman: “We will also have far more control over and protection of our intellectual property, which you don’t have in China.”

NCR’s decision to backshore goes well beyond dollars and cents — and, in fact, may provide the most convincing rationale for the gains that backshoring can produce. The ATMs being made in Columbus now are NCR’s most sophisticated, capable of scanning checks and cash and eliminating the need for the customer to fill out a deposit slip. This feature has provided a welcome revenue lift for NCR — bringing in as much as US$50 million a year, significant for a company with $5 billion in annual sales. But these machines likely never would have been developed had large customers like JPMorgan Chase and Bank of America not persistently prodded NCR to move in that direction. That type of potentially profitable interaction between NCR and its customers is difficult, and launching desirable new products is slowed considerably, NCR’s Dorsman says, when the manufacturing facilities are offshore. “We take our cue from our customers,” says Dorsman. “They are heavily involved in the development process. And with this new approach we’re taking, we can get innovative products to the market faster, no question.”

NCR also found that having Flextronics manufacture high-end ATMs in Brazil — and relying on the vendor’s third-party suppliers, many of which NCR was unfamiliar with — left important internal constituencies in the dark, further slowing and complicating new product launches. Hardware and software engineers, sourcing executives, manufacturing and operations staff, and customer service managers all had trouble applying their expertise throughout the many remote handoffs between separate organizations.

Despite backshoring’s growing appeal, it’s hard to call it a trend yet. Indeed, most Western CEOs remain convinced that offshoring and outsourcing are still the least expensive approach for manufacturing products — and notwithstanding recent anecdotal evidence to the contrary, their position is rigid. For example, Boeing CEO James McNerney Jr. still clings to a radically outsourced supplier model for the company’s wildly ambitious 787 Dreamliner aircraft even though the plane is more than two years late and is facing numerous customer cancellations because of supplier glitches in distant factories. Of course, CEOs are also attracted to offshore destinations because the manufacturing tax breaks offered by governments in many developing countries are more generous than those granted by the United States.

Author Profile:

via The Case for Backshoring.

But what may be at stake in the schism between offshoring and backshoring is a company’s long-term ability to innovate. The making of commoditized staples like shoes, clothing, and consumer electronics will mostly remain in Asia. Backshoring will be more prevalent at the high end of the technology spectrum, in industries such as telecommunications and health care that are sensitive to quality and fast product cycles or in cases in which companies feel they can profit from getting immediate and ongoing feedback from U.S. customers. Those aspects of manufacturing, many experts believe, are where the best opportunities for earnings growth lie. “That’s where we can be competitive,” says Ron Hira, associate professor of public policy at Rochester Institute of Technology and coauthor of the 2005 book Outsourcing America: The True Cost of Shipping Jobs Overseas and What Can Be Done About It (with Anil Hira; AMACOM).

Lean (Continuous Flow) process used by Venice in 1104 AD

I just received my regular newsletter from the Lean Enterprise Institute.  I’ve been a member for nearly 10 years now since reading the founder’s book “Lean Thinking” which explains the Toyota Production System.  I’m amazed at how many manufacturing and business process professionals I’ve met that still don’t get continuous flow.

I find it interesting that the Venice understood 500 years ago.  Say, I wonder if the idea came along with spaghetti from China.  Wouldn’t that be a hoot if China — which is today’s panacea and great enabler for the prisoners of Batch manufacturing mindset– is discovered to be the birthplace of continuous flow!

By the way, batch vs flow is not only a manufacturing application/issue.  It’s all about how you do business; it applies to any process or workflow.  There has been some fascinating work done in the healthcare area; specifically in hospitals and dental practices.  The vanguard institutions have realized remarkable improvements in customer satisfaction and  to the bottom line.

To to learn more, please visit the Lean Enterprise Institute at www.lean.org

“From: Jim Womack [mailto:jwomack@lean.org]
Sent: Thursday, December 03, 2009 2:47 PM
To: kolakowj@optonline.net
Subject: On Our Watch

Dear Joseph,

A few weeks ago I walked through the Arsenale in Venice, which has been in continuous use for building and overhauling military ships since 1104. The Arsenale is still an Italian naval base and visiting requires permission from navy headquarters in Rome. But my interest was not in present-day activities. It was in the remarkable history of the Arsenale as a landmark in the long history of lean thinking.

During the 1400s the Venetians made a remarkable leap in thinking about the organization of design and production. They adopted a standard design for their war galleys and began to think systematically about producing these ships in volume. By the mid-1500s they were manufacturing in advance and kitting the parts for the hundreds of ships built each year. Then, when military need dictated, pre-built hulls were caulked at the first production station and lowered into the water. They were then floated past numerous assembly stations for installing the masts, the steering, the flooring, the seats, the oars, the guns, and all of the items needed to complete the most complex manufactured product of that era. Thus we have the first known example of “flow” production in process sequence using standard designs. And by 1574, when King Henry III of France visited to observe the process, the Arsenale could caulk and final assemble a galley in only an hour. (Fortunately for us, the basic layout of the Arsenale hasn’t changed since the 1500s so it is still possible to imagine how the work was done.)

As I walked through the Arsenale and reflected on what the designers and production workers there contributed to human knowledge and best practice, I found myself wondering what we will add on our watch 500 years later. By my reckoning, our watch (or at least my watch) is the period after 1979 when the practices developed at Toyota, Honda, and their hundreds of suppliers in Japan were first transferred to new countries and new industries.

It seems to me that we have already achieved several things of lasting value:

  • We have transferred and adapted lean process tools for production, product development, supplier management, and customer support to a wide range of industries in a wide range of countries.
  • We have experimented with all of the management tools – policy deployment, A3 analysis, and standardized management with kaizen – that are needed to introduce and sustain these process tools.

But we haven’t combined all of these tools and management methods in more than a few organizations and even these are struggling in the turbulent conditions that the world economy will apparently continue to provide. So what is reasonable to hope for in the remainder of our watch, which in my case is probably the next ten years?

It’s not realistic to hope that all organizations will become lean. And this wish makes no sense in any case because lean thinking will continue to evolve with changing circumstances and as the customer problems needing solutions change. The journey never ends as long as there is ever-changing life.

But can we hope to reach a landmark intermediate destination? Specifically, can we create at least one complete lean enterprise in every major industry and activity by 2020?  By a lean enterprise I mean an organization that focuses clearly on the customer problems it seeks to solve and implements lean product development, fulfillment, supplier management, and customer support processes tied together by lean management to cost-effectively solve them.

This surely is a stretch goal and seems all the more daunting given the recent struggles of our lean exemplar companies. But we already have most of the knowledge in hand so no fundamental invention is required. And all of the elements of lean enterprise have been tested individually in real organizations. So the question is whether we think we can. And the only way to find out is to conduct a wide range of experiments within the global Lean Community, freely sharing our findings in the spirit of PDCA. For my part, I’ll continue to think that we can until our experiments conclusively prove we can’t.

Best regards,

James P. Womack
Founder and Chairman
Lean Enterprise Institute, Inc.

P.S. We have just announced the program for LEI’s annual Lean Transformation Summit, to be held in Orlando on March 3-4, 2010. We are focusing on what I call “lean for the long term” in my keynote talk and we have asked several senior executives who have been working steadily for more than a decade to make their organizations lean enterprises to share the secrets of their continuing progress. If we are truly going to make a lasting contribution on our watch, leader-experimenters proceeding with their constancy of purpose will be the key. Thus I hope you will be able to join us and join the discussion. Please go to www.lean.org/summits for more information and to register.”