Note: Entry #41 begins a series of blogs about General Motors.  How did an apparent culture change over time likely lead to bankruptcy and an apparent disregard for addressing safety issues.  Such actions by corporations affect societal attitudes.

(Want a PDF version for Entries #1-10, #11-20, #21-30 formatted for tablets and e-books?  Click links for download.  America’s 5th Revolution Volume I (Entries 1-10), America’s 5th Revolution Volume II (Entries 11-20), America’s 5th Revolution Volume III (Entries 21-30)

Scene: Jordan met former college economics professor. Just got a coffee refill.

Professor: “A few minutes ago you asked why US companies manufacturer electronic products in China when albert_einstein_professor croppedmuch of the production is automated.”

Jordan: “I really do not understand. But I think the #1 reason by far is perceived lower labor costs.”

Professor: “The perception of lower labor costs, not necessarily the reality of lower labor costs.”

Jordan: “Let me give you some personal experience. I realize data points of one are dangerous but the more I talk to people about their real experiences, the more my experience seems typical.”

Professor: “This should be interesting.”

Jordan: “I was recruited to run a small, publicly held company in northern California.”

Professor: “Lucky you. Near wine country?”

Jordan: “Smack in the middle of it. The area is great for grapes and apples but not what one calls a hotbed for manufacturing.”

Professor: “What was the product line?”

Jordan: “Electric bikes and scooters, all of which are assembled at company facilities in the same town.”

Professor: “What’s the issue? The company was manufacturing, or at least assembling in the US”

Jordan: “The Board of Directors wants to move assembly to China and lay off many of the US employees.”

Professor: “Because labor costs were too high?”

Jordan: “That’s what they thought but none of the Board members had any real manufacturing experience.”

Professor: “They could have been right. If the area is not a major manufacturing center, the costs could be too high.”

Jordan: “My analysis? To understand true labor costs we also needed to analyze other systems. When I started average production was 37 scooters per day. Some days production was 75 scooters and other days production was zero scooters.”

Professor: “Seems like a production scheduling issue.”

Jordan: “Scheduling and parts sourcing at a minimum. The company did not fully evaluate how quality of parts could affect the rate of production.”

Professor: “Give me an example.”

Jordan: “The scooter drive system included a sprocket that linked the electric motor and a belt, which turned one of the wheels. The price of the sprocket appeared cheap…”

Professor: “But further analysis…”

Jordan: “Further analysis indicated 80% of the parts were not to specifications. As a result the output of the motor assembly line was lower. Even worse was when the workers tried to make the sprocket fit, they sometimes inadvertently damaged the motor, which caused more problems.”

Professor: “So to get 100 good sprockets you had to buy 500 sprockets. Where were the sprockets manufactured? Let me guess…China.”

Jordan: “Yes. Look, China makes some quality products. I asked the chief engineer to call a contact of mine in automotive. We sent the drawings. He quoted parts from a US manufacturer that cost 30% less and guaranteed all parts were to spec.”

Professor: “The individual part cost 30% less?”

Jordan: “Each part. Not the total but each part.”

Professor: “Good move. Quality goes up, production goes up and purchase costs go down and warranty goes down. As if that’s not enough, anything else?”

Jordan: “We made some changes to the assembly line.”

Professor: “Equipment and automation?”

Jordan: “No capital equipment or automation, just basic layout and processes. Most of the ideas came from the employees. We also implemented some recommendations from lean manufacturing techniques…but all ideas you would learn before the first coffee break on the first day of class.”

Professor: “You’re telling me you used very basic information to begin to make improvements.”

Jordan: “I am embarrassed to tell you how basic. We literally taped off work stations, color-coded hand tools by worker, bought a few hand carts and implemented employee suggestions.”

Professor: “What happened to production?”

Jordan: “Give me a guess. In just 7 months how much do you think production increased?”

Professor: “50%? No make it 100%. You doubled production.”

Jordan: “Try a higher number.”

Professor: “OK 300%. Production increased from 37 to 150 per day.”

Jordan: “Try 37 to 250 per day. Well above a 500% increase in production with basically the same equipment…and workforce.”

Professor: “You didn’t add any people?”

Jordan: “We added a few in shipping because they could not keep up. But nowhere else.”

Professor: “What about labor costs? How much more did you pay people?”

Jordan: “We gave people bonuses for reaching certain targets. Here’s an interesting statistic. Take the US labor rate and bonus at the seven months and double it.”

Professor: “So you are going to pay the US twice as much?”

Jordan: “Yes. Now take the labor cost for products made in China and make it zero.”

Professor: “Double the labor cost in the US and make labor cost in China zero…free.”

Jordan: “And tell where it’s cheaper to build the product?

Professor: “I know this is a set up. Cheaper in the US.”

Jordan: “Hard to believe but it is true.”

Professor: “That’s remarkable. But seems like an extreme example.”

Jordan: “I agree the percent increase in production is unusual but not the savings in other costs. What companies often overlook are the less obvious costs – lead time between order and receipt of goods. Cost of not being able to adjust production quickly for parts changes or even a bad part. You might end up with container loads of product before the change.”

Professor: “What is the lead time between ordering and receipt.”

cargo_shipJordan: “Usually months. Unless you air freight, you have 6-8 weeks shipping time on the ocean versus days by train or truck in the US.”

Professor: “Is quality control really an issue?”

Jordan: “Quality control is a problem for any manufacturing company. But when your supplier is thousands of miles away and with long lead time, the impact of problems grows exponentially. Plus, the cultures are different when it comes to quality. Also ask companies how difficult it is to protect IP.”

Professor: “Intellectual property?”

Jordan: “Yes. Product knock-offs are a real problem.”

Professor: “In your example labor costs became a very small piece of the overall cost. Why do you think the companies continue to source outside the US when total cost seems to be cheaper when manufacturing in the US?”

Jordan: “That’s my frustration. And let’s take electronics specifically. Virtually all of the manufacturing and assembly of many electronic products are automated. Why go outside the US?”

Professor: “US offers competitive…and maybe lower cost…and faster turnaround time.”

Jordan: “That’s why we need a national policy to get more companies to start manufacturing in the US. Even with automation, there will be more people employed in the US. And we can start to rebuild wealth.”

Professor: “The administration can begin rebuilding with some macro-economic policies. The first recommendation might sound silly but the administration needs to promote buying products made in America. I’m not talking about everything but products that can be made here at a very competitive price.”

Jordan: “Are you suggesting that as a policy?”

Professor: “Jordan, you know as well as I know the power of persuasion. If the president begins to discuss in understandable terms why people should buy products made in America, then customers will begin to force companies to change.”

fdr_~FdrJordan: “You talking about fireside-chat talks, like FDR did?

Professor: “Have you ever listened to those chats…or read the transcripts? If you have not, you should. FDR presented major issues and solutions in an understandable way.”

Jordan: “None of the hyperbole of today?”

Professor: “Incredibly straightforward. You need to listen to them. If fact, all politicians Firesideneed to listen to them.”

Jordan: “A series of fireside chats might be a great start.”

Professor: “The chats will give you time to refine some recommendations.”

Jordan: “OK, we have a plan. I’ll propose fire-side chats. Can you help with the longer-term recommendations?

Professor: “Thought you would never ask. It would be an honor. ”