why chinese manufacturers must adopt lean manufacturing to stay competitive

1 © TXM Lean Consulting (Shanghai) Co., Ltd. 2014 CONFIDENTIAL

MANUFACTURING IN CHINA -

WHY YOU MUST CHANGE TO

SURVIVE

TIM MCLEAN

19 MARCH 2015


COMPETING WITH CHINA

• Introduction

• The changing competitive landscape for China

Manufacturing.

• Lean Manufacturing – a strategy to compete.

• Case Study – Harvest

• Getting Started On Lean


ABOUT ME

• Australian – born and educated in New

Zealand.

• 27 Years in Manufacturing

• Chemical Engineer and MBA

• Operations and General Manager 16

years

• Established TXM in 2004.

• Worked with over 100 Manufacturing

SMEs around Australia, China and

South East Asia

• Emphasis on implementation

and outcomes not training courses

• Lean Book Author.


SO WHY IS CHINA SO SUCCESSFUL?

Source: US DeptOf Labour 2004 Low-cost regions

Large markets

China

$1.85

S. Korea

$11.50

Thailand

$1.50

India

$0.95

E. Europe

$5.70

W. Europe

$34.00

Brazil

$3.00

USA$23.10

Mexico

$2.50

Australia

$23.00


* Source: National Bureau of Statistics, China Statistical Yearbook converted to $US

TIMES ARE CHANGING

0

200

400

600

800

1000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Mo

nth

ly W

age

$U

S

Average Monthly Compensation Urban Manufacturing Employees in China*


Source: “Farewell to the China Price, Steven Dickinson, China Economic Review, March 2011

WAGES MUST INCREASE

Metric China World Average

Ratio of Minimum Wage to GDP per capita 25% 58%

Years to buy a home at average income 74 3-6

Ratio of Manager salary to minimum wage (SOE)

98 times 5 times

Cost of 1000kWH electricity as proportion of average monthly income

31% 3-8%

Wages must double over the next five years to bring them in to line with per Capita GDP”, Liu Xinrong, Independent Economist


OTHER COSTS ARE INCREASING

• Industrial Land

• Construction Costs

• Energy Costs

• Regulatory Compliance Costs

• Interest Rates


COMPARISON OF A “TYPICAL” PRODUCT – EX

WORKS COST

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

Western Supplier China Supplier

Margin

Overhead

Direct Labour

Material

Gap $34

Gap $34

Gap$40


ADD SEA FREIGHT COST

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140


Sea Freight

Margin

Overhead

Direct Labour

Material

Gap$34


ADD INVENTORY HOLDING COSTS

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140


Inventory Holding &Storage

Sea Freight

Margin

Overhead

Direct Labour

Material

Gap$29


ADD COST OF POOR QUALITY

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140



Sea Freight

Margin

Overhead

Direct Labour

Material

Gap$24


ADD SUPPLIER SUPPORT COSTS

0

10

20

30

40

50

60

70

80

90

100

110

120

130

140


Supplier SupportCosts

Cost of Poor Quality


Sea Freight

Margin

Overhead

Direct Labour

Material

Gap$20


BUT CHINA STILL WINS

Western total cost = 108

China total cost = 88

China Saving = 20


BUT WHAT IS GOING TO HAPPEN

IN THE FUTURE?


ANNUAL INFLATION ASSUMPTIONS

• Wage Inflation 2%

• Other Costs 2%

• Currency Appreciation 0%

• Wage Inflation 10%

• Other Costs 4%

• Currency appreciation 5%

China West


COST TREND OVER 10 YEARS

0

20

40

60

80

100

120

140

160

180

200

Tota

l Co

st P

er

Un

it

Western Supplier

China Supplier


OUR COMPETITIVE PICTURE IN 2020

0102030405060708090

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Supplier Support Costs



Sea Freight

Margin

Overhead

Direct Labour

Material


HOW CAN YOUR CHINESE OPERATION STAY

COMPETITIVE?


MOVE OUT OF CHINA?

THAILANDINDIA


CAN WE IMPROVE OUR CHINA OPERATIONS?


HOW ARE YOU EXPERIENCING

COMPETITIVE PRESSURE?

WHAT ABOUT YOUR BUSINESS?

DO YOU THINK YOUR

BUSINESS HAS WASTE THAT

YOU CAN REDUCE?


WHAT IS LEAN?

• A system of manufacturing management developed by Toyota over

the past 50 years.

• Also known as the Toyota Production System or TPS

• Adopted by companies in industries all over the world in industries

ranging from Aircraft manufacture to hospitals.

• Popularised in the west by Jim Womack and Dan Jones in their book

“Lean Thinking” and the “Learning to See” handbooks.


THE LEAN APPROACH

“All we are trying to do is shorten the lead time…”

Taiichi Ohno

Toyota Production System


THE TOYOTA PRODUCTION SYSTEMBest QualityLowest Cost Shortest Lead Time

Just in Time

One Piece Flow

Best QualityLowest Cost Shortest Lead Time


FOUR KEY PRINCIPLES OF THE TOYOTA PRODUCTION

SYSTEM• All work is highly specified in its content,

sequence, timing and outcome

• Each person knows who provides

what to him, and when.

• Every product and service flows

along a simple, specified path

• Any improvement must be made

in accordance with a scientific method,

under the guidance of a teacher,

at the lowest possible level in the

organization.

Reference: Decoding the DNA of the Toyota Production System

by Steven Spear and H. Kent Bowen, Harvard Business Review, Sept-Oct 1999


KEY TOOL IS THE VALUE STREAM MAP

It is all the actions, both value added & non value added required

to bring a product through the main flows essential to every

product:

1、Information management (order to delivery)

2、Operations management (raw materials to customer)

Total Value Stream

SUPPLIERS PLANT OR COMPANY CUSTOMER TO END USER


WHAT IS VALUE?

• Those activities that a customer is willing to pay for when

they buy the product.

• Everything else!

WHAT IS WASTE?


CAN ANYONE LIST THE SEVEN

WASTES?

TYPICALLY THERE ARE SEVEN TYPES OF

WASTE WE LOOK FOR


INVENTORY


WAITING


EXTRA-PROCESSING


REJECT PRODUCT AND MATERIAL.


MOVEMENT

Total Travel Distance=1030m


OVER PRODUCTION - COMPLETING MORE

WORK THAN IS NEEDED OR SOONER THAN IS

NEEDED.


TRANSPORTATION


THREE TYPES OF ACTIVITIES

Incidental

Work

Pure

Waste

Value Typical target area -

Often leads to more

capacity to create waste


WHY LEAN??

• Typically 50%-80% lead time reduction

• Lower inventory/working capital

• Faster response

• better service to customers.

• At least 30% reduction in space for given output

• Reduce movement, storage and select smaller, cheaper more agile equipment.

• Up to 30% productivity improvement

• Eliminate wasted operator time

• Level workload in production.

• Significant quality and safety improvements


SO HOW CAN LEAN KEEP OUR CHINA

SUPPLY CHAIN COMPETITIVE?



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Sea Freight

Margin

Overhead

Direct Labour

Material


STEP 1 – SIMPLIFY THE SUPPLY CHAIN


WHAT PROBLEMS HAVE YOU

EXPERIENCED?

ARE YOU INVOLVED IN AN

INTERNATIONAL SUPPLY CHAIN?


EXAMPLE OF SIMPLIFIED PARTS REPLENISHMENT FLOW

FROM CHINA TO AUSTRALIA


KEY BENEFITS

• Clear accountabilities at every step.

• Routine reduces cost and complexity.

• Regular cycle keeps down logistics cost and minimizes unplanned delays (one delay in 20 weeks)

• Reduced supply and quality risk and inventory through shorter replenishment interval.

• Lead time from order to delivery in store around three weeks.

• Suppliers adopt kanban process internally on own initiative!!


HOW WILL THIS AFFECT OUR TOTAL COST

EQUATION?

• Tendering all our freight and logistics requirements to a single

provider lead to a 20% freight cost reduction.

• Inventory at our customer was reduced by around 50%.

• Cost of poor quality was reduced by half as the amount of

inventory in the supply chain was reduced by half.

• Simplified Ordering process reduced supplier support costs by

around 25%



0102030405060708090

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Western Supplier China Supplier Lean China SupplyChain




Sea Freight

Margin

Overhead

Direct Labour

Material


STEP 2 – MAP THE CHINA FACTORY’S PROCESS

AND IMPROVE QUALITY AND PRODUCT FLOW


WHAT KIND OF WASTE HAVE

YOU SEEN IN CHINESE

FACTORIES?


MAPPING THE SUPPLIER’S PROCESS

• Set improvement objectives.

• Provide coaching resources.

• Map the supplier’s end to end process –

Value stream mapping to “see the waste”.

• Agree an action plan.

• Coaching support to implement the plan.

• Improve internal processes at the supplier

to manage the flow of production.

• Focus on “right first time” rather than

quality through inspection


CASE STUDY – SOUTH CHINA SUPPLIER TO

ELECTRONICS INDUSTRY

Improvement Benefit

35% reduction in customer returns Reduce cost of poor-quality

18% reduction in scrap 1% material cost reduction

On time delivery increasedfrom 85% to 99%

Reduced customer inventory

34% reduction in downtime Reduce maintenance overheadIncrease productivity

35% reduction in WIPand lead time

Reduced customer inventory



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Sea Freight

Margin

Overhead

Direct Labour

Material


STEP 3 CHANGING THE SHOP FLOOR CULTURE

IN CHINESE FACTORIES


ALIGNING FOR LEAN SUCCESS


WHAT KIND OF CULTURAL AND

LEADERSHIP BARRIERS DO

YOU SEE IN YOUR BUSINESS?


KEY ELEMENTS OF LEAN SUPPLIERS

• Lean Leadership Process

• Drive changed leadership behaviors

• Focus on key metrics

• Plant Layout Improvement

• Improve space utilization

• Work cell design

• “One piece flow” at the production cell level

• Eliminate WIP.

• Standardized Work

• Standardize manufacturing processes


CASE STUDY – GARMENT MANUFACTURING IN JIANGSU

PROVINCE

Previou

s Status

Current

Status%

1. Total Lead

Time84 Days 70 Days 16.7%

2. Ironing and

Packaging

Utilization

Area

1302.4M2 475.2M2 63.6%

3. WIP

Inventory130K pcs 60K pcs 53.8%

4. Labor

Efficiency44.5% 55.7% 25.2%



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Supplier Support Costs



Sea Freight

Margin

Overhead

Direct Labour

Material


GETTING STARTED ON LEAN

• Identify clear business objective.

• Usually start with Value Stream Mapping to “see the waste”.

• Work with cross functional team:

• Individuals from end to end supply chain.

• Develop action plan

• Key metrics and actions

• A3 Plan

• Coaching to implement plan

• Build Lean foundations

• Expect dramatic impovement


SUMMARY

• Relative competitiveness of Chinese manufacturing changing

quickly.

• In less than 5 years total cost of sourcing many products from China

will be higher than sourcing locally in the west.

• Improving your supply chain through lean manufacturing can

reverse this trend.

• Lean can help you and your suppliers get there..

why chinese manufacturers must adopt lean manufacturing to stay competitive

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