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Leveling the Low-Cost Playing Field

As higher wages, inflation, and rising transportation costs begin to level the low-cost playing field with China, US companies can position themselves to take advantage of the changing environment.

Even small changes can help US component makers win back some of the ground they lost when low-cost competitors emerged from offshore, says Mark Hehl, principal of Hehl and Associates, a manufacturing consultancy. Although none of these practices are new, many of them have been overlooked as companies focus solely on low-cost labor.

By implementing practices such as lean, gathering intelligence on competitors, and improving customer service, a number of US companies have been able to get their costs and prices in line with offshore competitors, says Hehl. He recommends four “countermeasures” against the offshore cost advantage.

Fighting the Money Battle : Work at cost containment and operational excellence. This is a worthwhile effort for any organization. The best-performing companies, domestic and foreign, constantly watch their costs. “Of the various avenues they employ, what works most consistently is lean,” says Hehl.

One US manufacturer realized $4 million in cost savings by making some simple changes. Hehl was working with this company for an ISO qualification and during the process discovered a duplication of effort in purchasing. Two different groups in the company were both checking inventory and ordering new material. This resulted in too much inventory, which ate up warehouse space that could have been used for production. By eliminating the duplication, the company saved in labor costs, inventory, and extra space rented for storage. The company was able to expand production within its own facility.

Competitor Intelligence : Understand your overseas competition. It's not that hard to do — simply survey other companies doing business with your competitors. Collect this information and use it. “I've seen hundreds of companies in low-cost regions, and even the best-run companies have an Achilles heel. Identify those weaknesses and capitalize on them,” says Hehl. “Armed with competitive information, you can convince customers to come back onshore and it is easier to compete on price.”

Innovation : Companies that don't innovate don't grow. Look at your own business and select a niche in which you can excel. Hehl cites a component maker that was producing a broad range of components, including miniature parts. It turns out a large number of these tiny parts can be shipped overseas in a standard express envelope. This was enough to offset overseas competitors' lower labor costs.

Focus on Superior Customer Service : In the electronics industry, quick turnaround is difficult to achieve when suppliers and customers are separated by a 12-hour time difference. “Fast response is something US companies are unable to get from low-cost competitors,” says Hehl. “If you have a problem at 11 am and you need to resolve it, it's midnight in China. It may take two or three days to resolve. Within the US you can call and get someone during their work day. Companies are willing to pay more for this.”

Don't just add services for the sake of it — find out what your customers want. Find out what they are willing to pay for. Survey them regularly, and ask questions about what's important to them.

Hehl points out that practices such as lean are not widely implemented in the Far East. Lean faces a cultural barrier in many regions of Asia. “In the West, we are accustomed to working in groups. In some Asian nations, the culture is autocratic — the belief is 'I just work and you tell me what to do.' Engaging in a group is very difficult for this culture and a hard barrier to break.”

Implementing lean can be a significant competitive advantage.

13 comments on “Leveling the Low-Cost Playing Field

  1. AnalyzeThis
    March 3, 2011

    I thought this was the quote of the article, and basically sums things up for me: “Fast response is something US companies are unable to get from low-cost competitors,” says Hehl. “If you have a problem at 11 am and you need to resolve it, it's midnight in China. It may take two or three days to resolve. Within the US you can call and get someone during their work day. Companies are willing to pay more for this.”

    Absolutely 100% true in my opinion.

    Obviously, you will save on labor costs if you outsource, but you will not be able to deliver product with the speed and agility as you could if you kept your operations US-based.

    There is a clear competitive advantage to being able to deliver product faster than your competitors. And obviously you're able to bring new products to market faster than your competitors as well.

    Anyhow, your article already points all this out and makes some other great points, but the one thing you didn't bring up was quality: and this is where things get complicated. There are times where outsourcing will get you higher-quality product, there are times when outsourcing will result in lower-quality product. It all depends on what you are doing and who you are working with. And how well your product travels.

    I know some companies are fearful of bringing their operations back from overseas because they are satisfied with the quality of work being done in China. As much as I'd love to tease them for this (especially given the stereotype of Chinese goods being “cheap,” which obviously isn't true), it is a valid concern.

  2. Barbara Jorgensen
    March 3, 2011

    Point taken on quailty. The subject actually did come up, and there's no question the quality of goods in China (and probably being exported) are improving. It may still take awhile to undo the bad press, but headway is being made. It would also be naive to assume the Chinese have taken nothing away from seeing foreign manufacturing practices in action. Not to be too self-congratulatory, but US electronics has come a long way in quality improvement. Of course, that was in reaction to the quality movement in Japan…and so on… 

  3. Anand
    March 3, 2011

    “If you have a problem at 11 am and you need to resolve it, it's midnight in China. It may take two or three days to resolve. Within the US you can call and get someone during their work day. Companies are willing to pay more for this.”

     Barbara, I slightly disagree with this point. I have seen enginners adjust their working shift hours so that they can sync-up with US customers. Engineers work Overtime to compensate for this time gap. Infact the other way to look at it is, you get work done even during holidays because those countries doesn't declare holidays even during US holidays.

  4. Jay_Bond
    March 3, 2011

    The quote about the time change is very relevant. Yes, it is common place for technicians, engineers, and managers to work late or to come in very early to have some important discussions with your overseas teams. This practice is not a daily thing. You are then asking these professionals to in essence work off shifts. If they are staying late or coming in early all the time, who's there in the mean time, in the main business hours in your respective country to deal with situations?

    Another factor to the speedy delivery comment is transportation time based on shipment size. If these components are shipping out on freighters they could have a couple weeks at sea, instead of being produced locally and getting a quicker turnaround.

     

  5. Eldredge
    March 3, 2011

    You make some good points. In a previous job, I often participated in technical telecons with a company-owned China facility, coordinating customer feedback for design changes and new products. Really quick-turn results, however, were still difficult to pull off, although costs were definitely more competitive.

  6. Eldredge
    March 3, 2011

    One other factor that may have an impact on leveling the playing field is the comparative amount of excess capacity available. As any factory fills capacity, their ability and desire to respond rapidly to additional demand decreases, particularly if the additional demand is perceived to be low volume and/or high mix products, providing opportunities for those more able/willing to respond.

  7. Anand
    March 3, 2011

    Jay_Bond,

      Thanks for the reply. Yes you were right, many of them do work off shifts so that there is overlap between US time zone. Your comment for  speedy delivery holds good if its a manufacturing industry. If its a knowledge based industry, there is no delay at all. It just take couple of hours to send the data through internet.

  8. Mydesign
    March 4, 2011

        Barbara, the four points you mentioned here are very valid in today’s economic scenario.  As pointed by some of the readers, it’s one of the best opportunities; they have got for exploring the circumstances.  Because there is always instability around the world like transportation cost, rising crude oil price, instability in other countries like Egypt, Middle East, Inflation etc.

       Recently, I had read an article that almost all companies are planing to move their foot print to Northern America states, in order to grab the advantage of GDP growth in N. American states. I hope the new economic policy of Obama government may also motivated companies to shift their production line to US. More over the new outsourcing policy also makes them to think twice, before expanding their territory outside the main land.  Any way it’s good for US and techies. Hope more and more employment opportunities may create, which intern enhanced our economic growth also.

       But at the same time, just keep and watching how these companies are going to addressing the problems while moving their base-line like demand and supply, man power requirements etc.

  9. tioluwa
    March 4, 2011

    Great insight Barbara,

    alot to learn from it. the playing field is really getting leveled.

    but i believe the greates point like you mentioned is Competitor intelligence.

    China may have price advantage but competitors can capitalize on areas where they are short and with the pirce advantage breaking down, we could really get a very level playing field.

     

    Thanks for the insight Barbara.

  10. Barbara Jorgensen
    March 4, 2011

    That's helpful to know. I would expect there would have to be some accommodations–on both sides. I think the main issue in the supply chian is automated messages that may be sent and then not checked for awhile, but that's true for all of us.

  11. t.alex
    March 4, 2011

    Competitor Intelligence is really a good point. Competition can come from anywhere in the world. And of course, customers can be from anywhere in the world as well.

  12. itguyphil
    March 4, 2011

    This is what makes staving off the competition difficult and trying to lower costs of customer acquisition expensive at the same time. It takes a pretty good strategy to do 1 out of the 2 well. Let alone both.

  13. stochastic excursion
    March 7, 2011

    Another point to note is that Chinese companies (including Taiwanese) and companies employing native Chinese speakers have a double advantage.  They get the competitive pricing from offshore partners and are able to communicate directly with all parties in a teleconference.  Pacific standard time is on the opposite end of the workday, but trans-pac meetings can still be a routine part of business.

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