Chinese Manufacturers Ask: ‘How Can Americans Still Afford to Buy from Us?’

Excellent write up repeating the pitfalls from basing decisions on ‘piece-price’ and failing to factor actual total cost of ownership – with some perspective from the international business community laughing at how North Americans miss this.  It doesn’t seem to matter how often this is communicated, CFO’s and purchasing managers keep using inaccurate costs to base decisions on.  However now that shipping costs are 10x higher, finance/accounting, purchasing will incur a greater loss for missing this – learn to calculate your total cost of ownership.

Key points from article:   

“The cost benefit to manufacturing in China just isn’t there anymore.”

“in the U.S., purchasing organizations are primarily fixed on obtaining the lowest “piece-price,” pretty much regardless of other factors.

When asked “why,” I responded that reduction in material was the primary metric used to judge and reward purchasing managers.

I was then again asked, “why?” My response was that material variance is a primary focus when U.S. corporate CFOs report their quarterly financial results to stock analysts where, by the way, total cost is seldom—if ever—mentioned.

I had to explain this several times, as most of the attendees were incredulous to the fact.”

“Most suppliers are geographically close to their customers” – *a JIT practice – “and so are more closely integrated with them than their western counterparts.”

“Total cost,” not “piece-price” is what is measured.

“Despite most of the attending companies having current or past business relations with American customers, most were completely unaware of how Americans viewed performance in its purchasing function.

It didn’t make sense to them, but did generate a few laughs”

“if honest total cost metrics are employed, the cost benefit to sourcing in China just isn’t there anymore.”

 article link: https://www.industryweek.com/supply-chain/supply-chain-initiative/article/21176987/chinese-manufacturers-are-wondering-how-can-americans-still-afford-to-buy-from-us

Harry Moser, Reshoring Initiative CEO, set up a total cost calculator CFO's can use to learn their Total Cost of Ownership Estimator available here https://www.reshorenow.org/tco-estimator

I’ve used this to calculate actual cost comparisons at more than one company and it typically is more economical to source locally – which also reduces sourcing from region typically supplying product high in defects, which increases lead times when you have to reorder to replace defective stock and let the customer know you won’t be on time.  Local sourcing also reduces distance & associated lead times, a direct driver of sales and bottom line results.

 *I can't recall a business that knew their actual cost of offshoring, do you know yours?

Launching Lean at Danaher

read the article twice:

https://www.lean.org/LeanPost/Posting.cfm?LeanPostId=1264

my notes/key points from it:

“While they were pretty slow, way too expensive, and loved power point presentations, we did create our first couple of cells.”

“We even put potted plants in the first cell just to show how different the new look was.”

“We just did this because it made common sense.”

“These individuals were the real deal.”

“50 percent. Everything can be cut by 50 percent.” Later they told us they said 50 percent because they didn’t think we would want to hear the real number.  We liked that as we were only thinking about 30 percent

“listen and learn. Don’t push back. We found right away that lean (Just-inTime back then) was “learn-by-doing” and we wanted to learn.”

“Mark helped us initially in finance by moving us away from standard cost accounting and toward  something similar to what is now called lean accounting, and later became instrumental in creating/running the Danaher Business System (DBS). Switching to lean accounting was another big lesson as it allowed us to finally see what was going on and didn’t fight lean as standard cost accounting does. It also created great productivity in finance as Mark was able to go from 25 to 9 people and close the books in a day and a half.”

“all leaders need to emerge themselves in the details of lean and become lean experts themselves if they want to have a successful lean turnaround.”

“learning was the greatest strategic weapon we had ever seen.”

“cut your lead times from weeks to days, increase your productivity, drastically improve your quality and free up over half your floor space by removing the waste from your operations then you would have a huge strategic advantage.”

“A lot of times things didn’t work well at first (in fact most of the time) but we never let it go back to what it was. We just kept pushing till we solved the problems and made it work.”

“we involved the union in everything we did. We were always honest and up front with them. We treated them as equal partners.

we kept proving that every move we made was better for our work force we eventually formed a great relationship. We knew that the best ideas for removing the waste would come from the people doing the work, and that always proved to be true.”

“the Presidents of all 13 Danaher companies to be the lean drivers in their own companies. To do this we had to teach them lean… create the Presidents Kaizen.”

“all the Presidents to participate in a three-day kaizen every six weeks.  They weren’t too happy about this at first but the gains we got every time were so big that this quickly changed.”

“Mark DeLuzio created the M&A integration process as well as the due diligence process as it related to DBS. And along with Larry Culp, Danaher CEO (and now the CEO of GE), developed the strategic planning process for all of Danaher”

CEMEX’s Strategic Mix Business Turnaround:

Example how a commodity seller can become a solution provider growing market share.

CEMEX is one of the rare firms executing lean business strategy beyond the merger & acquisition stage.

Article here: https://www.strategy-business.com/article/00325

These are my unedited notes, however I HIGHLY recommended reading the article. Twice.

• Also leveraged mergers & acquisitions including entering new businesses in ready-mix concrete and aggregates

Strategy

long track record in lean operations (“ruthless operating efficiency”) evolved to become one of the most successful companies from an emerging market, and developed a high level of customer responsiveness. It delivers cement within 20 minutes of receiving an order in many locales. Its international business strategy enabled CEMEX to grow rapidly during the 1990s and early 2000s, when it became one of the biggest cement companies in the world.

• while maintaining consistently high profitability levels. (In 2014, the company reported US$2.7 billion EBITDA on revenues of $15.7 billion.)

developed a capability for environmental sustainability:

• decreasing the company’s own fuel use

• removing or mitigating pollutants in materials

• and looking for ways its products and services could lead to sustainable practices for all the industries CEMEX serves.

get good at postmerger integration, and extract more value out of those assets than the former owners.

“Enforcing is really the right word. A good example is the emphasis we put on closing the books on the 1st or 2nd day of every month. A lot of managers initially wondered why it was so important to do this. They thought nothing would be lost if they did their closings on the seventh or eighth day. But we believed that having that information readily available would increase the likelihood that managers would make the right decisions. And the practice had a very high-level overseer: Mr. Zambrano himself, into whose email inbox all of these reports flowed. This was not subject to negotiation.”

accounting management

[any] product has a disadvantage in that a customer can find a substitute for it. A solution, by contrast, cannot be that easily replaced. So we started to develop offerings that more closely resembled solutions.

“For CEMEX to play that kind of role, the company needed new capabilities. We needed a new kind of executive, connected with the environment, who understood the real needs of any given locality. We changed old habits; for instance, in the past our people were not prepared to interact with our communities or with the media. We had become an efficient company with an inward-looking culture. But our operational guys realized that they needed to be able to talk to the media, and to local communities and their leaders. The operational guys had to recognize that it wasn’t enough to lower costs; they also had to connect with local people and address their concerns — for example, about the dust generated by trucks picking up materials.”

“The sales guys had to learn not to wait for people to come in with orders; if markets were soft, they had to go out and propose solutions to problems that had not yet been brought to public attention. “We don’t just mend holes in your street — we can prevent those holes from recurring for the next 30 years.” selling concrete

Partly it’s a matter of how we talk about these things with customers. We’re not just selling cement or ready-mix; we’re helping you build a street. We’re helping you build a home. We aren’t selling a product to you; we’re working with you on a solution.”

each business must recapture transport dollars. We won’t dictate how you do it, but we require that you recapture all your freight somehow.

Left to their own devices, big companies will continue to act big. They’ll put in more rules, procedures, and standardization. When you’re running a hyperlocal business like ready-mix concrete and aggregates, you can’t allow that to happen. You have to fight all the time to be small

about 40% of the direct cost of cement is wrapped up in [energy use], you need to watch the expense of fuel and electricity carefully.