Tag: global manufacturing

OM in the News: Nike’s Struggle to Balance Cost and Worker Safety

 

Nike's factory in Vietnam
Nike’s factory in Vietnam

Nike’s head of sustainable business had been lecturing colleagues for years about the dangers of manufacturing in Bangladesh, reports The Wall Street Journal (April 22, 2014). Yes, the country featured some of the cheapest factories in the world, she argued, but the athletic-gear maker could ill afford another public pasting over its labor practices. Her counterparts in operations, charged with squeezing costs, countered that they should all visit the place together and then decide. So one day last year, they popped into a Dhaka building that housed one of Nike’s suppliers, Lyric Industries. Rolls of fabric were strewn across the production floor and some windows were bolted shut, clear-cut hazards in the event of a fire. The team flew home and decided to cut ties with the company.

Nike’s internal conflict over Bangladesh shows that its effort to clean up its act in the developing world, which began about 20 years ago, remains a work in progress. As the U.S. apparel industry sends more production to low-cost nations, Nike’s experience offers a lesson in the difficulty of managing the twin priorities of controlling costs and maintaining acceptable working conditions.

Nike was founded in 1964, in part on the premise that it could produce quality footwear at lower costs by using cheap labor at overseas factories. At the time, only 4% of U.S. footwear was imported. Today, the figure is 98%. But by 1998, the Nike CEO stated: “The Nike product has become synonymous with slave wages, forced overtime and arbitrary abuse.”

So Nike released the names and locations of its factories—the first major retailer to do so—to be more transparent about its supply chain. It improved air quality for workers and stationed dozens of people in countries where it manufactured products to help find cost savings and improve worker treatment. In 2008,  Nike created a “country risk index” to score the potential downside of doing business in certain locations. Bangladesh ranked near the bottom, with over 5,400 garment factories churning out $20 billion of clothing exports.

Classroom discussion questions:

1. Since Nike has 1,000,000 workers in 744 factories worldwide, how can it monitor both quality and sustainability?

2. What major disaster occurred in Bangladesh recently that highlighted the problems of manufacturing there?

OM in the News: Sharing the Same Production Process at Samsung and Globalfoundries

Two Globalfoundries workers in Albany, NY
Two Globalfoundries workers in Albany, NY

Samsung and Globalfoundries just announced (see The Wall Street Journal-April 18, 2014) that they have agreed to adopt the same production process as they upgrade their chip-manufacturing services, an unusual alliance with implications for many designers of computer chips and other devices, notably Apple. With the agreement, chips produced by Samsung and Globalfoundries will be essentially identical; companies that design chips could have their products produced in factories operated by either company with no extra effort.  Companies generally prefer to reduce their reliance on a single supplier for components. In this case, the pact between Globalfoundries and Samsung provides a new selling point as the two companies try to woo customers away from Taiwan Semiconductor, the biggest chip maker.

The new pact could allow Apple in the future to shift chip orders between Samsung’s Austin plant and a Globalfoundries factory near Albany, N.Y.  “The idea of doing business with multiple suppliers is built right into Apple’s DNA,”  says one industry expert.

The pact also reflects the intense financial pressures associated with pursuing Moore’s Law, Silicon Valley’s shorthand for shrinking semiconductor circuitry to improve chips’ speed and data storage capability. With individual production tools priced at tens of millions of dollars—and complete chip factories costing $5 billion or more—fewer and fewer companies still develop new production processes. In response, companies are now working together to share costs of developing new production recipes.

But the deal goes much further. Globalfoundries agreed to abandon a technology it had been developing for creating chips with circuitry measured at 14 nanometers, or billionths of a meter. It will instead license Samsung’s 14 nanometer process, which has technical benefits, and uses common production tools and materials.

Classroom discussion questions:

1. What are the benefits of shared production?

2. Why is Apple encouraging this concept?

                                         

OM in the News: Textile Plants Humming Once Again in the Carolinas

The old textile mills in the Carolinas are mostly gone now. Gaffney Manufacturing, National Textiles, Cherokee — clangorous, dusty, productive engines of the Carolinas fabric trade — fell one by one to the forces of globalization. Just as the Carolinas benefited when manufacturing migrated first from England to New England and then to here, where labor was even cheaper, they suffered in the 1990s when the textile industry mostly left the US. It headed to China, India, Mexico — wherever people would spool, spin and sew for a few dollars or less a day.

But remarkably, Parkdale Mills, the country’s largest buyer of raw cotton, has reopened and is thriving–another indication of the resurgence of US manufacturing, reports The New York Times (Sept. 20, 2013) in its cover story. For example, just last year, clothing maker American Giant was buying fabric from a factory in India. Now, it is cheaper to shop in the US, using Parkdale yarn.

American manufacturing has several advantages over outsourcing. Transportation costs are a fraction of what they are overseas. Turnaround time is quicker. Most striking, labor costs aren’t that much higher than overseas because the factories that survived the outsourcing wave have turned to automation and are employing far fewer workers. Further, monitoring worker safety in places like Bangladesh, has become a huge challenge.

In 2012, textile exports were $22.7 billion, up 37% from just 3 years earlier. That the industry is thriving again is indicative of a broader reassessment by companies about manufacturing in the US. A recent M.I.T. survey found that 1/3 of American companies with manufacturing overseas said they were considering backsourcing some production, while 15% said they had already decided to do so. This means jobs–but on nowhere near the scale there was before, because machines have replaced humans at almost every point in the production process. Take Parkdale: The mill produces 2.5 million pounds of yarn a week with about 140 workers. In 1980, that production level would have required more than 2,000 people.

Classroom discussion questions:

1. What are the reasons Parkdale is thriving?

2. What is the role of automation in the return of manufacturing to the US?

OM in the News: The Case of the $6.75 Bangladeshi Shirt

bangladesh sewingThe recent tragedies at several Bangladeshi garment factories have claimed over 1,000 lives—and focused international attention on this important industry. So far, much of the discussion has focused on Bangladesh’s minimum wage law–the average garment worker gets take-home pay of $70-$80 per month. But The Wall Street Journal (May 17, 2013) raises the question of how that minimum wage is being paid.

While the worker is sewing, on another floor of the same factory building negotiations are under way between the factory owner and a retailer’s rep. The factory owner is offering a shirt to the buyer at $6.75 per piece. Of that, the owner will spend $4.75 buying the 1.9 yards of 100% cotton with a fine 50s thread count, and another $1 buying the labels, accessories and other components the retailer specifies. The remaining $1 per shirt funds the “cutting and making,” which includes wages for the workers. Part of it funds the letters of credit the manufacturer will use to ensure a steady supply of raw materials. Part of it goes toward capital expenses–and part will become the manufacturer’s profit.

An order for 400,000 shirts typically means that 400 workers produce 3,077 pieces per day. The wage cost works out to about 38 cents per shirt. Another 15 cents goes to sending the shirt for a fine washing spin. Rent and utilities for the factory floor works out to about 11 cents per shirt, and head-office and marketing costs for the factory are 11 cents.

The remaining 25 cents may cover repaying a 10-year bank loan at 18% interest, which the factory owner has used for set-up costs. All is at a delicate equilibrium, writes the Journal, until the owner feels compelled to give in to a firmly worded request from the retailer for an additional discount, or a demand to air-freight some boxes of shirts that suffered a 2-week production delay.

Discussion questions:

1. If the cost of upgrading factory safety averages $128,000, where should the money come from?

2. How do students feel about paying more for clothes to help raise the living and safety standards in the country making the product?

OM in the News: A Toy Maker Comes Home to the U.S.

knex toyAs every American child knows, toys come from the North Pole or—more likely—China. But as The Wall Street Journal (March 11, 2013) writes, Philadelphia’s K’Nex Brands is trying to prove they can still be made in America. Over the past few years, K’Nex has brought most of the production of its plastic building toys back to its U.S. factory  from subcontractors in China. To make that possible, the company has redesigned some of the toys and even handed over to kids a bit of the assembly formerly performed by hand in China.

“In the long-term, it’s much better for us to manufacture here,” says the chairman of K’Nex. By moving production closer to U.S. retailers, K’Nex said it can react faster to the fickle shifts in toy demand and deliver hot-selling items to stores faster. It also has greater control over quality and materials, often a crucial safety issue for toys (see the Ethical Dilemma box in Chapter 5). And as wages and transport costs rise in China, the advantages of producing there for the U.S. markets are waning.

But K’Nex has found it impossible so far to produce 100% U.S.-made toys, the firm’s goal. The K’Nex experience shows both the attractions of “reshoring” production and the difficulties of making that happen in a country whose manufacturing infrastructure has atrophied. Lining up suppliers has been a complicated chore in the U.S., where toy-making skills have faded. China, by contrast, has a vast, efficient network of suppliers and skilled labor. “In China, you can go over with just a drawing and say, ‘I need a million of these,'” says K’nex CEO. That helps account for a huge U.S. deficit in the toy trade. In 2012, U.S. imports of toys, games and sporting goods, mostly from China, totaled $33.5 billion, or 3 times U.S. exports of such items.

Discussion questions:

1. Why is reshoring difficult?

2. What re-engineering changes were needed to make it more feasible to manufacture here?

OM in the News: Japan Dispensable as a Supplier?

The article in today’s New York Times (May 30,2011) begins: “Maybe Japan is not as crucial to the global supply chain as those first few weeks after the earthquake made it seem”.  As an example, the Times describes STMicroelectronics, the $10 billion European semiconductor giant, which after the initial shock of losing  Japanese components, quickly lined up alternative suppliers outside of Japan. “It is going smoother than we had thought”, says the CEO. And it turns out this experience is widely shared. Beyond a very short list of components (like auto micro controllers), it turns out that Japan plays only a small role in the global supply chain.

There may be 2 reasons for the limited impact of the Japanese disaster. First, the resiliency of supply networks and quick action by companies helped. But a new report by SCM World finds that Japan, despite being the world’s 3rd largest economy (behind the US and China), is not the major source of manufactured parts for companies outside that country. China was the #1 source (37%), then the US (20%), then Germany (7%). Japan tied with Canada for 8th place.

“What’s remarkable is how relatively isolated Japan is”, says the report’s author. “It’s far less integrated into the world’s manufacturing supply chains than you would expect, given the size of Japan’s economy”. Japan’s manufacturing prowess and global competitiveness are focused in a few industries, like autos and consumer electronics.

Further, big Japanese firms have preferred to have essentially captive suppliers. These tight, cooperative bonds have meant shared experiences and constant communication. But they also meant that Japanese suppliers have been less likely to sell to foreign corporations.

Discussion questions:

1. Why did the earthquake have a limited effect on manufacturers outside Japan?

2. How will the close relationship among Japanese companies help the country recover more quickly?