Tag: global OM strategy

Good OM Reading: The China Twist

china-twist“Want a challenge,” writes Wen-Szu Lin in his wonderful new book, The China Twist. “Try launching your first business in a foreign country where you aren’t familiar with the language or culture. Launch in a city where you have no connections. Introduce a product category (Auntie Anne’s Pretzels) that is completely new to the consumers. Limit your initial investment to a small amount. Oh yeah, for kicks, let this foreign country be China.” Here are a few takes from the Wharton MBA:

Operations is massively under-emphasized. “MBA classes often emphasized the ‘sexy’ part of the businesses. How it is going to be financed?  What is the innovative marketing that changed the course of the business? Operations and implementation is only represented in most classes as a tiny aspect of the overall process; thus creating that impression in the overall value.  Sad to say, I was part of that group who looked at operations as ‘beneath’ me. My perspective is completely reversed now. Poor operations will sink any business. Operations is hard and it is a daily grind. If you want to build a great business from the ground up, better start loving the operations.”

A corrupt regulatory landscape. “Our MBA program discussed the implications of the US Foreign Corrupt Practices Act and how large corporations deal with working in corrupt environments. I recall the classes portraying all cases as black and white. How does that translate to an entrepreneur getting shaken down by local government employees, all wanting some ‘favors’?”

How to ethically deal with unethical people. “Our procurement manager took bribes and demanded kickbacks from most of our suppliers. If I were in the US, I would have fired that guy as soon as the first supplier called to complain. However, he was the smartest person on our staff and could get prices lower than what we could, even with his kickbacks built in. And if we fired this manager, there is a good chance that we would face the same issue with the next employee. What we ended up doing was turn a blind eye but we checked the prices periodically to ensure that the prices he quotes are the same or lower than what we ourselves could negotiate.”

Good OM Reading: Michael Porter on Restoring U.S. Competitiveness

“Michael Porter has influenced more executives –and more nations– than any other business professor on earth,” writes Fortune (Oct.29, 2012), in a story on the 65-year old Harvard scholar. Porter’s newest article, with Jan Rivkin, in the same Fortune issue, called What Business Should Do to Restore U.S. Competitiveness, is critical reading for OM professors.

Porter and Rivkin write: “America’s feeble economy reminds us every day that our global competitiveness is in trouble.” Whose fault is that?  One camp holds that national competitiveness is the responsibility of policymakers, not business leaders, who need to focus on running their companies. The opposite camp says companies owe loyalty to the country that supports them, and executives who move American jobs overseas are Benedict Arnold CEOs. “Both positions are deeply flawed, reflecting simplistic views of how competition and economies really work,” say the authors.

They  explain that the U.S. is competitive to the extent that firms operating here can compete successfully in the global economy while supporting high and rising living standards for the average American. Doing one without the other means we aren’t really competitive. A high-wage economy like the U.S. can achieve both only by being a highly productive location, one where firms can create innovative, distinctive products and produce them efficiently.

“Managers must run their U.S. operations well,” they write. ” This means positioning U.S.-based activities to draw on unique American strengths.” For instance, La-Z-Boy has avoided head-to-head competition with low-wage Asian furniture manufacturers by emphasizing the customization and faster delivery that its U.S. location and worker skills make possible.

But running U.S. operations well does not always mean staying at home, they add. Going overseas often improves competitiveness by allowing U.S. companies to penetrate foreign markets. U.S. multinationals that expand faster abroad also tend to grow faster in America. And well-run companies do bring activities back to America as costs rise overseas and managers feel offshoring’s hidden costs, such as lower foreign worker productivity, quality problems, and loss of intellectual property.

OM in the News: Small Manufacturers Giving Up On “Made in China”

As costs in China rise and owners look closely at the hassles of using factories 12,000 miles and 12 time zones away, Businessweek (June 25, 2012) reports that many small companies have decided manufacturing overseas isn’t worth the trouble. American production is “increasingly competitive,” says the head of the Reshoring Initiative, a group  trying to bring factory jobs back to the U.S. “In the last two years there’s been a dramatic increase” in the amount of work returning. Here are 2 examples:

For LightSaver, a lighting manufacturer, the decision was simple. Neither of the founders has ever been to China, which made communicating with manufacturers difficult. Components that were shipped from the U.S. sometimes got stuck in customs for weeks. “If we have an issue in manufacturing, in America we can walk down to the plant floor,” says the CEO. “We can’t do that in China.” He believes manufacturing in the U.S. is probably 2-5% cheaper once he takes into account the time and trouble of outsourcing production overseas.

Even with strong Mandarin skills, the founder of Pigtronix, which makes electric guitar pedals, discovered that he couldn’t  monitor quality at Chinese factories. After several years of finding glitches in 30% of the pedals, the company decided to move production to  N.Y. Now Pigtronix can run multiple tests on its products and even has a guitarist play each of the 500 to 1,000 pedals it sells monthly before they’re shipped. While manufacturing in the U.S. can cost  from 3 to 6 times as much as it does in China,  Pigtronix benefits from not having capital tied up in products that spend weeks in transit and then pile up in inventory. “In China, you have high minimum quantities you have to order, so you’re building a couple thousand of every guitar pedal. Your carrying costs start to get huge.”

The bottom line: Although manufacturing in China can cost a third what it does in American factories, small companies are bringing production back to the U.S.

Discussion questions:

1. Why is reshoring gaining traction?

2. Why do many companies continue to move production to Asia?

Good OM Reading: Manufacturing in a Two-Speed World

A recent article published by Knowledge@Wharton raises the fascinating  OM topic of how companies are dealing with a “two-speed”  world. This world has 2 types of markets, each with different characteristics.  High-growth economies (such as China, India, Brazil) have growth rates of 8-12% and some 2.6 billion people with low average incomes. Slow-growth economies (US, Western Europe, Japan) have growth rates of 1-4%, but higher average incomes. What are the key challenges that global manufacturers face as they try to synchronize their worldwide operations to meet the demands of these 2 markets? The article interviews a series of Wharton profs and Boston Consulting Group execs to reach these conclusions:

1. In either market, companies need to have lean products and systems. In slow-growth world, “you need low costs and the ability to respond quickly to customer needs”. In the high-growth world, “you need to be lean to customize your products and create capacity to grow”. GE, for example, is making a $750,000 version of its MRI for emerging markets, while the sticker price of  a slightly more sophisticated model in the US is $1.6 million–see The Wall Street Journal (April 26,2011)

2. Companies need to have a shared platform for production of high-end and low-end products, often at the same factory. With cars, common components can be partly completed chasses.In pharma, it can be intermediate chemicals. In mobile phones, its partially kitted parts.

3. Networks  need to be restructured to serve local markets. “The global market means more languages, more rules, and different duty, tax, and patent issues–a new level of complexity. It’s a think local, act global thing”.

4. Companies need to balance the low-cost of labor with added logistical costs and risks inherent in lengthier supply chains. Although firms in slow-growth developed markets are tempted to manufacture in high-growth, low-cost markets and sell to both markets, “customers don’t just want the lowest cost, they want their products quickly too”.

 The bottom line in the article is that companies that are thriving in this two-speed world are really good at managing both mass production and JIT production.