Tag: labor costs

OM in the News: The Cost of Cheap Labor

“When companies consider making changes in their supply chains, the mantra of question everything can’t be overstated—even when the topic becomes cheap labor for consumer product manufacturing,” writes Material Handling & Logistics (Nov. 8, 2016). The article suggests that: 

  1. The source of the raw ingredient and its impact on cost is critical. A majority of a finished good product cost is often thought to be in labor and manufacturing overhead. But cost is largely tied to the ability to find local production of the raw materials and components. If a firm has to import “raws” and components, it is likely going to lose the economic edge that cheaper labor might otherwise provide. Focusing on raw material sourcing as the most important aspect of a supply chain shifts the firm away from chasing cheap labor. Companies are better off centering their manufacturing plant around material supply and proximity to their customer base.
  2. Understand customer preferences. Consumer demand for goods produced in certain countries is increasing. The value of the country of origin varies, of course, by the product category. “Made in the USA” carries premium positioning globally for nutrition products. For beauty and skin care, sourcing from the U.S., Korea, Japan or France carries a premium influence. For home care or durable goods, such as TVs, there is far less emphasis on the country of origin.
  3. Labor is just one of the non-material costs. Free trade agreements allow for significant savings when a company meets certain local sourcing minimums. Also, depending on the variability of the demand, shorter lead times and more supply chain agility (the ability to accommodate surge in demand) can make a big difference in sales.

In the end, simply chasing low labor costs is seldom the best way for a company to think about its supply chain. Consumer preferences, material supply and other considerations such as free trade and demand variability are more important.

Classroom discussion questions:

  1. Why are raw materials such an important part of sourcing?
  2. When might low labor costs be the most important factor in the supply chain?

OM in the News: Mercedes Heads East To Hungary

Businessweek (April 7-14,2012) reports that Mercedes has began production at its new $1.07 billion factory, located in Kecskemét, Hungary to make its B-Class compact. By heading so far east, CEO Dieter Zetsche is betting that Hungary’s rock-bottom wages will allow the automaker to wring more profit from its small-car, luxury lineup. “This could be the final big plant by a European carmaker in the region,” says one auto analyst. “ The growth and expansion have shifted to Asia and Latin America.”

Hungarian workers are paid a fifth of the about $61 per hour German workers cost, so Mercedes will use the factory to profitably meet its goal of boosting sales 27 percent, to 1.6 million vehicles by 2015. The Kecskemét plant is the first new Mercedes factory since the brand began producing cars in Alabama in 1997. Manufacturing costs at the plant are 30 percent lower than in Germany.  Lower production costs, including increased parts-sharing among models, are part of Mercedes’ plans to save €6 billion by 2017 to offset rising raw material costs and increased spending to lower carbon-dioxide emissions of its vehicles. With about 40 working hours spent to assemble the Mercedes compacts, the savings are about $2,000 per car.  Daimler aims to reduce the average hours spent assembling a vehicle in Hungary to 30.

In Europe, auto sales are poised to decline for a fifth consecutive year in 2012. The region’s automakers will likely use about 65 percent of production capacity this year, down from 71 percent last year. The unused assembly lines could manufacture an additional 10 million vehicles. Given the capacity overhang, it will take plant closures and job cuts to make auto production in Europe profitable again, says Sergio Marchionne, CEO of Fiat Chrysler, who last year closed a Fiat plant in Sicily. In February, Mitsubishi also said it will stop making cars at its factory in the Netherlands.

Discussion questions

1. Why is Mercedes “heading east” to Hungary and “west” to the US?

2. Is capacity an issue with the firm? Other automakers in Europe?

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OM in the News: If China is Too Expensive, Should We Locate in Vietnam ?

With China’s minimum wage at $170 a month, and rising steadily, the decision where to locate a manufacturing plant is not as clear as it was a decade ago. We discuss this issue in Chapter 8, Location Strategies, and see that low labor cost is a major factor in country selection.  The latest Businessweek (June 23-30, 2011) reports that Vietnam, until recently the low-cost alternative to China (with a minimum wage of $85 a month), was a very attractive choice. But with 20% inflation, stoked by fuel and electricity costs, multinationals are beginning to turn away in search of yet cheaper outsourcing sites. The problem is labor strikes–336 in the 1st four months of 2011–due to Vietnamese workers who say they can’t afford the higher cost of living.

Multinationals do not have to look far away–and they are turning in increasing numbers to Laos and Cambodia, the new Vietnams of cheap manufacturing. Last month, Japan’s Minebea  broke ground for a new 5,000 worker motor production plant in  Phnom Penh. “Labor is the key focus for us in choosing Cambodia”, says the company spokesman. And Srithai Superware, a Thai tableware maker, just suspended plans for an expansion of its Vietnam plant because of  economic instability. “Production costs have gone up after two salary increase this year”, says the GM.

The strikes have dented Vietnam’s 25-year-old policy of offering foreign firms a stable and low-cost workforce . “The nation is at a crossroads”, says the World Bank’s director for the country. “Vietnam can’t assume that foreign direct investment will continue. Money can go elsewhere”.

Discussion questions:

1. If manufacturers decide China is too expensive and Vietnam is in danger of following suit, how can they predict where to outsource to?

2. What other  critical factors influence the country location decision?