shoes – The OM Blog by Heizer, Render, & Munson

OM in the News: China’s Fading Factories

Workers walk past notices listing factory space for rent in Dongguan, a once thriving manufacturing hub.

For decades, the Dongguan region of China’s Pearl River Province drove that country’s global ascent in exports, producing furniture, garments, shoes and other goods. But the world’s workshop has been stumbling as cheaper production bases in Asia have gained ground, reports The New York Times (Jan. 20, 2016). Last year, Chinese exports fell for the first time since the recent financial crisis, a situation that is likely to be further eroded by the Trans-Pacific Partnership. The U.S.-led trade agreement deepens American ties with Asian countries like Vietnam and Malaysia, but it excludes China.

Chinese leaders have started to encourage the phasing out of low-end exports in favor of promoting the service sector and high-tech manufacturing. Some traditional manufacturers have responded to the downturn by relocating farther inland or overseas, where costs are generally lower. The shift away from low-end, labor-intensive manufacturing “is an unavoidable part of the structural change that the economy is undergoing,” says a China expert at Oxford.

At their peak, factories in Dongguen accounted for 1 in every 4 pairs of athletic shoes sold globally. Now, while costs are rising, demand from overseas customers has also been declining. So some companies are making a future bet by expanding to a less-developed province, Guizhou, where labor costs are 40% less than those in Dongguan. Other large Dongguan shoe companies have shifted production to Bangladesh.

Other sectors have similarly been struggling, including some electronics manufacturers. In October, Fu Chang Electronic Technology, a supplier to the telecommunications equipment makers Huawei and ZTE, shut its doors unexpectedly. The closing prompted a protest by thousands of workers.

Classroom discussion questions:

How is China following American manufacturing trends?
Is automation a major factor in Chinese production?

OM in the News: The Economics of L.L. Bean’s Boots

In Brunswick, L.L. Bean operates a 170,000-square-foot factory where the boot is assembled from start to finish.

For over a hundred years, the company Leon Leonwood Bean founded has been making rubber boots and outdoor clothes in Maine. “L.L. Bean’s offerings have traditionally not been synonymous with cool,” writes The Atlantic (Oct. 19, 2015). But then something happened in 2011: The outdoorsy aesthetic that L.L. Bean had been selling for 100 years became trendy. That’s when the duck-boot shortage first began, and “Bean Boot heartbreak” spread as countless consumers found that retailers didn’t have what they wanted. The answer to why the signature Bean Boot has sold out every year since 2011 lies in the decisions the company has made that are different than other American manufacturers in the past few decades.

The rubber bottom of the Bean Boot is made by a machine, but after that it’s handmade by 200 people who split their time between 3 shifts. All in all, making the boot takes about 85 minutes worth of labor. Bean describes it as “a mix of old and new technology.” While the boots aren’t made exactly as they used to be, the assembly process and sewing are all done by hand.

There are two main reasons, then, the Bean Boot can’t keep up with demand. The first is the company’s decision to keep making the boot in Maine, rather than exporting operations out to China, where the majority of shoes sold to Americans are made. Fifty years ago, 98% of shoes for Americans were made in the U.S. Now, China makes 12.5 billion pairs of shoes–about 90% of shoes made worldwide. To preserve its brand, L.L. Bean keeps operations local, which lets sourcing for leather and steel remain local. The second reason that the boot keeps selling out is that it’s not as easy to find shoe makers here as it used to be when Maine was the epicenter of the U.S. shoe industry. So scaling up has become more difficult than in the past, when L.L. Bean could simply find workers in the area.

Classroom discussion questions:

Why did L.L. Bean stay in Maine?
Describe the process of making the Bean Boot.

OM in the News: China’s Latest Export–Manufacturing Jobs

Huajian Shoes’ factory outside Addis Ababa is part of the next wave of China’s investment in Africa. It started with infrastructure, especially the kind that helped the Chinese extract African oil, copper, and other raw materials to fuel China’s industrial complex. Now China is getting too expensive to do the low-tech work it’s known for. African nations such as Ethiopia, Kenya, Lesotho, Rwanda, Senegal, and Tanzania want their share of the 80 million manufacturing jobs that China is expected to export, reports BusinessWeek (July 28-Aug. 3, 2014).

At Huajian’s factory, wages of about $40 a month are less than 10% of what comparable Chinese workers make. But just as companies discovered with China when they began manufacturing there in the 1980s, Ethiopia’s workforce is untrained, its power supply is intermittent, and its roads are so bad that trips can take 6 times as long as they should. “Ethiopia is exactly like China 30 years ago,” says Huajian’s CEO, whose company supplies such well-known brands as Nine West and Guess. Frustrated by “widespread inefficiency” in the local bureaucracy, the company is struggling to raise productivity from a level that is about a 1/3 of China’s. Transportation and logistics that cost 4 times what they do in China are prompting Huajian to set up its own trucking company.

Manufacturers coming here don’t have to worry about finding new workers. The population of 96 million is Africa’s second-largest after Nigeria’s. Cheap labor and electricity and a government striving to draw foreign investment make Ethiopia more attractive than many other African nations. “It could become the China of Africa,” says a Johns Hopkins prof.

Classroom discussion questions:

1. Why is China exporting manufacturing jobs?

2. What are the advantages and disadvantages of locating in Ethiopia?

OM in the News: That’s One Gigantic Shoe Warehouse

One of the largest warehouses in the US is about to open its doors in a new 1.82-million-sq. ft. building near the Port of Los Angeles. Skechers USA, Inc., the nation’s no.2 footware company chose the area because, in the world of international trade, Southern California remains the hub of choice. The Los Angeles Times (July 1, 2011) points out that the LA/Long Beach Port is the highest rated cargo movement region in the US in terms of container counts, rail connections, and infrastructure. Skechers needs the space to handle all the containers of shoes made in China by its contract manufacturers (the firm keeps 300 staff there just to stay on top of the contractors).

How big is the new $1/4 billion distribution center? First, it takes 1/2 minute to drive from one end to another at 60 mph. It’s 2,900 feet long and 700 feet wide, enough to hold 40 football fields. It’s the size of 17 Wal-Marts. There are 270 truck bays. But more importantly, it will replace 6 smaller warehouses. In the old system, workers had to handle shoes 3 times as they moved from building to building, adding costs, including the wages of truck drivers. “Now”, says the COO, “no one will have to touch it to do the same amount of work”. Instead of “7,000 pairs of shoes an hour, with the new warehouse, we’re expecting to be able to move 18,000-20,000 pairs of shoes every hour”. In effect, the move allows Skechers to get out of the trucking business.

At the LEEDS-certified warehouse, conveyor belts which are programmed and pressure sensitive will move the shoes and prevent product pile up, which happens with traditional belts. Storage racks are operated by robots that pick up the boxes and bring them to the desired locations.

Discussion questions:

1. What are the advantages and disadvantages of such a massive distribution center?

2. Why is proximity to West Coast ports become important to logistics?