The Industrial Economy Part Two
"We are justly proud of the high wage rates which prevail throughout our country and jealous of any interference with them by the products of the cheaper labor of other countries. To maintain this condition, to strengthen our control of home markets and, above all, to broaden our opportunities in foreign markets where we must compete with the products of other industrial nations, we should welcome and encourage every influence tending to increase the efficiency of our productive processes"
---Henry Towne, President of the American Society of Mechanical Engineers, 1911
Do I live in the same country as Henry Towne did in 1911? I think so. But, I also think many of the business and government leaders have forgotten the basics of business. Or, frankly, of life. Commitment, innovation, execution, perseverence and really difficult answers requiring really hard work. It seems many business leaders are simply a mirror of western culture as a whole. We want gratification and we want it now. And, we want something for nothing rather than having to work very hard to achieve it. But, why would that be a surprise? Aren't business leaders simply a reflection of society? I firmly believe success in life requires alot of hard work, calculated risks and a whole lot of being in the right place at the right time. Hard work has a tendency to put the odds of being in the right place at the right time in one's favor.
Before I answer the question to the last post, I'm going to tie a few posts together starting with the last one. I'm going to talk a little bit about labor costs in this post. I'm not an industrial engineer nor am I am manufacturing guru. I have worked in manufacturing environments and with manufacturing clients so I'm conversant enough on the topic to write an intelligible post on a blog. And, to raise awareness of a myth that the only way to compete in any manufacturing business is to pay the production team members a very low wage. This is not a treatise on lean manufacturing methods but rather a generalization of a topic which is very relevant to my next post and to the future.
It seems most people in the U.S. and Europe, countries with traditionally high manufacturing wages, have been brainwashed into believing their labor costs are too high to compete globally. So, they see an inevitable shift of all things manufactured to developing country sweat shops where employees making 50 cents a month. I just heard the the chief investment officer for the largest investment institution on earth, an American firm, state that he is bearish long term on the American auto industry because of high labor costs. Now, as I've pointed out before, the question you need to ask yourself is if the person making the comment is qualified in any way to be an expert on the topic. If you are Shigeo Shingo, then I want to absorb everything you utter on this topic. If you are a successful Wall Street CIO, then I want to hear what you have to say about asset allocation models in a highly correlated asset world not what you think about the manufacturing labor rates. Frankly, because you likely are just repeating what you read. And, the premise for what you read was probably inaccurate as well. To put it bluntly, it's hilarious to envision Shingo debating a Wall Street CIO about manufacturing methods, processes, technology or labor rates. That's like Albert Einstein debating me about the theory of general relativity.
What surprises me is that it doesn't matter whether a person has a production job or is a business executive, everyone believes the U.S. manufacturers are paying salaries that are too high. The mantra is that if developed countries are going to compete, they must lower wages. That's generally preposterous. Who really believes a race to the bottom of the barrel as it pertains to wages for the masses will create a healthy economy or a healthy consumer capable of maintaining an economy? Or who really believes that we can all sell real estate or be financial advisors and outsource all production employment to developing economies simply because they will work for lower wages?
It was recently reported on Autoblog.com in 2006 Toyota paid its workers more than Ford or GM yet is the most profitable industrial company on earth. Ring a bell? If you study history, it sound like Henry Ford's company one hundred years ago. Even before Toyota was manufacturing in the U.S., does one really believe Toyota was paying poor wages in Japan? A country whose GDP is second only to the U.S.. A country with incredibly high land costs, high labor costs, a quasi-union work force, national health care, very high energy costs and a need to import all of its raw materials? Please don't tell me it is because of an unfavorable dollar/yen exchange rate either because Toyota makes cars all over the world and regardless of where they make cars, they do so profitably. That includes the Europe where worker's rights are the most stringent of any continent.
The reality is manufacturing efficiency and the ultimate end product cost contains many variables beyond labor rates. Cost is more about a maniacal focus on continuously optimizing efficiency, quality and lowering labor's input into the final output. Labor's input into final output is not wage rate but continuous improvement of doing more with less via technology and business process improvement. And, a great industrial company never rests as it pertains to continuous improvement. Always questioning how to do more with less, even questioning if I need a skilled worker to do unskilled labor. Or whether my skilled labor would serve my client better by focusing on higher value work. So, where does this notion that people must make piddly salaries come from? Is this a reflection of too many finance minded executives infiltrating all sectors of our economy? Because I can assure you, most of what is taught at Toyota would require you to throw what was taught at Wharton Business School. Manufacturing and operations related segments of the economy are not about spreadsheets, they are about real commitment to rolling up your sleeves and understanding how you make something and continuously make it better.
Toyota's Production System as well as those of other successful manufacturers is based on the idea of reducing waste through optimization. Waste is generally classified into the following areas:
So, if I paid a worker $25 an hour or $10 an hour, if the best practices for final assembly of an automobile is between 15 and 18 hours, is the labor rate going to be the determining factor of whether I have a successful business model? A final product which may cost $30,000 or $50,000 and the variability of wages at $25 or $10 an hour is a few hundred dollars? That is absolutely ridiculous. I'd say the bigger variable is how to reduce the number of high paid management executives which bloat the full time equivalent salaries and benefits of production workers so often quoted in the press.
Isn't it more important to build a quality product and get it right the first time? To reduce recalls, warranty work and poor customer satisfaction? To make sure the assembly processes result in zero defects, highly efficient manufacturing processes and unnecessary waste be it human idle time or excess inventory? If you don't get these issues right the first time, how much does it cost if you are paying 50,000 people a wage of $30 an hour and $20 in benefits? That doesn't even take into account the other costs involved in rework or poor quality, or what impact design, branding, marketing, engineering or innovation play in a corporation's success. What's the difference of whether I pay an electrician working in a factory $35 an hour or pay a capital equipment salesperson $500,000 a year or the Home Depot CEO $250 million dollars? Are low wages for factory workers really the answer to a competitive world? Is it really about how little I can pay someone that determines my success because manufacturing requires a mindless body? Or is the issue one of a disconnected management culture which is more interested in their own financial gain as opposed to creating an industrious society or a successful organization? In other words, if Toyota and Honda can do it, why can't GM and Ford? What is the only variable between those four companies? Senior management's commitment to their company, the success of their products and their employees? May I ask what the difference is between a country who has a poor record of human rights and a company which only values the bottom line at the expense of associate welfare? Is there a difference? One where thugs rape a country of its wealth while the general population live in squalor. Yes, this is a very critical analogy but I believe every so often a society needs to have an open dialog about what we want to achieve as a whole. This has nothing to do with being a capitalist or pro-business. I am extremely pro-business and very passionate about capitalism. But, I also believe companys have a social responsibility and it is incumbent upon the markets to enforce what conscience we want of our businesses. Companys which treat their associates as expendable costs rather than cherished assets have a tendency to treat their customers with a similar blase attitude. In the end, as a shareholder or customer or consumer, is that an environment you endorse? There is no perfect answer to the questions I am asking. But, they should be asked. And now is a time to be asking the questions of what society wants from its leaders.
I'll leave you with one final quote.
"I determined absolutely that never would I join a company in which finance came before the work or in which bankers or financiers had a part. And further that, if there were no way to get started in the kind of business that I thought could be managed in the interest of the public, then I simply would not get started at all."
---Henry Ford 1922
---Henry Towne, President of the American Society of Mechanical Engineers, 1911
Do I live in the same country as Henry Towne did in 1911? I think so. But, I also think many of the business and government leaders have forgotten the basics of business. Or, frankly, of life. Commitment, innovation, execution, perseverence and really difficult answers requiring really hard work. It seems many business leaders are simply a mirror of western culture as a whole. We want gratification and we want it now. And, we want something for nothing rather than having to work very hard to achieve it. But, why would that be a surprise? Aren't business leaders simply a reflection of society? I firmly believe success in life requires alot of hard work, calculated risks and a whole lot of being in the right place at the right time. Hard work has a tendency to put the odds of being in the right place at the right time in one's favor.
Before I answer the question to the last post, I'm going to tie a few posts together starting with the last one. I'm going to talk a little bit about labor costs in this post. I'm not an industrial engineer nor am I am manufacturing guru. I have worked in manufacturing environments and with manufacturing clients so I'm conversant enough on the topic to write an intelligible post on a blog. And, to raise awareness of a myth that the only way to compete in any manufacturing business is to pay the production team members a very low wage. This is not a treatise on lean manufacturing methods but rather a generalization of a topic which is very relevant to my next post and to the future.
It seems most people in the U.S. and Europe, countries with traditionally high manufacturing wages, have been brainwashed into believing their labor costs are too high to compete globally. So, they see an inevitable shift of all things manufactured to developing country sweat shops where employees making 50 cents a month. I just heard the the chief investment officer for the largest investment institution on earth, an American firm, state that he is bearish long term on the American auto industry because of high labor costs. Now, as I've pointed out before, the question you need to ask yourself is if the person making the comment is qualified in any way to be an expert on the topic. If you are Shigeo Shingo, then I want to absorb everything you utter on this topic. If you are a successful Wall Street CIO, then I want to hear what you have to say about asset allocation models in a highly correlated asset world not what you think about the manufacturing labor rates. Frankly, because you likely are just repeating what you read. And, the premise for what you read was probably inaccurate as well. To put it bluntly, it's hilarious to envision Shingo debating a Wall Street CIO about manufacturing methods, processes, technology or labor rates. That's like Albert Einstein debating me about the theory of general relativity.
What surprises me is that it doesn't matter whether a person has a production job or is a business executive, everyone believes the U.S. manufacturers are paying salaries that are too high. The mantra is that if developed countries are going to compete, they must lower wages. That's generally preposterous. Who really believes a race to the bottom of the barrel as it pertains to wages for the masses will create a healthy economy or a healthy consumer capable of maintaining an economy? Or who really believes that we can all sell real estate or be financial advisors and outsource all production employment to developing economies simply because they will work for lower wages?
It was recently reported on Autoblog.com in 2006 Toyota paid its workers more than Ford or GM yet is the most profitable industrial company on earth. Ring a bell? If you study history, it sound like Henry Ford's company one hundred years ago. Even before Toyota was manufacturing in the U.S., does one really believe Toyota was paying poor wages in Japan? A country whose GDP is second only to the U.S.. A country with incredibly high land costs, high labor costs, a quasi-union work force, national health care, very high energy costs and a need to import all of its raw materials? Please don't tell me it is because of an unfavorable dollar/yen exchange rate either because Toyota makes cars all over the world and regardless of where they make cars, they do so profitably. That includes the Europe where worker's rights are the most stringent of any continent.
The reality is manufacturing efficiency and the ultimate end product cost contains many variables beyond labor rates. Cost is more about a maniacal focus on continuously optimizing efficiency, quality and lowering labor's input into the final output. Labor's input into final output is not wage rate but continuous improvement of doing more with less via technology and business process improvement. And, a great industrial company never rests as it pertains to continuous improvement. Always questioning how to do more with less, even questioning if I need a skilled worker to do unskilled labor. Or whether my skilled labor would serve my client better by focusing on higher value work. So, where does this notion that people must make piddly salaries come from? Is this a reflection of too many finance minded executives infiltrating all sectors of our economy? Because I can assure you, most of what is taught at Toyota would require you to throw what was taught at Wharton Business School. Manufacturing and operations related segments of the economy are not about spreadsheets, they are about real commitment to rolling up your sleeves and understanding how you make something and continuously make it better.
Toyota's Production System as well as those of other successful manufacturers is based on the idea of reducing waste through optimization. Waste is generally classified into the following areas:
- Overproduction (making more than what is needed, or making it earlier than needed)
- Transportation (moving products farther than is minimally required)
- Waiting (products waiting on the next production step, or people waiting for work to do)
- Inventory (having more inventory than is minimally required-Excess Inventory or Deadliest type of waste)
- Motion (people moving or walking more than minimally required)
- Processing itself (relates to standalone processes that are not linked to upstream or downstream processes)
- Defects (the effort involved in inspecting for and fixing defects)
- Safety (unsafe work areas creates lost work hours and expenses)
- Information (age of electronic information and enterprise resource planning systems (ERP) requires current / correct master data details) (Courtesy of Wikipedia)
So, if I paid a worker $25 an hour or $10 an hour, if the best practices for final assembly of an automobile is between 15 and 18 hours, is the labor rate going to be the determining factor of whether I have a successful business model? A final product which may cost $30,000 or $50,000 and the variability of wages at $25 or $10 an hour is a few hundred dollars? That is absolutely ridiculous. I'd say the bigger variable is how to reduce the number of high paid management executives which bloat the full time equivalent salaries and benefits of production workers so often quoted in the press.
Isn't it more important to build a quality product and get it right the first time? To reduce recalls, warranty work and poor customer satisfaction? To make sure the assembly processes result in zero defects, highly efficient manufacturing processes and unnecessary waste be it human idle time or excess inventory? If you don't get these issues right the first time, how much does it cost if you are paying 50,000 people a wage of $30 an hour and $20 in benefits? That doesn't even take into account the other costs involved in rework or poor quality, or what impact design, branding, marketing, engineering or innovation play in a corporation's success. What's the difference of whether I pay an electrician working in a factory $35 an hour or pay a capital equipment salesperson $500,000 a year or the Home Depot CEO $250 million dollars? Are low wages for factory workers really the answer to a competitive world? Is it really about how little I can pay someone that determines my success because manufacturing requires a mindless body? Or is the issue one of a disconnected management culture which is more interested in their own financial gain as opposed to creating an industrious society or a successful organization? In other words, if Toyota and Honda can do it, why can't GM and Ford? What is the only variable between those four companies? Senior management's commitment to their company, the success of their products and their employees? May I ask what the difference is between a country who has a poor record of human rights and a company which only values the bottom line at the expense of associate welfare? Is there a difference? One where thugs rape a country of its wealth while the general population live in squalor. Yes, this is a very critical analogy but I believe every so often a society needs to have an open dialog about what we want to achieve as a whole. This has nothing to do with being a capitalist or pro-business. I am extremely pro-business and very passionate about capitalism. But, I also believe companys have a social responsibility and it is incumbent upon the markets to enforce what conscience we want of our businesses. Companys which treat their associates as expendable costs rather than cherished assets have a tendency to treat their customers with a similar blase attitude. In the end, as a shareholder or customer or consumer, is that an environment you endorse? There is no perfect answer to the questions I am asking. But, they should be asked. And now is a time to be asking the questions of what society wants from its leaders.
I'll leave you with one final quote.
"I determined absolutely that never would I join a company in which finance came before the work or in which bankers or financiers had a part. And further that, if there were no way to get started in the kind of business that I thought could be managed in the interest of the public, then I simply would not get started at all."
---Henry Ford 1922
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