One Company, Two Factories

One Company, Two Factories

Globalization can be defined to be requirements seeking the most efficient resource. What is important to understand is that efficient does not necessarily simply imply the least cost. There are a host of factors (including cost) which contribute to being the most efficient resource. For example, a supplier that has the lowest price but supplies products that in any given shipment only 60% meet acceptable product quality standards is not efficient. What are these factors?

  • Product quality – the supplier’s goal would be to meet product specifications with each product delivered to the customer, yielding 100%.
  • Delivery lead time/ responsiveness to the customer’s schedule change – this is the essence of just in time materials management. Delivery of exactly the product required when it is required.
  • Product price – .competitive pricing, evaluated based upon the other factors.

“One Company, Two Factories” is the title of an article that I recently read in Fortune magazine (18Sep2006) by Alex Taylor III. The subject of the article is the comparison of two factories making similar products for the same multi-national company; one in Michigan, USA and the other in Shanghai, China.

The comparison between the two is rather stark. Both have roughly the same number of employees, though the factory in Michigan produces roughly more than 3 times the number of units as the factory in Shanghai.

Labor in the factory in Shanghai is younger, less prone to absenteeism and costs roughly 10% of the labor cost in Michigan. The factory in Michigan has a higher degree of automation, an older labor force with relatively low turn over, that is very focused on constant productivity improvement.

The article goes on the say that while the factory in Michigan is very profitable and the employees earn a very good middle class income, they are pessimistic about their future. Whereas the factory in Shanghai has acceptable profitability levels with employees that are very optimistic about their individual future. What is not said, though I suspect is true, because labor is so relatively inexpensive, the attitude in the Shanghai plant is that little attention/ priority is given to “first pass yields” and product quality.

Both factories supply product to the automotive manufacturing sector. In China exists a growing automotive manufacturing sector. The USA, however, represents a more mature, stable or decreasing automotive manufacturing sector, due to the increase in foreign imports and the maturity of the market.

What is key to the success of the Michigan factory is high productivity, consistent emphasis on/ measurement of product quality and its’ location. That is correct, location. In today’s business environment, supply chain management is of critical importance. Customers want and expect vendor supplied material to be delivered when they need it, only as much as is needed, based upon a constantly changing requirements schedule which matches the actual customer demands. In other words, being physically located close to your customer’s factory can be a competitive advantage when determining efficiency of a resource.

In summary, the Michigan factory has much higher labor costs (due to labor rate and absenteeism) which are a disadvantage when competing on a global basis. However, these are offset by higher productivity (automation and focus on constant improvement/ first pass yields) and a physical location close to their customer base. In order to offer middle class level incomes to our employees, a firm must offer superior levels of product quality and customer responsiveness, yielding an efficient resource on a global basis.

-- Timothy Chen