I recently worked with a few Japanese and US-based manufacturing companies to help establish new facilities in China, taking advantage of their still relatively low labor costs and exploding domestic market.
There are several potential pitfalls that can wipe out any expected benefits of expanding into China if you are not careful. Here are three points I observed that are critical to consider in order to make your investment worthwhile.
- Manage Cash Flow
It is not uncommon to hear the head of operations state “where has all the cash gone?” When building a new facility, the business operation typically undergoes a period of sustained ramp-up where more focus is applied to getting product “out the door”, instead of focusing on continuous improvement or cash flow. There are 3 major reasons on why cash flow can be more of a problem with the Chinese operations.
- Longer payment terms are typical – when compared to terms from other countries. For example, most European countries have average payment terms in the range of 30-80 days; it is not uncommon in China for payment terms to stretch out to 120 days or more, especially if you are selling to Chinese OEMs.
- Export-oriented manufacturing management practices – China is on the verge of shifting from an export-centric economy to one that is powered more by internal demand. Most operations managers come from a manufacturing environment that has been driven primarily by container-based purchases by overseas customers together with volume discounts by local suppliers. Batch-and-queue environments encourage management practices that can result in a lot of waste when compared to a more domestically-oriented demand driven supply chain.
- A lack of understanding about Lean manufacturing – Few managers understand how Lean manufacturing relates to their management challenges, especially when production issues have been addressed in the past through a continuous supply of low cost labor and ample factory space for expansion. Most attention was applied to more visible parameters, such as labor rates and material costs; few are trained to look at invisible waste, such as WIP or other non-value-added activities. As an example, I recently worked with a Japanese automobile component supplier to reduce their production batch size for their China operations to about 10% of the level of their Japanese plant’s operations in order to free up cash flow.
- Prepare for High Employee Turnover
Chinese managers typically don’t stay on the same job for more than three years. New operations managers can often acquire sufficient experience to double their paycheck within a year by simply switching employers. Under this environment, it is important to implement proper labor management practices as well as to standardize operational processes, in order to minimize the time required to train new employees.
- Watch Asset / Equipment Utilization Closely
The Chinese tend to over-rely on automation, believing it is the only way to address rising wages and quality issues. As pointed out by this recent NY Times article: “China is expected to pass South Korea and Japan to become the largest robot market next year, according to a forecast from the robotics federation. Units in operation worldwide are expected to top 1.3 million by 2014.” In an environment of high employee turn-over, it is especially important to watch how asset and equipment are being utilized, because capital investment decisions could be made by managers who will no longer be accountable. As an example, I visited a greenfield factory where bottle-necked machines contributed to an OEE of less than 40%; the same operations in other countries would have been at 60% or more. The plant manager did not see this improvement task as a priority – they were preoccupied with adding machines to meet the increased volume forecast over the next five years.
Key Learning: Leverage your Best Processes and Systems
Most manufacturers tend to focus on equipment and people when building a new plant, leaving the processes (and hence the IT systems that enable the processes) as an after-thought. This approach is particularly risky when comes to rolling out new manufacturing operations in China. A lack of standardized IT systems that provide clear visibility into operations can exacerbate the challenges of effectively managing cash-flow, employee turnover and asset utilization. Putting an initial effort to transfer best-practice processes and IT systems from the onset of planning a new plant can greatly help to ensure not only a successful launch of your new facility, but also can help to infiltrate a culture of sustained, dynamic growth in the Chinese market for many years to come.