Exporting Lean To China: Know Before You Go

Exporting Lean To China: Know Before You Go

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-- Here are some issues you need to address. --

Supply chain executives know that opening a manufacturing facility in China brings with it the opportunity for lower labor costs and increased profit margins. They also know that using Lean concepts to fuel process efficiencies, reduce inventory, and eliminate waste is a proven operational strategy. What executives are now trying to figure out is how to mesh the two. As the recent currency revaluation brings the potential of a stronger yuanand higher manufacturing costsminimizing waste becomes even more important.

Its a complicated issue. How can Lean manufacturing concepts be rolled out successfully in China, where a massive political, economic, and social transformation is under way and workers are not as well-versed in current manufacturing standards? There are no easy answers, yet companies of all sizesfrom large multinationals to small niche playersare increasingly testing the waters. They are finding that an understanding of Chinas cultural philosophies, labor issues, and business climate will help provide the solution.

While Lean concepts arent novel, they are new in China. It is well known that Lean concepts offer a proven, structured means to continuously increase quality and lower costs throughout the entire supply chain. When deployed in a manufacturing environment, Lean often brings immediate improvements in cycle times, inventory levels, product quality, costs, asset performance, and scheduled-delivery targets. And though China is already known for low labor costs, the recognition by supply chain executives that the benefits beyond labor make it worthwhile has placed China on the doorstep of the Lean revolution.

But implementing Lean has its challenges regardless of where the implementation takes place, and China is no exception. Although China is a world-class manufacturing hub, certain cultural practices can make a Lean initiative more difficult. At the same time, China is not as experienced with modern production concepts. Executives must now find ways to address these differences if they want their companies to hit anticipated corporate milestones.

-- Cultural Differences --

There are long-standing cultural and business ideals that must be acknowledged and managed for Lean concepts to be successful in China. A core difference between Western and Chinese principles rests in the concept of guan xi, the Chinese practice of building relationships.

Under guan xi, business partners strive to work together and support one another. The prevailing rule of thumb lies in the old adage, You scratch my back and Ill scratch yours, which essentially means swapping favors and developing long-term, mutually beneficial relationships while overlooking near-term weaknesses or vulnerabilities. Thats why, for example, its considered bad business to hold supply chain partners accountable for poor performance: it goes counter to guan xi.

Guan xi can slow down the implementation of Lean concepts because it dilutes accountability. In a Lean environment, when a potential line-down problem occurs, workers often decide to halt production, examine the cause of the problem, quickly report it to the appropriate parties, and fix it in a way that will prevent repeat occurrences. In a similar situation with guan xi, managers who want to avoid straining an established relationship may adopt a quick solution that does not address a problems root cause. This only serves to temporarily delay the inevitable; the problem will keep recurring until the root cause is addressed.

Managers implementing Lean concepts will also have to contend with the perceptions of personal empowerment, and the differences that exist between Chinese and Western cultures. In the U.S. and other industrialized countries, there is a strong sense of project ownership and responsibility for results beyond individual work silos. This is less the case in China. Although employee empowerment is making inroads, traditional hierarchical structures are still the norm. Since rules are commonly dictated by the upper echelon of government or corporate leaders, the notion that an individual worker can foster change requires a major shift in fundamental thinking. Obedience to an established hierarchy is not limited to the formal management chain, but can also exist informally via guan xi, which makes individual empowerment difficult to achieve.

Without individual empowerment, continuous improvement isnt possible. Lean operates on the notion that an end goal is never achieved there is always more waste than can be eliminated and better quality that can be achieved. This kind of improvement has to be driven from the bottom up; a top-down directive simply wont work. If employees are not given ownership, or are unwilling to accept ownership for continuous improvement, progress beyond the initial implementation is often lost.

Another cultural difference in China that may slow down the Lean adoption rate is a tolerance for an untidy or disorganized workplace. This is counter to the principle of 5S (Sort, Separate, Shine, Standardize, and Sustain), a housekeeping program thats essential to any Lean initiative. Since China has only recently experienced an industrial transition compared to Western cultures, workplace tidiness does not get the level of attention it gets in other modern manufacturing hubs, nor is it an innate part of the daily routine. Its acceptable to discard food debris on the street or toss cans into bushesan inclination that can find its way into manufacturing facilities. Since workers may not focus attention on tidiness in other aspects of their lives, they have limited experience in maintaining a shipshape workstation and, likely, will not fully appreciate the performance improvement that can be achieved when tools, parts bins, and processes are organized in an exact way.

Ultimately, the tendency to prioritize stable relationships over accountability and top-down direction over empowerment, while accepting undisciplined work habits over efficient workplace standards, can lead to inattentiveness to process and product quality. By contrast, companies in other industrialized economies put a priority on qualityso much so that it is inherent in everything they do.

The overriding emphasis in China on economics puts all other performance measures, like quality and waste elimination, at a severe disadvantage. This focus on output at the near exclusion of all other measures, coupled with the view that the product needs to be just good enough to satisfy the customers minimum requirements, will ultimately result in a workforce where there is little motivation to improve. For Lean to take hold, there must be universal acceptance that higher quality is always possibleand desirable.

-- Workforce Challenges --

Lean initiatives in China face equally challenging workforce issues. Often factories in Chinas coastal cities attract workers from rural, agricultural villages with little exposure to basic manufacturing concepts or technology products. Chances are slim that these workers will be able to effectively identify inefficiencies and suggest process improvements. This can be especially problematic if the condition exists in the management ranks because it leaves direct labor with no one to go to for mentoring or skill development training.

Chinese production managers also struggle with how to develop and maintain a highly disciplined workforce handicapped by the spoiled-child syndrome. The one-child policy, established by the Chinese government in 1979 to limit the countrys population growth, resulted in many children growing up as the center of attention from both parents and grandparents. Today, as these grown children enter the workforce, some are not accustomed to established and enforced work rules, or they adjust the rules as they see fit. In a Lean environment, where success of the process is based on teamwork, adherence to standards, and each person doing his part in parallel, any disruption can cause immediate imbalance.

The lure of money and much-respected titles throws yet another wrench into Lean deployment. The Chinese manufacturing laborer, in the midst of an economic boom and armed with multiple employment options, frequently jumps from job to job in search of bigger paychecks from companies willing to step up salaries to attract experienced staff. But potentially more appealing than the money is the title that comes with a new job and the importance that title bears in climbing the social ladder and garnering higher personal stature.

When workers leave, they take more than just their acquired skills. They can also take intellectual property and trade secrets and put them to use at the competitions manufacturing facility. The combined headaches of high employee turnover and potential IP theft make a consistent Lean deployment even more challenging.

-- The Challenge of Suppliers --

These are not the only challenges executives face when ramping up Lean manufacturing practices in China. As global supply chains become increasingly reliant on flexibility and simultaneity, success has as much to do with supplier reliability as with an internal appreciation of operational improvement.

Supplier reliability is a function of two characteristicspredictable quality and predictable delivery. An inability to determine when inbound production materials will arrive, if the materials will be acceptable, or when finished products will reach customers forces companies to stockpile inventory to meet delivery commitments. Building up inventory not only goes against the grain of manufacturing executives, it also runs contrary to the Lean methodology. More inventory invariably adds steps to the process and counters the core goal of eliminating waste.

If you cant establish dependable local suppliers, turning to overseas sources may not be the solution either. Customs clearance procedures for imports and exports are notoriously complex in China. Shipments can be stalled at airports for days. Drivers have to hand off cargo to other drivers from different logistics providers when they reach provincial boundaries. Tracking the movement of each parcel is a relatively new concept, which requires a well-defined way to retrieve dataand a vast amount of patience.

-- Making Hard Decisions --

Although deployment of Lean practices in overseas factories makes business sense, companies must approach a ramp-up in China somewhat differently from an implementation in other established manufacturing economies. Fundamentally, the challenges that exist in China are substantially more complicated than issues normally encountered elsewhere and, therefore, require careful planning. Additionally, decisions will likely need to be broader in scope and have greater impact in the workplace if they are to succeed.

For instance, to overcome the cultural differences in China, executives must ask themselves whether the local management team has the know-how and will to implement sweeping changes. A cornerstone to a successful Lean roll-out involves support from middle and senior managers. At the most basic level, meeting certain quality and customer satisfaction objectives depends on managers who consistently reinforce these objectives. Those managers must elevate the quality and customer satisfaction measurements to the same level of priority that financial measures occupy today.

If managers are not able to rally and empower the workforce to pursue Lean objectives, you need to figure out why. Does the problem lie in lack of senior management support and enthusiasm? Are middle managers who are afraid of losing their authority serving as a barrier to senior management vision? Or do they lack the resources necessary to enforce Lean?

Depending on the answers, you need to decide whether local Chinese managers or expatriates are better suited to the task. Its not an easy decision. On one hand, local Chinese managers have a grasp of how things are traditionally done and are in tune with cultural values. But finding local managers well-versed in Lean and motivated to deploy it can be challenging. It may be necessary to turn to expatriates with a Lean background. They will be able to introduce, educate, and reinforce business, quality, and cleanliness practices without bias towards historical precedent. While these managers will not have the established relationships of the local managers, they will develop them quickly through the intense management participation necessary in a Lean roll-out.

If you decide to go with expatriates, keep in mind that youll eventually need to replace them with local management, since ultimately, the local factory is best run by Chinese managers. You therefore need to give serious consideration as to who will be on that local management team and how they will be trained to take over. Providing for the outside managers to train their local replacements adds cost, but must be a part of any decision to use outside managers. Ideally, the local management team, if not already present, must be brought on as soon as possible so they can participate in the entire process of institutionalizing Lean thinking.

Bringing Lean to China also demands a mindset change from top management, particularly regarding the issue of workforce longevity. If companies want to exceed productivity, profit, and revenue expectations, senior managers need to stop thinking they have a disposable workforce, where new bodies can always be found to replace those that leave. They must invest in their workforce through training and employee-retention programs that promote long-term tenure and loyalty.

Training sessions should go beyond Lean concepts to encompass everything from inventory control and planning strategies to the definition and use of metrics. These programs will empower employees and make them increasingly more valuable.

As employees skills improve, so should their pay. Pay increases should not be applied across the board but directly tied to skill sets and performance improvements. Closing the gap between compensation and performance may eventually lead to a shift away from the just good enough ideology and inspire a new sense of responsibility beyond individual work silos. While this idea goes completely counter to why companies build products in China, increases in pay will ultimately be counterbalanced with increases in productivitythe savings from reduced inventory levels and manufacturing cycle times are icing on the cake.

Addressing internal issues is only one part of the decision to set up Lean manufacturing in China. How best to tackle supplier practices and the countrys logistics infrastructure is also important. Initially, there may be no getting around inventory build-up to ensure theres enough material in place to prevent a production shutdown. However, that inventory need not be yours. Establishing a vendor-managed inventory (VMI) hub may provide more control over raw material and encourage the supplier to keep materials closer to your locationwithout your company incurring the financial hit. A VMI hub provides a level of flexibility that may be needed in the interim as trading practices, supplier reliability, product quality, and predictable delivery improve.

Eventually, you may choose to deal with supplier inefficiencies yourself if your suppliers wont deal with them on their own. Looking back at how Japanese automakers addressed this problem when they opened their first factories in the United States provides a good model for what can be done in China. For instance, Toyota dispersed teams of Toyota Production System (TPS) experts to key suppliers to design and deploy Lean concepts in the suppliers factories. These experts worked hand-in-hand with the suppliers management team and workforce to implement the initial Lean process changes. The suppliers learned not only through classroom training, but also by being key members of the Lean transformation teams. Toyotas staff was readily available to the suppliers well after the initial implementation was complete to ensure that the TPS concepts were institutionalized. Toyota recognized that the operational improvements made possible by improved supplier performance more than offset the expense of using Toyota subject matter experts to solve someone elses problems.

If these experts dont already exist in your Chinese operation, where will they come from? If the timeframe is short, they will need to come from either outside contractors, or internal staff from outside of China. If time is not critical, staff from the Chinese operation can be used once they have developed a solid foundation of Lean knowledge through their experience of deploying Lean in their own factory.

As with all new ventures, replicating manufacturing strategies in a place like China comes with its share of headaches. The right amount of patience, forethought and understanding, though, will help ease the pain.

-- About PRTM --

Since 1976, PRTM has created a competitive advantage for its clients by changing the way companies operate. PRTM management consultants work with senior executives to develop and implement innovative operational strategies that deliver breakthrough results. The firm is a leader in operational strategy, supply chain, product development, and customer value management. PRTM has 18 offices worldwide and serves major industry and global public sectors.

We invite you to learn more about this topic. Contact PRTM at scinfo@prtm.com.

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