Applying Lean Manufacturing in China
Companies producing in China simply to take advantage of its low-cost labor are realizing that this approach is not sustainable. Overcapacity in industries such as automobiles and household appliances has led to price wars and low margins. With emerging wage inflation, labor costs are set to rise and will put further pressure on margins. Companies, foreign and local, should therefore seek advantages and opportunities beyond cheap labor if they wish to continue operating in China.
In Chinese factories, waste is widespread and exists in different forms--idling machines, piling up of inventory, production bottlenecks, late deliveries, and high defect rates. Initially, these inefficiencies were considered trade-offs that companies were willing to accept in exchange for low-cost labor in China. However, with increasingly shrinking margins and rising wages, companies have to find ways to raise productivity and improve product quality.
One measure is to adopt lean techniques which identify and eliminate the root causes of waste. while some of these techniques are now being adopted in large Chinese factories such as Toyota Motor, Delphi, and Lear, the majority of /chinese companies have yet to embrace the idea of lean manufacturing. The adoption of lean techniques in China can be challenging. Chinese managers tend to be promoted recently from the shop floor and may lack critical problem-solving, coaching and performance management skills. They also do not possess sufficient industry-specific knowledge needed to diagnose and solve complex prblems. High employee turnover is another challenge to lean adoption as continuity is crucial to the use of lean techniques. Cultural norms may also obstruct companies from addressing wasteful practices. By and large, the hierarchical nature of Chinese organizations hampers cooperation and collaborative decision making across departments that is often required to eradicate problems.
There are several key factors that would ensure the success of lean adoption in Chinese companies. First, a new knowledge and intellectual tool set has to be made available to support management and workers to improve the way they work so that they can resolve complicated problems. Second, better systems have to be put in place to set company performance goals and measure whether workers are able to achieve these goals. Last, Chinese companies must emphasize a mindset that focuses on long-term improvements and is not distracted by changes in the country and business environment.
For companies that successfully implement lean techniques, the benefits can be significant. According to a McKinsey survey of 30 electronics factories, wasteful practices and high defect retes can erode profits by 20-40 percent compared with returns at world-class production facilities. In addition, the survey established that if the output of the output of the median factory were to match the top performer’s output, the profits would increase by approximately $25 million a year. Other benefits include reducing inventories and raising overall quality standards.