Monday, September 23, 2013

Applying Lean Manufacturing/TPS in China

Applying Lean Manufacturing/TPS in China

Brief History
Since the 1978 open-door policy put into place in China, a renowned large state-owned company called “First Automobile Works” sent 40 people to Toyota plant to learn this concept for half a year and launched 2 TPS initiatives in the following 20 years and achieved great success. For instance, FAW achieved a 70% decreasein work-in-process inventory! After some success stories, the “critical mass” started to follow suit. However, the results of these initiatives were mixed.

Scholars have concluded some reasons why companies fail at that time. Two major ones are the following:

a.     Some companies implemented TPS without fully understanding it.
I totally agreed with this. Most companies just think it as many “tools” and “techniques” instead of a fundamental “philosophy”, as we talked about in the class. Most of them implemented this concept without proper business strategies or company culture to lead and accommodate to these new tools. Some companies even just copied what other plants were doing superficially, which definitely would not work..

b.     Plant managers wanted to see the results quickly and they lacked the patience, mentality and commitment to really change the way they operated. Some of them expected to see results once the TPS is in place.  But it took Toyota 40years to fully implement TPS.

What about now?
There are articles arguing that the time has come for factories in China to truly pull this concept off and I agreed considering the ever-intensifying competition, especially in the already crowed spaces like automobile and semiconductors.   For both local and international companies who have plants in China, they are facing:

a.     Surging production cost. According to a recent study done by AlixPartners, by 2014 the cost of outsourcing manufacturing to China will equal to the cost of producing in the U.S[1].   Just think of the rising labor wage (91% of manufacturer raised wages for workers in 2011 for an average of 13%[2]) , appreciating Chinese currencies and increasing transportation cost.

b.     More competition drives down the price. 

a and b together lead to squeezed margins.  Companies need to find out more way to increase profits.  TPS would be a great option. Considering this finding from a Mckinsey report: “ if the median factory were to match the top performers, profits would rise by $25 million a year.”

c.  The newly selected Chinese political leaders seem to be very serious about the “growth model and economic structure change” with a focus on technology and innovation.  This is a great opportunity for plants to “innovate” and fundamentally change the way they do things.

Some challenges:
As we discussed in class, the essence of TPS lies in its fundamental philosophy- the development of people instead of just some Lean Manufacturing tools. This concept itself presents the biggest challenge for Chinese factories.

a.     The great majority of labor forces in Chinese plants are low skilled and there is an extremely high turnover ratio in Chinese factories. 35.6% turn over ratio in manufacturing industry in 2011, much higher than other industries and other countries[3].  All these make the education and learn by doing difficult and costly.

b.     Chinese culture. I figured this is the point which most critics would raise when supporting the idea that “China is not ready for lean”. The logics goes like this: Chinese culture is famous for hierarchical structure and there is generally speaking, less cooperation and “equal” among different hierarchies and more top-down decision-makings.  I did not quite agree with this statement considering Japan, where TPS originated, has similar culture elements as China.

c.      Shorter time frame for factory to build and ramp up. The Mckinsey report raised this interesting point: “demand for some Chinese-made products increase to 20%-50% annually, which requires that building up to three new plants each year” . This partially leads to the so-called  “China Speed”  which indicates that speed and quantity are what the Chinese value most.

The solution?
It will probably take longer and more effort for Chinese factories to catch up with their foreign counterparts in the application of TPS. Some thoughts on How:

a.     Educate the factories/companies/employees on the core and essence of lean and TPS.
b.     Break the culture barriers and build cooperation and trust among hierarchies.
c.      Come up with new incentives and performance evaluation metrics. One report mentioned that  some manufacturing plants in China award bonus to workers based on how many products they made, which will naturally lead to a over-production problem and does not conform to the essence of lean manufacturing…

More sources:
“Why most Chinese Enterprises Fail in Deploying Lean Production”  Asian Social

[1] New Study Finds China Manufacturing Costs Rising to US Level,
[2] China's factory workforce suffers from high turnover rate despite wage raises
[3] China's factory workforce suffers from high turnover rate despite wage raises

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