GA 203 | How to Apply Lean to Manufacturing Location Decisions with Harry Moser

End the practice of awarding business on the basis of price tag. Instead, minimize total cost.

Determining whether a product should be manufactured overseas or domestically can be a difficult task. That's the bad news. The good news is my guest today has developed what he calls a total cost of ownership estimator that allows organizations to make a fact based assessment on where to produce and purchase their products. His name is Harry Moser and he's the founder and president of a not for profit organization called Reshoring Initiative. Now to learn more about the total cost of ownership estimator and to read all kinds of success stories, please be sure to visit their website over@reshorenow.org now on today's show, Harry and I talk about the topic of reshoring. We start with the basics, such as what reshoring is, before showing how we Lean thinkers play an important role in an organization's decision as to where to produce and procure materials. Now, show notes for this episode, which will include links to everything Harry and I discuss, can be found over@gembapodcast.com just look for episode 203. You can also check out Gemba Academy's Lean Learning System over@gembaacademy.com with a fully functional trial. Now let's get to the show. All right, Harry, welcome to the show. Thanks for coming on, Ron.

It's great to be here.

All right, very good. Well, hey, we've got a really interesting topic today and super excited to talk about reshoring. But before that, why don't we kind of get things started with you telling folks about your background and maybe how you got into this sort of work and just us a little bit about who Harry is.

So engineering degrees from MIT and an MBA from the University of Chicago. 50 that's 5o years in manufacturing, a variety of companies, ending with what was Charmy and is now called GF Machining Solutions. So edm, high speed milling machines, et cetera. I was president for 25 years, responsible for North America and retired from that in 2010, founded the Reshoring initiative, which is a not for profit. And I used to say the mission was to bring manufacturing jobs back to the US and now I say it's to bring millions of manufacturing jobs back.

To the U.S. okay, very good, Very good. Okay. And what is your, I guess, where does Lean play into it? We'll get into this more in the interview, but obviously you've run with a lot of Lean folks. Jim Hunsinger is the one who introduced us. But what's your affiliation on that end of it.

I've been fairly active with AME over the years and worked, had some discussions and maybe help with Womack and Shook and others that are the leaders of the group. Yeah, and I believe in it. I believe that by process improvement, by the methods of Lean, by doing the things that bring value to the customer, that the US will be more competitive. And if the US is more competitive, then more gets reshored. So there's a nice alignment.

Awesome. All right, well, let's get started. So just to level set everyone and make sure we're all on the same page, what is reshoring?

Reshoring really has two components, reshoring and fdi, or foreign direct investment. So when a US headquarter company, think General Motors, decides to once again assemble a car or source a wheel in the US Instead of offshore, that's reshoring. If a foreign company does essentially the same thing, then that's foreign direct investment. So think Toyota or Siemens in that case. But in both cases, they're bringing to the U.S. the manufacturer of product that at least for some period was done offshore.

Give us the state of the union of reshoring today. And we're here in 2018. How's it going?

Really, very well. I was ecstatic with 2017. The rate of reshoring plus FDI rose in 2017 by over 200% from 2016. So it went from 2016 around 77,000. It went up to approximately 240,000 manufacturing jobs announced as coming back. Some don't come back for six months or 12 months or some such if you build a new auto factory, for example. But a huge increase. Never seen an increase anything like that. And it's now at 240,000 per year, which is a macro number. It's the kind of number that materially influences overall employment, manufacturing employment, the gdp, et cetera. So in the past, people questioned what whether reshoring was a trickle or barely a stream. And we can now say it's a torrent.

So where does lean play into it? I know we've exchanged some information where we're looking at what we would call the seven deadly wastes and so forth. Talk about the relationship there.

Well, the one quote that I make in all my presentations is from Deming. And his fourth key principle for management from out of the crisis was end the practice of awarding business on the basis of price tag. Instead minimize total cost. And that's the essence of what the reshoring initiative does. That essentially everybody who deals with reshoring we know that the wage rates are higher here than in China, India, Mexico. We know that the EX works price or standard cost is going to be higher. And so the only logical way to decide to bring it back is to calculate the total cost to start with that EX works price or standard cost and add to it. Duty, freight, packaging, carrying, cost of inventory, travel, cost, quality differentials, the impact or an innovation when you bring engineering and manufacturing back together, the risk of stocking out when you have a four month lead time instead of a two week lead time, all those wastes essentially travel. And when you add all those up in some cases, and we'd say maybe 25% of the cases today, the product flips from the offshore column into the US column. By doing the math, companies can see that it makes sense to bring it back.

All right, let's do some rapid fire. I'm going to, I'm going to say a name of a waste and you tell me how. Give me an example maybe how offshoring could help.

Okay.

All right. Well, the first one is a mother of all waste, as we would say in lean is overproduction, making more product than, than you need. How does offshoring help?

Well, typically or almost always the US company that's buying from offshore gets maybe wants to get maybe or doesn't, but gets a container full because the supplier, somebody wants to ship a full container because the costs come down and they get to bill a lot. So you get much larger batch shipments. So maybe once every two months a container instead of once a week a pallet.

Yep. Waiting.

Well, you don't know. First is a long wait from inland China. Could be eight weeks, could be more, depending on whether there's a port strike or a hurricane or something else happening. And there's not just the average weight, there's the uncertainty. Even if the norm is 10, is that one going to be 11 or is it going to be 12 or is it going to be 9? You don't know. And because you're waiting, because you're uncertain and you're waiting, then that starts to influence inventory.

Transportation. I guess it kind of plays into the same thing you just said.

Right. Obviously you're shipping it some huge distance, 12,000 miles, 10,000 miles, something inbound. And then in effect you're responsible for that container, that boat going back to China half full. Because we only export maybe a third as much as we import.

Yeah, yeah. What about over processing?

There's inevitably more packaging, more packing, more unpacking, more paperwork, more worry about regulations, more Customs forms, more all this stuff for stuff that's imported than there is for product that's produced by somebody in your own factory or 10 miles away.

Last one that I'll talk about here, because I think you've covered some of these other ones. Defects.

Yeah, about, I think half or more of the defects reported in the US like product recalls are Chinese products. And there's certainly some Indian, whatever, maybe even some German and Swiss for all I know. But something like half of all the recalls are Chinese. And there's been a lot of cases where the product quality was such that it's almost unimaginable that the US could have done it. Some of these cases with pet food, with baby food, with the drywall cases where maybe could have happened in the US 50 years ago or 100 years ago, but it's essentially unimaginable today because somebody'd be in jail if it happened. So there's just a lot more control here, a lot more responsibility, maybe a lot more regulation, but it seems to work.

Mm. So can you tell us a little bit about that total cost of ownership? Like, like how. How does one go about calculating that? Because it's obvious there's tons of variables, right?

Yeah. And that's why people typically don't do it, because it's. It's very easy. You get a quote from somebody in the US and a quote from offshore, and you compare the two prices and the offshore price is 25% lower and bam, you, you, you, you order from there and you, you're gonna get your bonus cause you saved a lot of money.

Right.

And the. And so it's easy. People do it. It's all nice firm numbers. Whereas total cost of ownership has some firm numbers like duty and freight and carrying, cost of inventory, travel costs, but then it has some more subjective numbers. What's the political instability risk in that country? What's the impact, impact on customer preference for your product if it has a made in USA label on it? How much better can the. Can a local factory work with engineering than a country that's 8,000 miles away and most people don't speak English? And there's going to be some difference in terms of the efficiency of that process. So the challenge, I'd say, is especially with those subjective things, to put some value on them, but not to overstate them. I always recommend to people stay on the conservative side, stay such that if the other guy you're dealing with is sure that the work ought to stay in China or India, that he or she cannot Poke holes in what you've done because you've overstated the case. So the way of getting it done, we have an online software called the Total Cost of Ownership Estimator and it's at our website. You can sign up for it and then sign in. It's free to use and you answer 30 questions about the US source and the foreign source and it goes chug, chug, chug, chug. And you push complete and it takes you to a unit cost calculation of each of 29 different cost factors that have been calculated from all of the inputs you put in and it comes to a total and then it projects the total for five years into the future based on the user's assumptions about wage and currency change over that time period.

So I'm curious, like what would happen if just hypothetically speaking, you were comparing a. I know I say a factory in China to a factory in America. And let's just assume for the sake of this example that defects weren't a problem, that the Chinese source made a product just as high quality as the, in this case American equivalent. So that's a wash. But now everything else is in play. Right. You still have perhaps overproduction, transportation, you.

Know, all the other unsurely have inventory carrying costs.

Yeah.

You probably have some emergency air freight when, when demand goes up higher than you forecast and you're afraid you're going to lose orders if you don't air freight the product in.

Yeah, yeah. So I guess. So I guess what I'm saying is even if, even if quality was kind of removed, it's probably still going to be challenging from a total cost ownership perspective for a foreign company to really be able to beat an American. Is that fair?

Yeah. Here's to quantify it. The mode. So the center for the normal distribution.

Yeah.

Of Chinese price as A percentage of U.S. price is about 72%. Okay. That means roughly half of the Chinese of the product imported from China is within 30% ex works price of the US price, the TCO with the same distribution, the Chinese mode is more like 95%. And so depending if you look at price, you'd say there's half of it. That's sort of with a fair shot. And if you look, or maybe, certainly 25%, maybe 40% because you got a shot at it. If you look at TCO you'd say, you know, 40, 45% of it makes sense. So if we can convince the, as we convince the companies to do the math properly, a substantial portion becomes US favored and obviously in the Last I was watching CNBC today, and the dollar is now down 3 or 4% already this year and maybe 12% from the high about, I don't know, six, seven months ago. And that makes a huge difference in terms of the price competitiveness of the US Product. It's changing all the time. Something that was not attractive six months ago could be quite attractive today.

Yeah, I guess the challenge there is to get to all the wheels in motion. By the time you got them all in motion, things might be different. Right?

Same other going back again.

Yeah, yeah. That's running a business is not easy. Right. So, yeah, yeah. Okay, well, by the way, we'll put it in the show notes. But what's the. How do folks get to your website?

Yeah, it's www.reshorenow.org org.

So it's reshorenow.org. okay.

Reshorenow.org. yeah, yeah, for what it's worth, they can, they can reach me at Harry Moser@reshorenow.org okay, good, good, good.

And we'll put everything in the show notes. This is going to be episode 202. So Gemba podcast.com and folks, look for episode 202. And we'll, we'll link to everything, everything Harry's got, we're going to link to it. So. Hey, so kind of the last question I have here on this section, Harry, is, I mean, obviously Lean can play a big part in this reshoring effort by, you know, making American based companies more efficient and better quality and all the things that Lean's about and respecting humanity and all the rest of it. But let's flip it around. How can total cost of ownership and reshoring perhaps advance Lean?

Yeah, I can imagine a company that at the moment is trying to decide, should I improve my efficiency? Like should I automate, Should I train my employees better? Should I do process improvement Lean here, or should I offshore the work to China? And if they check the X works price between the two and they find a 30% difference, and they asked you as an expert, do you think if you did all those things, you can get 30% out of my manufacturing cost here, which means out of material, labor and burden, the odds are pretty small. You're going to be able to get 30% up 10%. 10%, maybe you could talk about 30. Pretty tough. So if you look only at price, it can be hard to justify Lean. It's easier just to send the work off and have it done somewhere where the labor is cheap. Whereas if you do the TCO and you see that instead of a 30% price difference, there's a 7% total cost difference. Now the return on investment, on automation, on lean, on training just went up to the point where it's attractive, where it probably makes sense to do it. So companies that either have offshored or that are thinking of offshore, the Lean champion should be talking to the management saying, yeah, I think there's some of those things out there where we're having quality problems, where we have delivery issues, where we have too much inventory, where there's frequent design changes and that causes us issues because of the distance. I think if we got together and did lean, thrown in with a little automation, a little bit of training, I think we could get those back here and we'd have the best of all worlds. Let's give that a shot.

Yeah, yeah. Very good, Very good. All right, name the website again. Reshore. Reshorenow.org Reshorenow.org okay, good stuff. All right, well, let's go ahead and jump into the, the reflection section. I got a couple questions here I'm really interested to hear your, your perspective on. So if you could. Where do you just. When we talk about Lean, you know, before we started recording, I told you, the audience here is mostly a bunch of folks are running around doing some form of continuous improvement. Where do you see the future of Lean? And perhaps it might be fun to kind of tie it in with, with reshoring. Like, where do you see the future of Lean and reshoring going maybe a year from now, five years from now?

Okay, I thought more about the future of reshoring and I'll start with that. So we have, I believe it's feasible in the next five or 10 years to bring back 1 million, maybe 2 million manufacturing jobs. Right now there's about 4 or 5 million jobs lost to offshoring at current levels of US productivity based on the size of the goods trade deficit, the things, the products trade deficit. And we cannot bring them all back in six months or a year because we don't have the physical capacity and especially the skilled workforce to do it. So it's a longer term process to bring back the increased US manufacturing headcount by a million or two is at least a 10 year process. But that would be my goal. And that's feasible if companies do the math and if the government helps by getting the dollar down a bit, keeping the taxes down, moving on with the things that seem to be happening for the last year in Washington. So I believe the reshoring is quite, has made Very good momentum has a chance to make it happen. In terms of lean, lean to me is efficiency. It's doing the right things, the things that bring value. And as the world gets tougher and tougher and the Chinese productivity improves and their skills keep going up, then they're going to have the same equipment as we do. They're buying more robots now than we are. They're buying more CNC machine tools than we are. So they're going to be eventually as well equipped as we are, and they'll have lower wages than we do for the foreseeable future. And therefore, we have to be smarter. We have to only do the things that bring value or we're not going to win that competition.

Mm. So I know, I know you don't practice lean, like, on a daily basis or anything, but you've been around and talked with a lot of what we would call some of the lean leaders of the world. But I'm curious, is there any aspect of Lean that you wonder if. Does that really work? You know what I'm saying? Or is that. That sounds good, but does that really work? Is there any aspect of Lean like that out there for you?

I understand. When I was the president of the company, we did continuous improvement. And at that point, everybody was telling me that if the management isn't totally involved, it's never going to work kind of thing. I think I did a good job of supporting. Maybe I wasn't as good as I could have been. And so at the time, I doubted on that. But I'd say today I believe that that is an essential requirement, that the management has to commit the time and the resources to make it happen.

Yeah, kind of what my answer to folks when they don't have that leadership support, my question is, are they blocking you? If they're blocking you, get out. But a lot of times it's that they're not blocking their folks from doing it. They're just, you know, they don't know anything themselves, so there's not much they can do to help. Right.

So it'd be better if they did know for sure. Actively helpful for sure.

Or at least try to learn. Right. And have some humility. Right. That maybe let's learn together and grow together. So, yeah. Hey, so if you could jump into a time machine and go back in time and spend one day shadowing any. Any leader of. From the past, that could be anybody from manufacturing lean, just some president, I don't know anybody. Who did you go back and spend a day with and why that's interesting.

I'd say Edison, he was very influential in terms of the US Manufacturing, engineering, getting what were great companies going. I think he'd be very interesting to see how he did it, how he made things happen.

What would you ask him? You got a day?

Well, the one question that now would seem unfair was that he was the one, I believe, that caused us to go with alternating current, whereas one of the great European scientists was pushing for direct current. And generally it's agreed now that the US Would have been smarter if we'd gone with direct current instead of alternating current. So I guess I'd have probed him to see why he made that decision.

Interesting, Interesting. All right, the last question. What are you most proud of as it relates to the work that you've done?

If I might have two with my old company, Charme, when I took the company over, we were eighth in the industry, in the EDM industry in North America. And horrible just in. Almost all the motion was irrelevant. We were just all screwed up. And about seven years into it, we were number one in the industry. And we were known for having the best customer service, the best spare parts availability, the best caring for the customer in not just in edm, but in all of machine tools. We were the reference. Our distributors used to say, harry, you know, you guys are horrible, but you're so much better than everybody else. And so I was very proud of that. And when I'd meet the customers, it was a wonderful experience because they appreciated what we had done for them. So that was one of the highlights. And now I was at a Commerce Department event in Washington, D.C. about two years ago, and the. The then chief economist for the Commerce Department, when she got up to make her presentation, she said, you know, and the conference was all about reshoring. And she got up and Sue Helper is her name, and she said, you know, we wouldn't be here today if it weren't for Harry Moser out there in the audience and reshoring initiative, you know, so to know that we have had an important role in, I'd say, hundreds of thousands of people having jobs. And it's enough for me to know it, but it's even better when other people know it. There's always a little ego that we all have.

Yeah, no, for sure. Okay, well, good stuff. Good stuff. All right. Well, yeah. Reshorenow.org so everybody needs to go and check that out. And yeah, there's total cost estimator is just right here at the very top of the website. So click that Bad boy and fill it out and see what you learn. And I guess if folks want to connect with you, Harry, I suppose they just do it through your website.

Well, As I said, harry.mosereshorenow.org they can just email me. There's an inforshournow.org on the website. It comes to me one way or the other. If they have reshored, we'd love to hear about it because then I can report 240,010 jobs and if they have the opportunity to do so. For example, there was a company outside Chicago, an EMS company make printed circuit boards. They populate them and they came to me about a year ago. They were about to lose an order to a Chinese competitor because of price the VP sales and I did the TCO estimator, he took it into the customer and he credits that with saving a $60 million order.

Wow.

So companies can use the system both as a sourcing decision tool and also as a sales tool when they're competing with lower priced offshore product. Wow.

Very cool, Very cool. Are you on LinkedIn or anything like that, Harry?

I am. And also the reshoring Initiative has a LinkedIn group called the Reshoring Discussion Forum.

Okay.

Love to have people join.

Yeah, so I'll get you to email me all those links, Harry, and then we'll put them in the show notes. Again, folks can find everything@gembapodcast.com just look for episode 202. Everything Harry's got. We're gonna link in the show notes. So. Good stuff. Well, hey, I really appreciate you coming on. I know talking lean and all, that's probably not something you do on a daily basis, but it's. We sure appreciate you coming on and giving us a little bit of your time. So you're going to be speaking at a conference, right? I believe it's a Lean Frontiers conference coming up.

Yes, they call it the Leadership Summit. I'm doing a keynote and I think a workshop September 2021 Jekyll Island. So I look forward to seeing everybody there.

Yeah, Jim and Duane put on some awesome conferences. They're smaller than the big monster, you know, two, 3,000 person conference, which are also cool but you can get lost in a shovel. I just love these, the Lean Frontiers ones because they're very. You can really connect with folks. So yeah, we might even be there. So if so I'll. I'll go buy you a cup of coffee or something. How's that?

That's great. I look forward to it.

All right, well, thanks again for coming on, Harry. I really appreciate you taking time. Let us know if there's anything we can do to support you and keep up the great work.

Thank you, Ron. We're doing it together. We appreciate it. Bye. Bye.

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