Skip navigation
2010

A recent Banksy Film animation released on YouTube raised, once again, the specter of those things that may be being swept under the rug in supply chain outsourcing. However, as a businessman and consultant, I have been hearing questions raised about outsourcing for more than a quarter century. Some of the allegations are legitimate and some are not.


I am a believer in free markets. By that, I mean that I do not believe there should be either fraud or coercion in the agreements between participants in the market. That rule should obtain from lowest level of production and the hiring of workers to the nations and governments that set the rules under which international trade transpires. Beyond that, matters should be left to buyers and sellers to work out details.


When I lived more than twelve years in El Paso, Texas, I had friends on both sides of the U.S.-Mexican border. So, what I have to say is not born of hearsay, but from first-hand experience. Frequently, people who-for whatever reason-felt some moral ambiguity over the "twin plant" operations (where a U.S. company generally owned and operated a plant in Ciudad Juarez, Mexico) would ask me about how these Mexican workers were being "exploited."


It's been a long time, so I many not recall the numbers precisely, but here were the facts back in the 1980s in approximate figures:


1.    For every job opening in a "twin plant" operation, there was (typically) more than 300 applicants
2.    The typical hourly wage in the plant was about $2.00 per hour
3.    The workers typically worked 40 to 50 hours per week
4.    Frequently, the firm provided--at no charge or a very nominal charge--an on-site hot-lunch program
5.    Some firms also provided daycare facilities

 

Now, let's talk about what Mexican firms were paying these same unskilled or semi-skilled workers. The same workers who would qualify to apply for a job in a "twin plant" operation would be comparing the option of being "exploited" by a U.S. company to working for some Mexican firm. The Mexican firm might require the workers to work as much as 80 hours per week for as little as $16 (U.S.). That amounts to 20 cents per hour. There was no hot-lunch program and no daycare offered. In addition, the workers in Mexican-owned operations did not work in air-conditioned comfort or, most likely, even have access to clean restrooms.


What is my point?


My point is that one can hardly, if rational, call giving an employee a ten-fold increase in wages along with shorter working hours and fringe benefits "exploitation." If these jobs offered in by U.S. manufacturers were not the "cream of the crop," there would not have been more than 300 Mexicans standing in line for every opening.


It makes no difference if a U.S. worker would get $19.80 per hour plus fringe benefits for the same work. That is not a valid measure. If it were-if $19.80 per hour reflected what the work was worth in real economic terms-then the U.S. worker would never have lost his job producing the products that were moved to the Mexican operations.


There was no fraud and no coercion involved in the agreements made between the U.S. companies and their Mexican employees. Most of them had no hope of finding any similar pay scale anywhere in their indigenous economy and their fondest hope was that they would never have to work anywhere else.


On not being blind


Now, that doesn't make everything "okay," necessarily.


U.S. firms have frequently discovered that, while they themselves are unwilling to engage in deceit or coercion, there are unscrupulous native citizens in almost every company that are willing to make huge profits by virtually enslaving their own people. Such folks are no different than the native Africans who sold their own people-or other nearby tribes-into slavery in the 18th and 19th centuries.


Coercive slavery led to huge profits for both the slave traders (today's unscrupulous indigenous businessman) and those who profited from the products produced by enslaved workers (traders in sugar cane, tobacco, cotton and more). The world will never-in this age-be free of men full of the moral depravity that drives them to accept profits built on the backs of coercive labor methods (slave labor).


Contrary to popular opinion, it is not solely up to governments to put an end to such practices. It is up to you and me--the buyers and sellers who keep such operations in business by turning a "blind eye" and remaining willfully ignorant of conditions under which our profits (or our products) are produced. Until consumers ranging from end-users to corporate buyers and negotiators are willing to stand up and do what is morally right on behalf of those who are being defrauded or coerced in the supply chain, we will not see this problem diminished.


Like drugs, the answer is not in more and better government enforcement. The real answer is to be found in drying up the "demand" for goods through consumer education at all levels. Companies should be willing to investigate with an open eye how and where the products they buy are being produced. In fact, given the spate of dangerous products arriving from China and elsewhere, U.S. corporations should be willing to do this in their own interest and in the interest of their customers.


Instead of seeking a "cheaper" source when a competitor is offering products produced in coercive "sweatshops," why not expose the competitor's supply chain to the light of day and dry up the competitor's markets through such publicity. This gives firms in the supply chain the opportunity to do well--be profitable--while doing good--the right thing--at the same time.


This problem will never be totally eliminated. But a caring approach to the human side of the supply chain could allow firms to take actions that can be both profit-producing and profitable for all mankind.


©2010 Richard D. Cushing

 

 

 

A good friend of mine recently called my attention to a forum discussion in which a quality assurance (QA) person was in the throes of discouragement because the purchasing department was buying poor quality in the spirit of "cost cutting." (We will call him “Bill,” but that’s not his real name.)  Bill asked, "How do you convince purchasing that they are an integral part of the supply chain?"

 

 

 

My response was two-fold to this immediate question:

 

 

 

FIRST, the fact that those in "purchasing" do not see themselves as part of the "chain" is really a manifestation that top management in the firm probably does not have a "system view" of their own organization.  Chances are good that this firm—like most—is still managing and rewarding people within functional silos instead of managing and rewarding based on the performance of the “system” (read: the organization) as a whole.

 

 

 

This is an issue that needs to be addressed first, and folks like “Bill” in QA should try to show management (in a respectful way) that he sees (even if they do not) that, for real and effective improvement, the whole system must work together. He might do this by recommending some books to middle and top management (e.g., The Goal, It’s Not Luck, Viable Vision) and by having some casual conversations with executives and managers on the subject.

 

 

 

SECOND: The second matter that came to mind was that most companies do not measure the true cost of poor quality.

 

 

 

Example – Let us say that a small business determines that, all told, the cost of poor quality from vendors across the whole organization amounts to about the equivalent of one full-time employee or full-time equivalent (FTE). Now, let us also say that the average cost per employee in this organization is only $50,000 annually (including taxes, insurances and so forth). And, as our last assumption, let us say that this firm makes an average of 10% profit (net profit after taxes) on total revenues.

 

 

 

How much more must this company sell every year to make up for the additional $50,000 a year it’s paying out to support poor quality from its vendors? The answer is $50,000 (FTE cost) divided by the NPAT (net profit after taxes) percent or $50,000 divided by ten percent. That’s $500,000 in additional revenues that must be generated just to cover the cost of poor quality.

 

 

 

Now, add to that the costs associated with generating those additional revenues. If every salesperson generates about half-a-million-dollars in sales every year, that means they are paying an extra salesperson, as well. At an average of $50,000 per FTE, that doubles the cost of poor quality right there! That means the company is selling $1 million worth of goods every year just to cover the cost of poor quality from its vendors.

 

 

 

Now, add to that $100,000 the additional expenses from sales, marketing, support and executive oversight that relate directly to creating an additional million dollars in sales every year.

 

 

 

As you can see, most executives in most companies never think through these things. If they did, do you not believe that executives would be taking different actions? Surely executives would be taking firm and immediate steps to be certain that the Purchasing Department clearly understood its role in the supply chain.

 

 

 

Bill’s next question was, “Does anyone recommend any particular training for these guys?”

 

 

 

Well, I have no recommendations for just “these guys,” if the reference is to the purchasing folks. I do have a recommendation for training for the executive and management team as a whole. That would be to learn how to use the Thinking Processes so that they begin to have a “system view” of their organization and the supply chain.


Anyway, I thought you might find the matter to be of interest.


(c)2010 Richard D. Cushing

 


RDCushing

Seeking success

Posted by RDCushing Oct 4, 2010

In a recent informal poll I conducted, I asked "Which ERP success is most important to your organization in the long run?" I offered the following options:

    1. An ERP project that is on-time and within budget
    2. An ERP project that increased throughput (i.e., revenues less truly variable costs)
    3. An ERP project that reduces inventories or the need for other investments
    4. An ERP project that reduces operating expenses

 

I was somewhat dismayed when the results were that fully two-thirds of respondents count success in ERP as a project that reduces operating expenses. The only worse answer, in my opinion, would have been "An ERP project that is on-time and within budget."

 

Here's why I believe that is true.

 

First, consider that I can dramatically reduce the operating expenses of any business enterprise virtually over night -- saving the organization, perhaps, millions of dollars every year -- and I can guaranty those results. All I have to do close the business. That automatically reduces operating expenses to zero.

 

If an organization is seeking "success," and they are making progress in that direction. It would seem to me that they would want more and more of whatever it is that they are calling "success." That would just make common sense, would it not?

 

But executives and managers that pin their "success" hopes on "reducing operating expenses" want only "partial success." Few of them are really endeavoring to reduce operating expenses to the "ultimate prize" of zero dollars.

 

What is worse is that they constantly face the law of diminishing returns. If they reduced operating expenses last year by five percent, the chances that they can reduce costs this year by another five percent are pretty slim, and even if they do, this year's five percent will still be a smaller actual dollar amount than last year's five percent. And next year will require even more effort for less dollar-savings.

 

However, for people caught in cost-world thinking, this does not seem foolish. They see no contradiction or futility in these efforts (sadly), ususually because that is all they know or have been taught to think.

 

On the other end of the spectrum are those one-in-three executives and managers who have discovered that real and enduring success comes from the "throughput" side of the business. If you can increase T (Throughput, which is Revenues less Truly Variable Expenses) this year by five percent -- all else being equal -- then you have made gains. In fact, if operating expenses have not increased, then that five percent increase in T falls directly to the bottom line just like a five percent reduction in operating expenses does.

 

What is even more exciting is the fact that there is no law of diminishing returns at this end of the enterprise. If you are able to increase T by five percent next year, that five percent will bring more dollars of profit to the bottom line than last year's five percent increase did. And next year's five percent will make an even larger contribution to stakeholders in the business.

 

Success on this end of the business -- if repeated year after year -- leads to real success, not "closing the business" (as "ultimate success" in reducing operating expenses does).

 

So, why are not more managers and executives seeking ERP success differently?