The Midwest region is rich with manufacturing business, but as unemployment rates skyrocket, thousands of workers are left wondering where the job opportunities are. With increasing regularity, the work is being sent away. It has been going to the southern United States, to Mexico and most recently, to China. This outsourcing trend is not only bad for the economy and bad for the labor force, but it may also prove bad for business, says Rebecca A. Morgan, president of Fulcrum ConsultingWorks, Inc., a manufacturing consultant skilled at finding creative solutions
to complex business problems.

"Companies are in search of the Holy Grail of cheap labor," Rebecca says. “And unless the United States becomes a Third World economy, there will always be someplace where labor is cheaper than it is here." Outsourcing work is an easy way to cut manufacturing costs, but the easiest solution is not always the best one, Rebecca cautions. Manufacturers need to realize that no part of their business takes place in a vacuum; when the labor structure is changed, other operations aspects will change in turn. A decision to outsource should be a strategic decision more than a financial one.

Outsourcing work to China may drastically reduce labor costs, but sending the work away may actually add cost down the line. “Unless you’re in a straight commodity market - and you want to avoid that in any way possible - many factors besides cost go into the purchase decision,” Rebecca says. "Speed of delivery is one important factor. Don’t forget China is a slow boat from North American markets. If you outsource work to China, turnaround times will increase. Some companies believe this may be offset by increasing inventory, but increasing inventory adds cost. Customer service is another important factor in winning jobs, but if you eliminate a good portion of your workforce, you’ve put this value-added business characteristic in jeopardy, and that can cost you work in the long run."

In the manufacturing world, there are three types of cost: labor, materials and overhead. To reduce overall cost, most employers focus their attention on labor because it’s the cost that has an immediate and direct budget impact. That’s why today’s headlines are filled with accounts of massive layoffs, Rebecca says. Problem is, most companies consider reducing the labor force a panacea. But when it comes to effective cost reduction, there is no quick fix. "Companies want to be able to point to a line on the P&L to demonstrate that costs have been cut. The labor line is the most readily influenced line on that statement. But what companies really should focus on is increasing revenue and controlling cost," Rebecca says. "When the proper attention is paid to the top and the middle lines as a whole, the most important line - the bottom line - will fall into place."

The key to effective cost reduction, Rebecca says, is to take a good look at your processes. Companies need to understand where their costs are and where their options are. "If you want to reduce costs, you must first focus on what you’re doing," Rebecca says. "Take a look at your resources. Eliminate waste. There are business processes and manufacturing processes; you must address both of these. Examine any bottlenecks. Streamlining can save tremendous costs."

On her company’s Web site, www.fulcrumcwi.com, Rebecca offers some free tips to help manufacturing companies thoroughly and effectively manage cost-reduction efforts without resorting to outsourcing initiatives. Her advice for companies:

1. Invest in maintenance of your equipment. Unplanned machine downtime is much
   more expensive than planned downtime.
2. Don't make across-the-board budget reductions. It's highly unlikely that equal cuts in every area will have equal impacts on the company overall. "Fair" is not the objective; "effective" is.
3. Consider the long-term impact and goal. Labor may be the easiest, quickest target, but improving processes may have greater long-lasting positive impact.
4. If a capital expenditure is justified based on labor reductions, make sure the labor will really go away or be used elsewhere profitably.
5. Before increasing the rate of output from a piece of equipment, make sure
   you understand the impact of that increase on other equipment and on inventory flow.
6. . Question everything. Much of the work we do is because "we've always done
   it this way." Don't do things that cost more than the value provided, unless
   legally required. Use the time to do something that matters.
7. Visual, simple, and real-time information communicates quickly and
   effectively in many cases. Don't make it fancy unless there are real benefits to doing so.

Manufacturers are frequently frustrated by how difficult it is to manage costs and stay competitive in the marketplace. But following Rebecca’s advice will put them on the path to improvement without making dramatic and potentially damaging changes to the labor force. "Instead of focusing on growing the business, we tend to focus on cutting costs. But you must understand and manage your costs to grow your business. By enacting dramatic cost-cutting initiatives, there is the danger of losing your business altogether," Rebecca says. "To stay in business, you can’t cut your way to success."

© 2005-2007 Fulcrum ConsultingWorks, Inc.

Since 1990, Rebecca A. Morgan, President of Fulcrum ConsultingWorks, Inc. has generated bottom line improvements for her clients through development of more effective operations. Sign up for her informative newsletter at www.fulcrumcwi.com.
© 2007 Permission is granted to reprint this article if the paragraph above is clearly included and contact information www.fulcrumcwi.com is provided.