In Search of the Holy Grail

The rush to the south, away from labor unions, was followed by the rush to China for its cheap labor. And now that China labor rates have risen (still WAY below US and European rates), the rush to Vietnam, India and Mexico is underway. And reflecting an increased understanding of Total Costs, some are rushing back to the US.

In some products, labor is a major portion of costs. It seems much easier to move operations to a country with labor rates that are 50% lower than to double productivity where you are. But that Silver Bullet quick fix brings its own set of problems with it. The one least recognized is that the impetus to improve productivity is reduced, and with it, the commitment to operational excellence.

In other products, labor is a minor portion of costs. It doesn’t make sense to locate those operations based on labor rates, yet some companies try anyway.

If you look at a Profit & Loss (P&L) statement, you will find many items under the expense category in addition to labor. The challenge is that labor seems to be the easiest to impact. Just get rid of some people or pay them less. Voila! Labor costs are down.

But good leadership understands that low labor rates are not the Holy Grail. There’s no need to move all over the world chasing one line item on the P&L. Good leadership understands customer service, delivery lead times, total costs of ownership, and other items not specifically listed on the P&L but that are crucial to the one number that matters: The bottom one.

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