The Pitfalls of Chasing Cheap Labor

How Conmed stayed away from offshore manufacturing, and came out ahead.

Q. What did you find when you walked in the door in 2007?

 A. I had been doing lean manufacturing for 20 years at two different companies, Stryker in Kalamazoo, Mich., and Invacare in Elyria, Ohio. At Conmed, the initial primary need was to improve the reliability of the internal supply chain. Product availability was a significant problem because of the internal complexity and the number of suppliers. Cost was becoming more an issue. Most of our competitors were going to Asia or pushing more into Mexico and Costa Rica. The company was in the final stages of drafting a plan to shift manufacturing to Vietnam.

What we did was take a step back. I convinced other c-level executives that it wasn’t the best answer. The best answer was to stay grounded in North America. We had one plant in Mexico and we had several in the United States. Let’s optimize that supply chain, I said. We had our first event built around continuous improvement, or kaizen, in June 2007. Since then, we’ve done more than 120 of those week-long events, and we’ve consolidated three facilities into one. We’ve achieved a 60 percent space reduction

Q. Do you think your competitors are making a mistake by chasing the cheap labor?

A. Yes, I think it’s an enormous mistake. They’re chasing what they perceive to be cheap labor without fully understanding it. If you look at our business, about 60 percent of the total costs are materials, 30 percent is overhead and 10 percent is labor. In this area, we’re paying $14 an hour with benefits and in Mexico we’re paying $3 an hour with benefits. In Asia, it may be $1 or a $1.25 an hour. People chase that, but it introduces volatility into your supply chain and the chain of custody of sterile products, which is important if you need to comply with U.S. regulations.

Q. Was their resistance from inside your own company to your thinking?

A. Oh, sure. Being the new guy, I had to convinced by counterparts. They believed that $1 and hour versus $14 was the right way. But I convinced them it was the wrong way and I did that by getting the right accounting into place so that we were measuring true productivity and dollars paid, dollars earned. You align those. We had been just making product and shipping it to warehouses, where it sat. They thought they were making money.

Q. Large companies like General Motors and Caterpillar have been adopting Toyota’s methods for decades. Is it just now catching on in smaller and medium-sized businesses?

A. The short answer is yes. There are a lot of consulting firms chasing the large jobs. But small and medium sized manufactures don’t have as deep as pockets to pay for that advice. Also the medical device industry is behind the other industries, like automotive, because we haven’t been hit by the same cost pressures as autos have. Margins are generally higher in the health care field. Your whole profit structure is different. So the mentality becomes, “If it ain’t broke, don’t fix it.”

Q. I understand you have more than 15 languages being spoken in the plant because you’re near the Mohawk Valley Refugee Center. How did you overcome language and cultural differences to roll out something as complex as lean manufacturing?

A. Yes, we have Bosnians, Somalians, Vietnamese and others. The way we did it was by making lean into a very universal language and by making everything visual. We used a lot of pictures to simplify the process.

The result is one of the most sophisticated visual management systems you’ll see anywhere. We have the andon lights, which is copied from the Toyota system. (Andon means “lantern” in Japanese. Workers can pull the andon cord to slow or halt the production line to fix glitches.) It’s all wireless and it’s tied into five touch screen monitors that are 42 inches wide. These monitors display the status of all the lines. If the color of a light changes from green to yellow, meaning there’s a problem, the pager or Blackberry of the engineer for that line will get a status change. He knows, “I need to get to that line.” But yes, the very diverse culture has made communications somewhat interesting.

William J. Holstein is a New York-based business writer and author.

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