Lately, I’ve been running into manufacturing companies that have off-shored much of their value stream. One company’s “China strategy” involves buying components from vendors and also building sub-assemblies at a company controlled plant in China.

That’s fine, and I certainly understand the compelling economics in some situations (for example, commodity items with high labor content). But too often, the visible savings with direct labor overshadows the less obvious yet greater wastes that are created. For example:

• Less agility. As Bill Waddell wrote earlier, “you can’t pull from China“. Your ability to adjust to customer demand is compromised if your total lead times are four times longer.
• More inventory.
• More defects. Why? There’s a longer delay between defect creation upstream, and defect detection downstream.
• More transportation.
• More management costs. The effort to integrate operations overseas is usually underestimated.
• Product development and launch. Lean product development principles require concurrent engineering and a minimum of knowledge “hand offs”.

I’m not saying that having an off-shore strategy means that a company is not lean. I am saying that having some of your value chain somewhere else in the world for the sole purpose of reducing direct labor costs is a huge red flag. Be sure you understand the significant waste, cost, and additional lead time that will be created as a direct consequence.