02 Dec 2022 OVERCOMING INTERNAL OBSTACLES TO RE-SOURCING
“Change is hard because people overestimate the value of what they have – and underestimate the value of what they may gain by giving that up.” — James Belasco & Ralph Stayer
Does the above sound familiar to you? If you’ve read any of my previous blogs, you know that I focus on re-shoring from China to Mexico, strategic sourcing, leadership, and everything companies need to know to successfully make large and impactful sourcing changes. All of these topics involve change, and any time there is a change in an organization the individuals within the organization may feel threatened, and the culture may change. In this article, we explore how technical changes also impact a company’s culture and what should be considered when embarking on reshoring.
Internal Changes Involved in Re-Sourcing or Re-Shoring
Technical change is defined as “the effects on the machines, products, processes, or procedures within a company.” Any proposed technical change is inherently proposing some social changes as well. These social changes are a form of threat to the status, habits, beliefs, etc., of the people involved. These people have a way of life which is important to them, and which they will defend against interruption or invasion.
Culture is defined as a body of learned behavior, a collection of beliefs, habits, practices, and traditions shared by a group of people (a society) and successively learned by new members who enter the society. This is the definition as expressed by Margaret Mead, the celebrated anthropologist. Culture is a shorthand description for the fabric of human habits, beliefs, traditions, etc. The elements of culture are a fabric that is interwoven so that the disturbance of one element has an effect on many others.
Among the ingredients of a culture is the scale of values – what is important, and what is not. Cultures differ remarkably in what groups of people consider important, and many tragedies have resulted from not understanding these differences. When members of a company are faced with a threat to something they regard as important, their reaction can be anti-social or anti-company. This may result in actions to sabotage the proposed technical and or business model change. When someone sabotages a company project it is outward evidence of resistance by that person to what is perceived by them as an unacceptable change.
Successfully Re-Sourcing or Re-Shoring first requires an organization’s leadership to recognize and address the resistance to this culture shift. To do so, we must first understand the basis of the problem.
Today’s Problems Are the Result of Yesterday’s Solutions
When China entered the WTO, many US companies embraced China as a manufacturing partner. The allure of dramatically lower labor cost was irresistible. Sources of product changed to China. Many U.S. factories were closed due to a lack of competitiveness. Subsequent to the factories closing, many US engineers and support staff were downsized as the Chinese factories quickly added design capabilities. The downside was intellectual property theft and the willingness of the Chinese factory to sell your competitors both your products and your ideas.
On the positive side, there was a reduction in inflation pressure due to Chinese made goods. There was also the hope that China would embrace free market economics and democracy as it enthusiastically engaged in globalization. Contrary to many hopes, China never liberalized its political system and consistently interferes with industrial policies. Examples of this are the extremely large amount of state ownership of production, and heavy subsidies in industries such as steel and aluminum. In short, China never fully embraced globalization.
Companies that successfully sourced products in China grew, and eventually established quality control organizations and oftentimes deployed other resources in company offices or through trading companies (agents) in China. The building of the infrastructure to ensure product quality and the translation of new product ideas into actual production required an investment in time and effort to develop the protocols and procedures for doing business. This has become part of the culture, as have the departments and individuals within the US company.
Historically, the solution to many problems of cost, capital, and products has been China. It has also been the easy answer as the factory manager in China will perform local sourcing activities to complete the supply chain to manufacture the finished product. In the US and Mexico, those activities are required to be performed by resources within the U.S. company. Those U.S. resources were greatly reduced when the factories were closed over the last 30 years.
The problems that continued to occur included intellectual property theft and increasing product costs as factory wages have been increasing in China for decades. More recently the supply chain disruptions due to the pandemic and other events caused massive increases in logistics costs as well as increased operational risk due to unreliability of both factory production and delivery. This has resulted in delays in both manufacturing and shipping. This was addressed via expensive premium freight, large buildups in inventory (increased costs of working capital), and exhaustion of supply chain personnel, which led to increased cost due to higher turnover. Although many of these factors have improved to a limited degree, China continues with its Zero Covid Policy.
Due to all these factors, many companies are aggressively looking at alternative sources. As they begin this effort, many of the people who have been successful with China now feel threatened. The potential of dismantling those things which they poured their business lives into is disconcerting.
Attitudes Towards Change Effort
As in all things, there are various attitudes towards a change effort and Pareto’s Law is applicable. About 10 percent of any group of people is pro-change, about 10 percent is anti-change, and the 80 percent majority is indifferent. Those that are pro-change are eager to experiment or try something different. The vast majority of people have a wait and see attitude and will eventually embrace the change when they see positive results. It is the remaining 10 percent that perceives the change as threatening as it represents a loss of prestige, power, or status. They cannot be convinced by logic and will refuse to accept results. This perceived threat leads to an intense desire to protect that power or reputation at all costs.
Protecting a Reputation or Legacy
For those executives and managers that capitalized on China’s capabilities, many received both extrinsic rewards, such as promotions, or intrinsic rewards, like the feelings of accomplishment of having established new procedures or sources. While all of those are good from a historical perspective, many executives and managers both consciously and sub-consciously exhibit behaviors that resist or inhibit changing to new sources or procedures. These behaviors can manifest in any of a variety of tactics used to protect that which the individual fears losing.
Tactics to Protect the Existing Culture (Resisting the Change)
There are a variety of tactics that the threatened party uses to protect its turf. Some of these include:
- Creating a standard or criteria that the new source cannot pass. Oftentimes, the existing source cannot pass the new requirement either, but the existing source is not measured under the microscope of change. I am reminded of the rejection of product quality by a marketing department in New England when the production lines were relocated to the southeastern U.S. Before the move, concerns were expressed as to whether the factory workers in North Carolina could ever obtain the skills acquired by those in Rhode Island. Once manufacturing was relocated, the marketing team went out of its way to inspect and critique product from the new factory. However, when we conducted a blind product review (product from both locations labeled on the back for source but randomly placed upon large conference tables) and then asked the marketing team to identify from which factory the product had come, they were able to point out various minor flaws (within quality standards) but identified the source of the flawed product incorrectly most of the time. In short, the Rhode Island factory had produced a lower average quality product.
- “Discovering” a requirement or standard after the new source has submitted a proposal or samples. Recently, an internal team responsible for sourcing declared a factory unqualified despite the sample being made per instructions as to size and overall appearance. The sample was made based upon the factory’s internal standards; however, it did not pass the client company’s construction standard for the simple reason being that the requirement had not been communicated in advance.
- Going through the motions of evaluating alternative sources, but not really expending the factory development effort that they did 20 years ago in China with the new factory in Mexico.
- Conducting sham Request for Quotation (RFQ) process and then concluding no alternative exists to the present source. I was reminded of this recently. A large, well known, U.S. branded company has had a large manufacturing presence in Mexico for two decades. The corporate headquarters directed the local purchasing team to evaluate other alternatives. Requests for meetings and appointments were made to potential component manufacturers. Due to schedule conflicts that arose with the local purchasing team, these appointments were rescheduled several times and never kept by the local purchasing team and more than likely reported internally as the component factories not being interested in quoting.
Another technique that I’ve experienced involves setting a ridiculously low target price to which any new factory quickly realizes is unachievable. Rather than waste their time, the component factory does not submit a quote. This will be reported internally as the target factory not responding. The target price shared will not be reviewed internally even though the U.S. company has never achieved any quotation from any other source even close to the target price that was shared.
There are many other creative tactics that managers and leaders will use to resist the change. On the surface, these will appear to be reasonable as the undermining will be subtle. The actions will not be apparent, because the individual reporting success or failure will report only the results and not the self-placed obstacles that prevented positive change from occurring. Leadership must be in tune to these potential tactics and understand that there is one clear path forward if successful Re-Sourcing is the end goal.
Overcoming the Resistance to Change
J. M. Juran, a noted management theorist and icon of quality improvement and therefor of change, wrote a seminal book on achieving fundamental change. This classic book, Managerial Breakthrough, first published in 1964 and revised in 1995, describes the difficulties and necessary efforts required to accomplish a major change within a company. It presents in detail the individual psychology of managers and leaders towards change.
Maximizing the Possibility of Successful Re-Sourcing
Unfortunately, there are only limited options in dealing with people who are protecting the existing culture, as well as their status quo and position within that culture. Since they cannot be convinced by the logic of the change and will not accept the change once it starts to produce results, there is only one conclusion. They must be bypassed or eliminated from the change effort. That is not to say that they must be eliminated from the company, but they must be removed from the effort to re-source the products from another country. Failure on the part of senior leadership to address the resistors in this way means that the change will be undermined in various ways that will be difficult to discover and therefore impossible to offset.
Re-Sourcing from China to another country is a strategic decision. It involves great effort and there are difficulties to overcome. Re-Sourcing to another Southeast Asian country like Vietnam or Thailand is relatively easy as the Chinese culture extends into those countries and oftentimes the factory in China will facilitate the change. The existing culture within the company should be successful in implementing such a change as it does not threaten the cultural patterns which have been established over the years.
However, Re-Sourcing to the U.S. (Re-Shoring) or to Mexico (Near-Shoring) is far more difficult and resource consuming. Executive leadership will need to be more intimately involved to ensure that the change effort is appropriately staffed with those favorable to the potential of change rather than the existing managers and leaders who may resist the change. Since it also requires far more effort, it may be necessary to add additional resources either internally or externally to accomplish the tasks required. If external resources are required, then the executive leadership should be diligent to select a consulting resource that has a demonstrated track record of results and hands-on experience with resources on the ground in the target country. Shoreview Management Advisors is that resource for companies considering Re-Shoring to Mexico.