Dec 8 2012
Comparative advantage, free trade, and productivity
In a recent post in Evolving Excellence, Bill Waddell pointed out that the economic theory of comparative advantage was wrongfully used to justify outsourcing to low wage countries. The way Bill puts it: “…the theory is based on productivity – not hourly wages. It is driven by the idea that goods should be made wherever the collective combination of hours results in the overall minimum consumption of human effort…” (http://bit.ly/Uy8yfg)
In an earlier post, Bill cited the economic report of the president in 2010 as defining comparative advantage as the idea, “that nations specialize in producing the goods that they can produce cheaply relative to other goods.” (http://bit.ly/UsT0aA)
The comments by readers of Bill’s post seem to confuse Ricardo’s comparative advantage with the Adam Smith’s division of labor.
They also tend to confuse low labor costs with low wages, when increasing productivity achieves both low labor costs and high wages. In the 1910s, when Ford started paying workers $5/day, twice the going rate in Detroit, it still had lower labor costs than competitors because its workers on assembly lines were four times more productive.
Ricardo’s own words are easy to check, because the Kindle edition of his Principles of Political Economy and Taxation costs $0.00 and the discussion of comparative advantage starts on p. 92. It is more a case study than a theory, in which two countries benefit from free trade in two products, even though one is more productive at making both than the other.
Ricardo’s case is cloth and wine made either in Portugal or England. Both needed less labor to make in Portugal but wine required much less while cloth only slightly less. In this case England was said to have a comparative advantage on cloth even though Portugal has an absolute advantage on both wine and cloth. The practical consequence is that more wine and cloth are produced overall if England focuses on cloth and Portugal on wine.
It sounds like a hypothetical example, contrived for the purpose of illustration, and that is what I first assumed it was. It sounded particularly far-fetched, writing in 1817, that the production of cloth should take more labor in industrial England than in Portugal. But it is not a made-up case. It is a real one that unfolded in the century before Ricardo wrote, before the industrial revolution. If we believe the following excerpt from the Wikipedia article about the history of Portugal, it happened as follows:
“The 1703 Methuen Treaty between England and Portugal had both direct and indirect effects on the Portuguese wine industry. The treaty not only stipulated that the amount of duties on Portuguese wines was to never be more than two-thirds that of which was levied on French wines, it also allowed English woolen cloth to be admitted into Portugal free of duty. This second stipulation ended up having a devastating effect on the Portuguese textile industry, leading to huge numbers of shepherds and weavers becoming unemployed. In and around the Douro region, this segment of labor turned to the wine industry and encouraged a boom in vineyard planting.”
Three centuries later, while British textiles are not what they used to be, port wine from Portugal can still be found in liquor stores worldwide. It owes its unique taste to its fortification for sea travel to England, and it is sold under English brand names like Croft or Sandeman, from the British trading houses that used to ship it.
It is a great story, but hardly enough to prove that free trade always benefits all participating countries. It is not easily generalized from two countries trading two products to many countries trading many products, and it is not obvious that it can be used to justify outsourcing. On the other hand, I have applied it in production to the allocation of work among machines with overlapping capabilities.
Ricardo talks about “the labor of 100 Englishmen” as the main measure of the resources consumed in making a product. In the 1700s, labor was the main resource used in production, but, in 2012, labor is only one of many, the others including equipment, tooling, energy, and data, and a discussion focused exclusively on labor would not be appropriate.
So, what metric would you use to represent the total amount of resources used to make a product? The metrics used for this purpose are usually called “cost.” Their calculations involve debatable allocations that are not consistently made even within one country, and equally debatable exchange rates to make international comparisons. You would also use different metrics depending on whether you are deciding where to locate a new plant or how to allocate work among existing plants.
In using comparative advantage to allocate work among machines, the metric was the amount of machine time used per unit of product, which was relevant because we were trying to maximize production for a given mix of products. To minimize WIP instead, you would use a different metric, so as to penalize a machine for processing WIP-generating batches instead of single pieces.
When I first heard of comparative advantage, it was described to me as one of the few economic theories that is neither trivial nor false. And indeed it is, and I believe it makes Ricardo a precursor to today’s Operations Research and Game Theory, but we should be wary of jumping to overly broad conclusions about 21st-century globalization based on the trade of wine and cloth between England and Portugal 300 years ago.
Dec 16 2012
Deming’s Point 10 of 14 – Eliminate slogans and exhortations
Deming’s full statement is as follows:
This point reminds me of Howie Makem, the quality cat lampooned by Ben Hamper in Rivethead in 1986, about the same time Deming’s Out of the Crisis was published. At the time, Ben Hamper was a riveter at GM’s Truck plant in Flint, MI, who could describe his shop floor experience with the wit of a Tom Wolfe. Rivethead was originally a column in Michael Moore’s Flint Voice, later edited into a book.
According to Hamper, the management of the plant had decided that what it needed to improve quality was a mascot for workers to rally around, and organized a naming contest, of which “Howie Makem” was the winning entry. The mascot then materialized as a man in a cat suit with a large Q embroidered on a red cape walking the floor and exhorting operators to improve quality amid jeers, catcalls and the occasional bolt throw. Howie Makem is one of the few artifacts of which no picture can be found on Google, which is why I had to draw it from Hamper’s description.
Spending time and money on slogans, mascots, banners and monogrammed shirts or mugs is predicated on the assumptions (1) that quality and productivity problems are primarily due to lack of motivation in shop floor operators and (2) that it can be changed by the same kind of marketing campaign that works for selling detergents. Deming’s and Hamper’s point is that it is counterproductive and that these assumptions are false.
The key points that I see about appropriate public relations and communications around Lean are as follows:
Do it first, play it back later
Improvement does need marketing and promotion inside the company, to customers, and to suppliers, but not at the start of the effort, and not in this form.
The beginning of an improvement program like Lean transformation is when it is most likely to fail. At that time, the organization, from management to line workers, has everything to learn about its technical and managerial content, as well as the art of implementing it. It is then that they will make the most mistakes and therefore least need publicity. The first pilot projects only need to be known and understood by those who are directly involved, and should not be announced upfront with a marching band at an all-hands meeting. You are much better off trumpeting results once the projects are successes that can inspire others. And even then, it is not done with slogans but by testimonials of participants, demonstrating the improvements directly on the floor or in video recordings.
With outsiders as well, you do it first and play it back later. You don’t announce what you are going to do, but, once it is done, you make it a field trip destination for local schoolchildren as well as other industrial tourists.
Car companies and public relations on manufacturing
Toyota plants have visitor centers with posters on the products and cartoons explaining the production system to children and have a whole staff of professional tour guides taking groups on a set path through the plant, wearing headsets to hear the explanations. These tours are part of public relations and not given by retirees, as is the case at many other companies.
Porsche in Leipzig charges customers €1,000 extra to spend a day at the plant to pick up their Panameras or Cayennes, during which they get a tour of the shop floor featuring their version of Lean, a lunch at top of the visitor center, and an hour with a driving pro on the test track to learn how best to drive their new car in various conditions.A striking feature of this plant site, is that it is dominated by the round, inverted diamond shape of the visitor center, on the top left of the photogaph, between the test track on the left and the production shops on the right.
This is part of a new marketing trend in Germany, where, rather than hide plants away, you locate the cleanest, most automated and most spectacular processes where your customers, or even the public at large, can see them. In this spirit, Volkswagen has located a plant downtown Dresden, with glass walls for passersby to see the final assembly of cars.
Honda pioneered a different form of promotion of its manufacturing system to end users with its homecomings at the Honda motorcycle plant in Marysville, OH, where, once a year, they hosted bikers who see the production lines and meet the operators who built their bikes. The same approach was later emulated by the now defunct Saturn division of GM.
Companies in other industries rarely go this far, particularly when their products do not excite the public’s imagination. Bart Simpson’s class goes on a field trip to a box factory, which does not generate much enthusiasm.
Promotion of Lean efforts by component suppliers
If you make components to sell to OEMs rather than to consumers, the promotion of your Lean programs takes a different form, with customers sending teams of auditors to assess whether you are “Lean enough” to do business with, and they may send you supplier support engineers to help you implement Lean to their satisfaction. This means that you must present your plant in a way that allows the auditors to check all the marks needed to give you the right score, even if it means setting up a Potemkin village with tools that you don’t think are essential to your business.
Working with your customers’ supplier support organization — or supporting your own suppliers — is a different process, requiring a deeper level of involvement, and it is not a matter of public relations for either side, and should not be treated as one. The customer provides free consulting to help the supplier increase productivity and improve quality. In exchange, the supplier reduces prices by a fixed ratio every year, calculated so that the improvements are to economic benefit of both sides. The customer pays less, while the supplier makes more profits. It is a win-win, but not an easy system to set up and operate. It involves top management, engineering on both sides, purchasing on the customer side, and customer service on the supplier side, and it is not run by Public Relations.
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By Michel Baudin • Asenta selection, Deming 9 • Tags: Deming, Lean certification, Marketing communications, PR, Public Relations, supplier development