Business Best Practices

Stephen Covey (1932-2012), the business self-improvement master of our times, died last week. He authored The 7 Habits of Highly Successful People, a book that has sold over 6 million copies.

In addition to having read several of Covey’s books, I saw him present at a Lessons of Leadership conference. Here are the two most important take-always from his body of work:

Lesson 1: Point Your Compass Towards True North

In his book First Things First, he differentiated between the clock and the compass. The clock represents our commitments, appointments and activities. In contrast, the compass represents our vision, values and direction. Angst occurs when there is a gap between what we do, and what is most important in our lives.

This distinction painfully struck home. Once, I was scheduled to attend a Board meeting during a day when my 4-year old son had to undergo major surgery. I elected to attend the Board meeting, rationalizing my decision by telling myself that my wife and father-in-law were at the hospital.

Although the surgery was successful, I regret my decision, realizing that I did not put First Things First, which is to be there for my son. Had I spoken up, the Board meeting could have been delayed.

Lesson 2: Invest in the Goose That Lays the Golden Egg

This lesson is based on one of Aesop’s fables.  A farmer and his wife had a goose that laid a golden egg every day. They assumed that the goose had a great nugget of gold in its inside, so they killed it. They discovered that the goose was no different from other geese. Instead of becoming rich, the coupled deprived themselves of the gain of which they were assured day by day.

Covey argued that we must invest energy in increasing our productivity. Using the metaphor of a saw, he suggested that we must sharpen the saw, otherwise the blade becomes dull. And a dull blade results in reduced output.

There are many ways of nurturing the goose. In a previous post, I described how playing bridge enhances one’s memory and mathematical skills. Is it surprising that Warren Buffet and Bill Gates are avid players? In tennis, I know that if I fail to do strengthening exercises, pulled muscles are the end result. My physical therapist can attest to that!

In terms of business, at Frito Lay’s Orlando,  Florida plant , the largest inventory investment is not in the potatoes, corn oil and salt seasonings that are needed to make the company’s snack products. Rather, the biggest inventory item is in parts that are required to maintain the expensive machinery. Management knows that the costs of production downtime far outweigh the investments in inventory that are necessary to keep the machines in good condition.

Conclusion

Some of Covey’s notions are commonsensical—they will not put him at the table with the pantheon of self-improvement thought-leaders. For example, his 7 habits include advocating “being proactive; begin with the end in mind; think win-win, etc.”

But the ideas of nurturing the Goose That Lays the Golden Egg, and setting ones compass on true north, will stand the test of time.

The supply chain in China, including thousands of mainland factories, is reeling from a 13.6% increase in the minimum wage, as reported yesterday by CNBC. As a result, the lowest salary is being pushed up to 1,500 yuan or $240 per month. The increase was caused by a series of strikes that occurred around the Pearl River Delta, a major Chinese industrial center.

Chinese export manufacturers in the Hong Kong area expect that the increase will result in the downsizing—or complete closing—of 1/3 of Hong Kong’s 50,000 factories in China. These suppliers are critical links in the supply chain that stretches all the way from China to Europe and the U.S.  In addition to the wage increase, another reason for the anticipated decline in Chinese production relates to the general downturn in global economic activity.

The gap between U.S. labor costs and Chinese labor costs is narrowing. In fact, a recent article in the New York Times described how GE is bringing back jobs to the U.S. at GE’s Appliance Park in Louisville, KY. In return, the union agreed to a two-tier labor structure, where the U.S. employees who are hired will be paid $10 to $15 per hour less than what the current union workers are making.

Let’s do the math.  The offshore jobs that are being backsourced to GE’s Appliance Park will result in U.S. workers making between $20,000 to $38,000 per year. The workers in China, who will receive the 13.6% increase in their minimum wages, will be making $2,880 per year. Thus, G.E.’s workers will be paid approximately 700 to 1,300 per cent more than their Chinese counterparts.  Jeffrey Immelt, GE’s CEO, is spearheading the U.S. government’s campaign to bring jobs back to the U.S. Are these new, Appliance Park jobs being brought back because of lower labor costs? Or, are political factors affecting the decision?

As discussed in an interview with a U.S. manufacturing executive who lived in China for 13 years, global manufacturers who are looking to minimize their labor costs are locating factories in Viet Nam, not China.  This strategy—chasing every cent of labor savings—requires rejiggering the supply chain every few years. Vietnam’s minimum wage is only US$85 per month (or $1,020 per year). Thus, Chinese workers are paid 282% more than Vietnamese workers. 

Although the labor differential gap between the U.S. and Asian countries is narrowing, it is still significant. Offshoring will continue to be attractive to firms with products that have

• High labor content
• Large Production volumes
• Low variety
• Low transportation costs

Products that meet these criteria—such as electronics assembly—will most likely never return to the U.S. Furthermore, in certain industries—for example, in computer and cell phone production—most of the companies that comprise the supply chain are situated in Asia.  Given this reality, moving production to the U.S. would be uneconomical. In these industries, hoping for backsourcing to happen is like waiting for an airplane to touch down that is simply not going to land [on U.S. shores].

In conclusion, the key determinant in terms of where to produce is based on total cost, not just labor cost. One must begin by looking at the manufacturing process to determine where the most economical location is. Although China’s increase in its minimum wage is significant, it is just one of many factors to consider.

What do you think? Is there a future for manufacturing in the U.S.? Given the labor differential between China and the U.S., do you think that we can still compete?

There are not enough jobs for college graduates whose degrees are in non-STEM areas. STEM stands for skills in science, technology, engineering and mathematics. I know, because as a university professor and parent, I have learned about the predicaments of many young graduates. The plight of Tom K. is a case in point. He graduated from Dartmouth with a degree in history, but the only decent-paying job that he could find was one in construction. Last year’s valedictorian from one of the top 25 law schools is still looking for work, according to a lawyer friend.

These anecdotal stories are buttressed by a report from Georgetown University, Center on Education and the Workforce. The authors project that by 2018, only 23% of jobs will require a bachelor’s degree, and 10% will require a graduate degree. Put differently, 67% of jobs in 2018 will not require a college or graduate degree.

Vocational and Technical School IT Training Class

In short, we are producing far too many college graduates who are finding that the job market has little use for them. To add insult to injury, the typical college graduate is saddled with an average of $25,250 in student loans, a yoke that is heavy to bear. The combination of debt and dim job prospects have together provided the kindling that has ignited the “Occupy Wall Street Movement.”

Our current predicament is addressed in the report “Blueprint for Jobs in the 21st Century,” which was compiled by the Human Resource (HR) policy Association. The HR executives indicated that many good paying jobs are going unfilled, because our educational institutions and government training programs are producing workers who lacked the necessary, technical skills. In addition, the authors of the report indicate that we are gutting our high school vocational training programs, thereby exacerbating the problem.

For example, the New York Times reported that President Obama is prioritizing increasing academic standards and college graduation rates while reducing federal expenditures for vocational training in public high schools and community colleges. The objective to produce a higher percentage of college graduates is reminiscent of our previous public policy to increase the percentage of Americans who own homes. Is the administration unknowingly creating another bubble? Call it the bachelor degree bubble (too many B.A.s and not enough jobs) as opposed to the housing bubble (too many houses, and not enough viable buyers)?

Recommended Course of Action

What opportunities are there for the 67% who need training for work?

First, we must realize that having a bachelor’s degree is not a guarantee to a job, as it once was. We must create a strong vocational option for high school students, so that they can go on to develop the skills that are needed by future employers.

According to HR professionals, certain jobs are going “begging.” During a December 12, 2011 speech before the Economic Club of Chicago, Rahm Emanuel, Chicago’s mayor, indicated that while the city struggles with a 10 percent unemployment rate, more than 100,000 jobs are available.

Skilled trades are always in constant demand. For example, AMR, an aircraft leasing company, indicated that it has 500 openings for aviation mechanics. Experienced mechanics can earn as much as $56,000 a year. Also, rewarding careers are available in occupations such as health care, information technology, etc.

But to develop the requisite skills in these fields, workers need education for jobs and/or apprenticeships. Earlier this week it was announced that the City Colleges of Chicago plans to provide vocational training to meet the needs of business in industries such as health care, and supply chain management.

Government, educational institutions and industry must work together to restructure the educational system. Only by doing so can young people acquire the requisite skills and training that employers seek. Developing these skills will enable youth to be able to earn a living wage, and achieve a productive career.

What is your view? Should we put resources into increasing the graduation rates for undergraduate degrees? Or should we put our resources into developing vocational and technical schools and/or career paths?

And hark! how blithe the throstle sings! He, too, is no mean preacher: Come forth into the light of things,

Let Nature be your teacher.

—excerpts from William Wordsworth’s “The Tables Turned”

In the summer of 1964, Matt Ellsworth–a biology teacher and freshman wrestling coach at Oak Park and River Forest High School located in Oak Park, Illinois–took a group of 15-year-old boys on a one-week canoe trip. We drove 11 hours from Chicago to Ely, Minnesota, which is the point of departure for trips into the Boundary Waters canoe country, a 2 million acre area of pristine wilderness. This area includes a vast network of lakes and streams on the US-Canadian border.

Unlike much of the Midwest, the Boundary Waters canoe country is designated as primitive wilderness. This means that this area has been set aside to be preserved in all of its primeval beauty. In effect, the boundary waters are the same today as when the Ojibwa Native Americans hunted the Caribou that once lived there. While paddling our canoes on a Canadian river, I remember seeing Ojibwa Indian cliff paintings that were created 800 years ago.

I recall how the lakes and rivers were absent of the droning sound of machines: no motor boats are allowed. The area is so vast that we often paddled an entire day without seeing other people. At night we built campfires under towering pines where the solitude was periodically broken by the haunting calls of loons.

Apart from experiencing nature in all of its pristine glory, I learned how to portage a canoe. Portaging entails carrying a canoe and gear between lakes that are not connected by water. The length of the portage path varies, typically ranging from 100 feet to well over a mile long. Carrying a canoe on your shoulders can test the mettle of even the strongest and fittest athlete: I remember having to dig deep when traversing those 1+ mile portages. After all, how could a 15 year old quit a job–albeit a hard one–when his peers expected that he would be successful?

Moving forward 41 years, I thought that my then 15-year-old son, at the time a sophomore at Oak Park & River Forest (OPRF) High School, would benefit from experiencing the wilderness. We are both city slickers, so we used an outfitting company that provided the gear and the guidance required to survive for a week.

I immediately knew who to contact. Dan Waters had grown up in River Forest (OPRF ‘57). His mother, Mitzy Waters, lived in River Forest and knew my mother, Helen Mojonnier, who grew up in Oak Park. I asked Dan how he ended up owning Canadian Waters (www.canadianwaters.com), an outfitting company 570 miles from Chicago. He said that his family spent many summers vacationing in northern Minnesota. He liked that part of the country so much that he moved there in 1963. Shortly thereafter, he founded the outfitting firm.

Getting back to the trip itself, I think that going into the wild has even greater value today than it did 41 years ago. First, it seems to me that we spend an inordinate amount of time interacting with screens: computer screens, cell phone screens, and TV screens. I recently saw the comedian Bill Maher perform at a theatre in Hammond, Indiana. Although this was a live performance, I observed most of the audience staring not at the human being on stage, but instead, looking at two humongous screens—reflecting the comedian’s image—that were positioned on both sides of the stage.

There is nothing inherently wrong with staring at screens; however, sometimes it is done excessively and at the expense of our relationships with people. This fact is put into relief on a wilderness journey. In God’s country, there are no screens to stare at. Absent cell phone towers in close proximity, you are cut-off from society, as we know it. What you have instead is an opportunity to spend significant time bonding with your child, actually talking with one another, face-to-face, free from civilizations distractions. In addition to communicating with one another, you and your child have an opportunity to jointly interact with nature in all its beauty and terror.

In the middle of one night, we were woken up by our campsite dog, Bubba, who was barking wildly. Shortly thereafter, Bubba ran up the path to the top of a hill. A black bear came close to our camp, but after being chased by a wildly-barking Bubba, the bear high-tailed it out of the camp-site. Black bears fear dogs whereas grizzlies have no fear of dogs. So, if you take a camping trip to northern Minnesota or Wisconsin, bring you dog and you won’t have to worry about being harassed by black bears.

The final lesson learned pertains to portaging. I figured that I knew how to portage from my experience carrying canoes 41 years ago. Furthermore, I believed that portaging would be a piece of cake, because today’s canoes are made with ultra-lightweight Kevlar in contrast to the heavier Grumman, aluminum canoes of yesteryear.

The author carrying leeches in one hand and a paddle in the other

Well, did I ever get that wrong! After portaging a canoe over a couple of lakes, my back ached. Moreover, I slowed down the entire group, possibly preventing us from achieving our goal of making base-camp by dusk.

So we changed things around. As shown in the pictures, I carried the leeches, paddle and life preservers (see picture on left), and my son took charge of carrying the canoe. As a result of these changes, our pace increased, and we easily made it to our base-camp by dusk.

In thinking about the portaging aspect of this experience in the wilderness, my carrying the canoe caused a bottleneck. The bottleneck constrained us from achieving our goal (making it to base camp by dusk). By offloading the portaging to my teenage son, we eliminated the bottleneck; and, consequently, achieved our groups’ goal. This is actually a manifestation of  a business philosophy—that many firms practice—called the “theory of constraints.” It is described in Eli Goldratt’s book The Goal. In retrospect, I found it fascinating how an experience such as a canoe trip can illustrate a fundamental philosophy of business management.

So, if you can take a week in the summer, spend it with your daughter or son up in the Boundary Waters canoe country. It will provide you with a great bonding opportunity. In addition, you might learn some meaningful life-lessons to boot.

In my first blog post, I contrasted the U.S. manufacturing industry with the newspaper industry. I indicated that both industries are similar in that each one is hemorrhaging jobs. Some of you commented about that post, pointing out that US labor costs—which are substantially higher than those in China and other developing countries—have caused US manufacturing companies to move work offshore.

There are other factors as well that have caused the loss of US manufacturing jobs. Industrial production has declined during the worst recession since the great depression. All things being equal, the drop-off in demand translates into fewer jobs. Second, the Chinese are manipulating (undervaluing) their currency, making the value of Chinese goods artificially low. This stimulates demand for Chinese producers thereby creating jobs for the Chinese economy at their trading-partners’ expense.

But on a structural level, what is happening to US manufacturers is similar to what has happened to our farmers.  In 1900, the farming sector employed approximately 11.6 million people, representing the largest sector of the work force (43.5%). In 2000, the farming sector employed only 3.3 million people, a 72% decline in employment. Farming is now the smallest sector of the workforce (2.4%). Although there are significantly fewer people working in agriculture, the output from this sector of the economy has grown dramatically, spurred by technological innovation.

Similarly, US industrial production has more than quadrupled since 1950, despite the fact that US manufacturing now employs fewer workers.  As in the agricultural sector, improvements in productivity–in effect,  the substitution of technology for labor– has translated into job losses in the manufacturing industry.

Despite the bleak job picture, US manufacturing is still strong overall, if one uses the level of  industrial production as a measure.  As pointed out in a Barron’s article,  as recently as 2007, American factories produced 5,250 complete civilian aircraft, 15,341 complete civil-aircraft engines, 81 million metric tons of raw steel, 10.7 million motor vehicles,  25.6 million computers,…and $125 billion of pharmaceuticals.  We are still the worlds’ largest manufacturer. Although some producers are actually moving some work back to the U.S., the jobs that have been lost will probably never come back.

What do you think about the future of U.S. manufacturing?