Cheaper than China
27 Mar 2007
The process industries are an important centre of European wealth and jobs creation. Operators have to produce the right product at the right time while satisfying all the environmental, safety and, in particular, product regulatory control requirements.
Process manufacturing in Europe has challenges not least in terms of average wage rates. Published figures put rates at $18/hr in the UK and $36/hr in Germany. This compares with Poland, $2.7/hr; India, $1.12 /hr; and China, $0.8 /hr. Different manning policies in low labour cost countries mean the effective difference is nearer a fifth to a half of European rates.
Europe also faces rising oil, energy and other raw materials prices, which are passed up the supply chain to manufacturers, and stringent regulatory pressures.
Given these pressures it is hardly surprising that a many European process manufacturers have already established manufacturing facilities in China and India to satisfy the large indigenous market and are considering "off shoring" other manufacturing.
But is this the only answer? Analysis of the figures suggests otherwise.
The three prime process manufacturing sectors are; the large continuous commodity chemicals, smaller batch speciality chemicals and the even more specialised life science industries.
The life science industries are the most labour intensive due to need for extensive QA and QC checking demanded by the regulators. Commodity is the least labour intensive due to the high degree of automation.
While supply chain costs as a percentage of sales are similar for all three sectors, the differences are that in speciality and commodity chemicals the main costs are those associated with actually shipping the bulk products — in life sciences the product weight is very low and the costs arise from marketing expenses which are people-based.
Overall equipment effectiveness (OEE) varies from a low 35% in life sciences to a higher 75% in commodity chemicals, but none of these are world class figures. Stock turn figures, meanwhile, are low in each sector as that none of the sectors practice "just in time" manufacture and delivery.
While the actual wages in low labour countries are very low, experience indicates that people are used rather than automation hence the actual difference is smaller — though still very significant. This applies in both operations and supply chain costs (Table 1).
Commodity and speciality producers in low labour costs country transport their products to Europe by sea with the consequential need to fund the stock in the ships and in storage at both ends of the journey.
However, in each sector the delivered cost to the customer in Europe is less than the figure from the local European manufacturer. European process manufacturing assets have a problem.
What happens if the concepts of "Lean Operations" are applied in both Europe and the low labour cost countries?
Lean operation means driving out waste in terms of overproduction, off-spec products and services, unnecessary movement of products and materials across sites, unnecessary inventory and inappropriate processing of material and information. Other wastes include unnecessary transport of products en route to the customer and unnecessary waiting times in manufacture and the supply chain.
By implementing world class lean performance in the speciality process industry, the European operation becomes competitive again on a delivered cost basis, but is unlikely to be successful in exporting out of Europe. The analysis indicates a similar conclusion for commodity chemicals and life sciences (Table 2).
The reasons are that the productivity of operations increases dramatically as the OEE moves to world class; supply chain costs drop significantly and the cost of funding stock reduces as the plants move to just in time manufacturing driving out the above wastes along the journey.
This transition takes time, and the sooner the industry starts the better. It highlights what other industries have learned already, namely that it will always be cheaper to distribute products 200 miles in 24 hours than ship them half way around the world in seven or more weeks.
Beyond lean, the bottleneck preventing additional cost reductions is often the existing plant equipment. Historically the trend has been to build even larger plants, reactors, packing lines etc on centralised sites.
With the benefits of hindsight these have a number of disadvantages including increased supply chain costs as all feed stock and products have to ship to and from the central location.
Breakdowns are also very significant and changeovers are often complicated and time consuming. Moreover, as the products for many different countries are packed on one line the number of SKU's (Stock Keeping Units) increases due to different languages and sizes with all the consequential problems of changeovers. Sustainability costs are also high
To really compete in Europe with low labour cost operations requires fully automating the operation to remove the high labour cost component. Operators must also become capable of manufacturing to a "unit of one" where the unit size is determined by the customer and distribute process plants adjacent to or on the customer's site or market — and ensure the plants operate at world class lean performance.
Such plants are often called "agile" and are fully automated and possibly managed from a central remote control room. They operate at a rate and time determined by the customers and sized according to customer requirements. Agile plants are also more energy efficient, produce less waste and are lower cost due to the manufacture of many of the same.
The impact is very significant (Table 3) as in all three cases the delivered cost to the final customer is much reduced so that it is almost impossible for a low labour cost country to export to Europe as it has to incur the shipping/supply chain costs, which more than offset their low labour cost advantage.
The process technologies involved are all available today in other industries such as food and some parts of the chemical industries. For example, at least one manufacturer of CaCO3 for paper whitening has distributed its plants to the paper manufacturing sites. Such change does, however, demand a different business model such as the one (above) suggested for the life science industries.
The life science business model is currently adopting an "agile" distributed model that is already used in gas liquefaction and other industries. Final processing of the API, particularly blending and packaging, is adjacent to the major customers and countries in a fully automated operation.
This illustrates the importance of focusing on all the costs incurred in delivering the product to the customer, not just the manufacturing costs.
This is not an easy journey, but it is winnable and on the way the capacity of existing assets will almost double and productivity will increase dramatically. Standing still is not an option as it will inevitably lead to either closure due to excess capacity arising from those who do make the journey effectively or off-shoring as a last breathe effort to compete.
If Europe's process industries do not make the journey, many of the plants will be closed within 10 years, and the critical mass of skills, support services and product supply chains in Europe will be gone. It has already happened to other industries like cotton and electronics. Why not the process industries?
The solution is in the hands of technologists, engineers and business managers throughout the process industry.
Process manufacturing in Europe has challenges not least in terms of average wage rates. Published figures put rates at $18/hr in the UK and $36/hr in Germany. This compares with Poland, $2.7/hr; India, $1.12 /hr; and China, $0.8 /hr. Different manning policies in low labour cost countries mean the effective difference is nearer a fifth to a half of European rates.
Europe also faces rising oil, energy and other raw materials prices, which are passed up the supply chain to manufacturers, and stringent regulatory pressures.
Given these pressures it is hardly surprising that a many European process manufacturers have already established manufacturing facilities in China and India to satisfy the large indigenous market and are considering "off shoring" other manufacturing.
But is this the only answer? Analysis of the figures suggests otherwise.
The three prime process manufacturing sectors are; the large continuous commodity chemicals, smaller batch speciality chemicals and the even more specialised life science industries.
The life science industries are the most labour intensive due to need for extensive QA and QC checking demanded by the regulators. Commodity is the least labour intensive due to the high degree of automation.
While supply chain costs as a percentage of sales are similar for all three sectors, the differences are that in speciality and commodity chemicals the main costs are those associated with actually shipping the bulk products — in life sciences the product weight is very low and the costs arise from marketing expenses which are people-based.
Overall equipment effectiveness (OEE) varies from a low 35% in life sciences to a higher 75% in commodity chemicals, but none of these are world class figures. Stock turn figures, meanwhile, are low in each sector as that none of the sectors practice "just in time" manufacture and delivery.
While the actual wages in low labour countries are very low, experience indicates that people are used rather than automation hence the actual difference is smaller — though still very significant. This applies in both operations and supply chain costs (Table 1).
Commodity and speciality producers in low labour costs country transport their products to Europe by sea with the consequential need to fund the stock in the ships and in storage at both ends of the journey.
However, in each sector the delivered cost to the customer in Europe is less than the figure from the local European manufacturer. European process manufacturing assets have a problem.
What happens if the concepts of "Lean Operations" are applied in both Europe and the low labour cost countries?
Lean operation means driving out waste in terms of overproduction, off-spec products and services, unnecessary movement of products and materials across sites, unnecessary inventory and inappropriate processing of material and information. Other wastes include unnecessary transport of products en route to the customer and unnecessary waiting times in manufacture and the supply chain.
By implementing world class lean performance in the speciality process industry, the European operation becomes competitive again on a delivered cost basis, but is unlikely to be successful in exporting out of Europe. The analysis indicates a similar conclusion for commodity chemicals and life sciences (Table 2).
The reasons are that the productivity of operations increases dramatically as the OEE moves to world class; supply chain costs drop significantly and the cost of funding stock reduces as the plants move to just in time manufacturing driving out the above wastes along the journey.
This transition takes time, and the sooner the industry starts the better. It highlights what other industries have learned already, namely that it will always be cheaper to distribute products 200 miles in 24 hours than ship them half way around the world in seven or more weeks.
Beyond lean, the bottleneck preventing additional cost reductions is often the existing plant equipment. Historically the trend has been to build even larger plants, reactors, packing lines etc on centralised sites.
With the benefits of hindsight these have a number of disadvantages including increased supply chain costs as all feed stock and products have to ship to and from the central location.
Breakdowns are also very significant and changeovers are often complicated and time consuming. Moreover, as the products for many different countries are packed on one line the number of SKU's (Stock Keeping Units) increases due to different languages and sizes with all the consequential problems of changeovers. Sustainability costs are also high
To really compete in Europe with low labour cost operations requires fully automating the operation to remove the high labour cost component. Operators must also become capable of manufacturing to a "unit of one" where the unit size is determined by the customer and distribute process plants adjacent to or on the customer's site or market — and ensure the plants operate at world class lean performance.
Such plants are often called "agile" and are fully automated and possibly managed from a central remote control room. They operate at a rate and time determined by the customers and sized according to customer requirements. Agile plants are also more energy efficient, produce less waste and are lower cost due to the manufacture of many of the same.
The impact is very significant (Table 3) as in all three cases the delivered cost to the final customer is much reduced so that it is almost impossible for a low labour cost country to export to Europe as it has to incur the shipping/supply chain costs, which more than offset their low labour cost advantage.
The process technologies involved are all available today in other industries such as food and some parts of the chemical industries. For example, at least one manufacturer of CaCO3 for paper whitening has distributed its plants to the paper manufacturing sites. Such change does, however, demand a different business model such as the one (above) suggested for the life science industries.
The life science business model is currently adopting an "agile" distributed model that is already used in gas liquefaction and other industries. Final processing of the API, particularly blending and packaging, is adjacent to the major customers and countries in a fully automated operation.
This illustrates the importance of focusing on all the costs incurred in delivering the product to the customer, not just the manufacturing costs.
This is not an easy journey, but it is winnable and on the way the capacity of existing assets will almost double and productivity will increase dramatically. Standing still is not an option as it will inevitably lead to either closure due to excess capacity arising from those who do make the journey effectively or off-shoring as a last breathe effort to compete.
If Europe's process industries do not make the journey, many of the plants will be closed within 10 years, and the critical mass of skills, support services and product supply chains in Europe will be gone. It has already happened to other industries like cotton and electronics. Why not the process industries?
The solution is in the hands of technologists, engineers and business managers throughout the process industry.
