Leading manufacturers in China—domestic and multinational alike—are beginning to adopt proven global-management techniques, such as lean manufacturing, to make their factories more efficient. With so many companies producing goods there today, low-cost labor isn't the advantage it used to be. Global overcapacity in many sectors and intense competition in many domestic Chinese markets have prodded manufacturers to look for new ways to cut their costs and tackle other competitive issues, such as reducing lead times and boosting the quality of products.

Lean-manufacturing approaches have started to catch on globally, so it is hardly surprising that they are finally appearing in China. Many manufacturers around the world now use the production approaches and tools that Toyota Motor pioneered a generation or more ago. Lean tools are particularly effective for identifying and eliminating the root causes of waste and inefficiency, as well as variability and instability—and in the Chinese factories of both multinational and domestic companies these obstacles to world-class manufacturing are omnipresent. When low labor costs confer huge benefits, manufacturing managers generally don't pay attention to other sources of competitive advantage. Now they do.

But to apply lean techniques in China today, manufacturers must accept compromises or trade-offs that they may not have to make elsewhere. Suppliers in China, for example, typically are not as stable and reliable as those in other countries, and this has implications for the ability of manufacturers to adopt just-in-time assembly or to manage the quality of their products. What's more, China's workers don't take to problem solving as readily as their counterparts in Japan and the United States have.

One company that has pioneered a lean transformation in its Chinese operations is Preformed Line Products (PLP), a Cleveland-based midsize manufacturer of equipment that telecommunications, communications, and power companies use to secure and maintain overhead and underground cables. In this interview, Bill Haag, PLP's vice president for international operations, and Wu Yu, the managing director of PLP's plant near Beijing, explored the lessons they learned during the company's lean transformation with James Hexter, a principal in McKinsey's Beijing office. The conversation took place in July 2006 at PLP's Chinese operations, just outside Beijing.

The Quarterly: When did PLP enter China and why?

Bill Haag: We started looking at China in 1994. A colleague and I traveled over here that year, and in 1996 we broke ground on the construction of the factory. It was a joint venture, 80 percent owned by us and 20 percent by a local partner in the electric power industry. Our intention in coming to China was to produce and sell power sector products in the Chinese market.

But two things happened quickly. First, the telecommunications market took off in China. Our products for that market, to be used on telephone poles and towers, took off faster than we expected. The market for our traditional power products has since taken off, but our very quick success in China came in the telecommunications market.

The second big change that happened after we opened our Chinese facility was that PLP's global margins started to decrease, largely due to market pricing issues caused by competition and pricing in other low-cost countries. That, combined with increasing costs in the more industrialized countries around the world, changed the focus for this factory. Now it's oriented to about 50 percent production for the Chinese market and 50 percent for export to our affiliated companies. By that, I mean we're producing and sourcing a lot of products for our sister companies around the world and for the parent company in the United States.

The Quarterly: What did that shift in focus mean for the way you operated in China?

Bill Haag: With the growth in the telecommunications business, we expanded the plant, increasing its size to 60,000 square feet, and handled the domestic demand without a problem. But when we started to manufacture for other PLP companies we ran into capacity issues. This was in 2004.

The business was divided into two businesses—one domestic, for China, and one international—but their lot sizes, number of orders, and lead times were dramatically different. The factory started getting bogged down in long production runs for export in order to fill out a container or two. And the local salespeople were going crazy because they couldn't get their products through the factory.

Wu Yu: Our international products have predictable lead times and lot size requirements. If companies are going to do maintenance on part of an international power grid, they will know months in advance about their need for a certain power product. They can outsource that to us.

But in China, domestic demand is very different. Here, the orders are frequently smaller and typically come from all over the country. Customers need to have their orders delivered quickly. Their planning may not be good. They may be talking about the need for products, but funding for the project may be uncertain. Then, suddenly, they have a problem to fix and need the products urgently. This ordering behavior is very common in China. It's common in many sectors, not just ours.

The Quarterly: McKinsey is seeing that too—for instance, with manufacturers that supply Chinese retailers—though perhaps the pattern isn't as erratic as the one you describe in the power industry. So one lesson here is that if you have a factory in China that is filling both international and domestic orders, you may have to deal with these differences in demand patterns?

Bill Haag: In our case, yes, because of the kinds of products we make for our sister companies. We've had similar issues in US plants with some international orders. African, Asian, and Latin American organizations frequently go out for tender and bid out a big project, doing the whole thing turnkey through a contractor. So it's one big-shot, big-order project. Generally, the delivery times in that sort of situation can be long, but sometimes they are short. Once in a while, one of these large orders lands at a US plant that ordinarily manufactures a continual stream of small orders, and suddenly the factory's smaller orders get backed up to meet a large order with a short lead time.

The Quarterly: Were you outsourcing production to suppliers to help you deal with this?

Wu Yu: Yes, but our suppliers were part of the problem. A portion of our products are outsourced to third-party vendors. Supplier quality is a big issue here in China. Many suppliers aren't stable. They will give you initial samples that are of very good quality. They give you the first delivery and it's OK, and the second delivery is OK. But when you get the third delivery, the quality just goes. When we return the order the supplier says, "If you're lucky you'll get this back in two weeks. If you're unlucky it will be two months."

Bill Haag: The items we outsource have to match up with the ones we produce ourselves. We can't have good delivery performance if the outsourced products don't arrive in time. Our lead times for domestic orders were increasing to 14 days. We were disappointing domestic customers and our sister companies, but demand—both domestically and internationally—continued to grow. People were working a lot of overtime. Capacity was the issue for us.

The Quarterly: How did you come to the decision to take a lean approach to solve your capacity issues?

Bill Haag: We were looking at traditional ways of solving the problem—putting up another factory, buying more equipment, hiring more people. But we also knew there was another way to deal with this. Our US factories had, at that time, been spending a couple of years working on lean transformations to reduce costs.

But we wondered how we would do that in China, where there aren't many resources related to lean or to something similar to Toyota's production system. Lean was a word, an idea, that wasn't really well known here. Also, our situation was different in China. We have done a significant amount of lean work in our North Carolina facility in the United States and, just recently, in our Brazilian location. Neither was under the capacity crunch we had here. They were stable, profitable businesses that wanted to do something better. They had systems in place—everything from computer systems to quality and maintenance systems. They were not under significant production pressure. The goal at those locations was to reduce work in progress, reduce inventories, reduce lead times, and reduce costs.

But in China we were fighting fires on all fronts. The business was growing, and every system in the business was under stress. The computer system, the maintenance and quality systems—everything was overloaded. Our people and our managers were overloaded. It's hard to step back from firefighting and say, "OK, now let's try to implement a structured program."

The Quarterly: Would you say, then, that the lean work you did here was more about creating room for growth?

Wu Yu: Yes, but something else too. Our need to reduce lead times is a competitive strategy. The type of product we make is not an advanced-technology product. We now have many competitors in China and other low-cost countries. To be successful against them we have to react quickly in the market, particularly for power products. How fast we can meet a massive order is important not only for PLP-China but for PLP as a whole. While product knowledge isn't the sole area where we can compete, having production capacity for global-market orders can be a focus for how we compete.

The Quarterly: How did you begin the lean transformation?

Wu Yu: We pulled together a team to look at the problem carefully and define a new plan. The team included production, maintenance, and purchasing supervisors. We wanted people who would be very enthusiastic about the change. We dedicated these people 100 percent to the project.

Also, we wanted people who were dedicated to the company for the long term. In China there is a high level of turnover, and we didn't want people who would see this as an opportunity to gain experience and sell it elsewhere as soon as the project was finished.

Bill Haag: The team looked hard at all sorts of data: at production orders, sales, and many other things. We involved some of our US people in looking at the data too, because they know this manufacturing process and they have experience with similar capabilities and equipment. The team came up with the design to move from nearly four production lines to two—one for domestic orders and one for international—and to adopt a lean "pull system" to move orders through the factory.¹

I have to say we were surprised by that design recommendation and more than a little nervous. After all, just six weeks earlier we were looking at requests for more equipment and people. But we analyzed the design, looked at the capacity estimates, and brought some people over from the United States to look at things. PLP's vice president for manufacturing was very involved in the decision to take the design to the president of the company. In the end, we validated the design.

The Quarterly: Was there anything in the project's design that was unique to China—something you had to pay attention to only in China and not elsewhere?

Bill Haag: In hindsight, we should have thought more about the immediate fallout that would occur as we started to implement production system changes on the factory floor. Our China business wasn't as stable as our businesses elsewhere were.

This is a point that may be important to a lot of companies that are prepared to implement lean in China: they have to give a lot of thought to their capabilities. Equipment would have issues, quality and training limitations would pop up, and so on as we put pressure on the system to operate in a more disciplined manner—everything from reducing the number of lines to changing the way we identify and store inventory on shelves and flow inventory to the line. We didn't think through those problems as clearly up front as we should have.

The Quarterly: Were there other differences?

Wu Yu: In lean, the supervisor's role changes from being a monitor to being an active problem solver. This is very difficult in China. People here don't like to be challenged. In the West, people speak up and suggest ways to solve problems. In China, they are less inclined to speak up and make a difference. They wait for the person above them to say what needs to be done. Supervisors like to say "Do this" rather than get workers to participate in solving problems. And workers don't typically give ideas to managers.

Implementing lean is a big change for us, and I think we're still adjusting. People here are doing more team problem solving than they were a year ago, but we still have a long way to go. Getting the supervisors to change is key.

We've done some kaizen events to try to change things.² In the United States, kaizen events can unfold over a three- or four-day period, and you bring in people from all levels of the organization. Our kaizen events in China were not as long and didn't involve as many people as they do in the United States, but they have helped us. We need to do more.

We've had people from the United States here to help train people in lean production processes and in such things as equipment changeovers. Training is very important to us.

The Quarterly: One year after implementing a lean program in China, how do you assess the outcome?

Bill Haag: In my view, throughput is much better now. We have much better control of the process, quality control included. We know whether PLP products are running on the line or are now in a box or will run tomorrow—production is now very predictable. Lead times have improved, and even such things as the times for inspecting and stocking incoming materials have improved dramatically, from two weeks to 24 hours.

We gained a lot of capacity. We've added a second shift in a very organized way instead of just throwing some people into a shift and hoping for the best. We're producing well beyond what the lean design estimated. Invoice sales in May [2006] were at an all-time record for the month. From the standpoint of delivery, quality, and costs, this plant is highly regarded within the PLP group. We have a reputation for getting things done. We produce more product per piece of equipment than any plant outside the United States.

Of course, success means we're facing a capacity crunch once again.

The Quarterly: What still needs to be done?

Bill Haag: One area of focus is continuous improvement. As Wu Yu was saying earlier, it is still new for people here to say, "OK, we've done that; now what do we tackle next?" During the transformation, we improved many areas of the factory, but not all. The idea was that we would follow up on those areas—in assembly and storage, for instance. But we're still struggling with continuous improvement and with some slippage of the discipline implemented last year. We need continual mentoring, coaching, and training, as Wu Yu said.

One thing we will do to help here is to bring a supervisor from the United States for a couple of weeks. He's a supervisor of a significant portion of one of our factories there and responsible for lean in the whole factory. He was here a few times during the transformation, and he will help us get some more discipline in our continuous-improvement processes.

Wu Yu: Mind-sets and behavior are difficult to change in China. Bringing in new ideas from the West, such as lean, and having them understood, accepted, and adopted is a big challenge. But it can be done.

The Quarterly: What about improving suppliers?

Wu Yu: We are discussing a program to bring more engineering to China rather than having most of it in our corporate headquarters, in Cleveland. That will give us more capabilities for changing our production and sourcing.

Also, we have changed some suppliers after doing some analysis and finding that a few suppliers were responsible for most of the delays. And we are working with some of our top suppliers, not so much to train them as to take ideas we've learned here to them in order to help them improve too.

The Quarterly: Has the role of this plant within the entire PLP network changed at all?

Bill Haag: This plant is the hub of our low-cost-country strategy. Our Mexico plant has location advantages for short, small-quantity orders delivered to the United States. Brazil is very important to us. And we're expanding in Thailand, largely to supply the local market but also to be an offshore plant for our Australian operations.

My personal goal for PLP-China is to keep it at 50 percent production for the domestic market, 50 percent export, and to have both businesses growing at 20 percent a year.