And with some good reasons: sector leaders such as Dell (personal computers) have long used foreign outsourcing of production to Asia to first establish and then extend the low cost leadership in industries that are becoming increasingly commodity-like in nature.

So why in the world would cellular handset manufacturer Nokia anchor its global manufacturing operations in comparatively high cost locations such as Salo (in the company´s native Finland), US and Germany? 1

Maybe because in certain situations where (1) responsiveness to fast changing competitive situations is more important than line costs and (2) direct labor is a relatively small portion of total costs, the ‘low cost´ decision is sometimes to stay in so-called high cost host nations.

In Lean Thinking and The Machine That Ruled the World, authors Jones and Womack described how direct labor cost is often a much smaller part of total product costs, correctly analyzed. 2 While the typical guesses that direct labor and line supervision represents 30-35% of total product costs, the real answer is often closer to a third of that.

Why? Most if not all of the inflated perceptions of labour are because of incomplete costing. The DL-obsessed manager tends to ignore the three layers of administrative fat that represents managers from closed-down plants who are now given make-work assignments in those that are left.

He conveniently forgets to count the Normandy invasion of adjusters, expediters and forecasters who add to production/ assembly costs while adding little if anything. For if the production arrangement was set up from the beginning on a least cost (flexible/LEAN) operation, these hangers-on are not needed.

All of these considerations apply at Nokia, plus two others. The first is a manufacturing culture.

Instead of treating production as a career backwater, a dead-end before inevitable outsourcing to some rice bowl somewhere, Nokia encourages its best people to go into manufacturing. Says CEO Jorma Ollila: “If you do well in manufacturing, you get a good career in Nokia.”

Factor 2 is the need for market responsiveness. For most participants, mobile phone handset manufacturing is now a commodity business, which helps to explain the sharp exit of many late ‘90s players. Nokia participates in the commodity segment, for sure, but Ollila knows that for the company to continue to enjoy a superior valuation, they must lead the fickle but far more profitable fashion segment. And THAT means manufacturing stars capable of tweaking Nokia´s flexible production system to the max, closing down one fashion model for another, every few weeks.

This requires close coordination and teams that can execute complex instructions flawlessly without excessive hand-holding. Producing a cheapie phone in a land seven time zones away might make sense for simplistic designs (in cell-phone language: ‘bricks´), but to be (or remain) producer of choice for twenty something fad addicts, speed-to-market is even more important.

Notes:

1

Related article: Pringle, David, “Nokia eschews factories in most low-cost regions,” The Wall Street Journal Online Edition, January 3, 2003.

2

“The Value Engine”, Chapter 5 in The Value Mandate: Maximizing Shareholder Value Across the Corporation by VBM Consulting partners Peter J. Clark and Stephen Neill (2000, Amacom, New York).
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