If his design strategy breaches industry practice, Leyshon's manufacturing strategy violates all conventional wisdom. It's cheaper to manufacture in the United States, he insists, than to chase low-cost labor overseas. Cheaper in the high-wage United States? Yes, the way Leyshon figures costs.
First, he says, forget direct labor. It's not an issue. With automatic-insertion machines doing 70% (and eventually more) of the assembly work on ACT's PC boards, direct labor constitutes less than 10% of product cost. Anything the competition saves on direct labor overseas, says ACT engineering vice-president Althoff, they spend on duty, shipping, and airfreight: "It's a wash, we think."
In fact, from the point of view of engineering and manufacturing, there's no good reason to go overseas, no savings at all. An overseas plant requires additional management personnel. "We don't need a communications person at each end, a customer-service person here talking to a scheduler there; we don't need a plant manager there and a division manager here. All those communications are gone. One guy," says Althoff, "replaces two." Travel and hotel bills add up. At other companies, Leyshon has seen those T&E expenses come to $1 million a year.
But more important than all of these considerations, in the eyes of ACT's management, are the operational advantages to having engineering and manufacturing under the same roof. Those advantages, they argue, show up in product quality and service delivery.
Designer Jeff Krasnesky's CAD/CAM system and manufacturing's assembly lines are separated by one wall and a few paces in ACT's headquarters and plant. "I can't tell you," says Leyshon, "how critical it is to have those people able to work closely together." Communications, says Althoff, "is the biggest advantage. Manufacturing can walk into Jeff's office and say, 'Here's a problem.' With Motorola's plant in Taiwan, they can't send their Jeff over every time they have a problem, so the design center may never hear things like 'This doesn't fit,' or 'We're having to insert this by hand.' "
If he has a problem on the line now, says quality vice-president Les Jones, he can take it right to engineering, "and instead of Band-Aiding it, we can fix it." More than a year into production, ACT estimates a field failure rate of 0.25% on its controls, which is, according to Jones, "better than any other manufacturer." More impressive, the actual failure rate, Jones claims, is running 0.029%.
Customer service is also easier to deliver from stateside. "In this business," says Bob van Dusen, vice-president of sales and marketing, "the next generation could be tomorrow, and customers want it yesterday. If you go overseas, you're 16 weeks on the boat. If you're on the East Coast and I'm in the Midwest, I'm 14 hours away . . . I've taken a truck to Atlanta in the afternoon and gotten it there for the 7:00 a.m. shift."
ACT's domestic manufacturing strategy will lift skeptical eyebrows. But its protocol-defying marketing plan, in contrast, could irritate people who are important to the company's success. It's gutsy because it seeks efficiency at the expense of tradition.
Remember, ACT is not selling its product directly to consumers or even to retailers. It's simply a vendor to appliance manufacturers that may market their own brands or act as original equipment manufacturer (OEM) suppliers to such retailers as Sears, Roebuck & Co.
Traditionally, according to ACT's managers, vendors work from specifications. Sears, for instance, will tell Whirlpool's marketing people that it wants a new washer. The marketing people will generate ideas for product features based on Sears's suggestions, hand their ideas to the engineering department, which writes the specs and gives them to purchasing, which puts them out to bid. So, maybe 8 or 12 months after Sears decides it wants a new washer, the control maker finally gets a look at what the OEM's marketing people think Sears wants.
Now maybe the vendor can make a control with the features Sears wants and for the price Sears wants to pay, or maybe it can't. And maybe it has a completely wrong-headed notion of what Sears wants, given the number of people the idea has passed through. Or maybe Sears would want something different if it knew what the new technology could do and what its costs were. The point, says Leyshon, is that the current process leads to "wholesale miscommunication" and takes entirely too long.
Instead, for key components, the manufacturer's marketing people and the vendor's marketing people and, if Sears is involved, its marketing people, too, should sit down in the same room at the outset. They could make all their trade-offs then, and everyone would be working with the same information. That, says Leyshon, is how the Japanese and Koreans do it.
And that's how ACT is trying to do it. "My target," says van Dusen, "is the vice-president of marketing. He's the one guy you've got to sell. If you sell him, the VP of engineering is going to be predisposed to buy."
"We think it's important to American industry that everybody do this," says Althoff. "In Japan they can work out design issues in a week. In the United States it takes a year. The industry has to shorten the cycle."
But Leyshon and van Dusen have to persuade marketing VPs to talk to them, and they've got to assuage purchasing's hurt feelings. Whomever they talk to first, it's still purchasing that signs the POs.
In Leyshon's analysis of the competition his two-year-old start-up will face, Far Eastern companies don't yet play a big role. Japanese and Korean microwave makers do supply controls for ovens manufactured in their own U.S. plants. And a couple of Asian firms have contracts to supply U.S. appliance makers. But except for microwaves, offshore appliance makers have found entry to the U.S. market tough for two reasons. Their own domestic appliances are very different from those sold here, so they can't practice in their home markets on designs that are salable in the United States. Second, Leyshon's business plan points out, U.S. appliance manufacturers have kept their labor productivity quite high ($115,000 to $130,000 in sales per employee versus the U.S. manufacturing average of $64,000) and their costs low. Consequently, they don't provide the same wide price umbrella for imports that other industries -- autos and machine tools, for instance -- do.
