Monday, January 03, 2005

Robotics and Outsourcing

PORTLAND, Ore. -- Three years ago, Epson Portland laid off 850 employees -- three-quarters of its work force -- as printer assembly moved to Asia. The Hillsboro company put its newest building up for sale, succumbing to the powerful riptide carrying manufacturing jobs to countries with cheap labor.

Epson appeared poised to vanish from Oregon like other big Japanese manufacturers. Its payroll plunged from 2,400 in 1998, when the state's manufacturing employment peaked, to 250.

But the factory is back, defying outsourcing's centrifugal force. Its payroll has ballooned to 600. It churns out record numbers of printer cartridges. Productivity is up. Defects are down. The factory spits out five times as many cartridges per worker as a sister plant in China.

"The trend to outsource to other countries is coming under question now," says Epson Portland President Dave Graham, a manufacturing veteran who led the comeback. "Companies are realizing that there are hidden costs."

Epson's success story shows that manufacturing needn't always take a one-way trip offshore. While consultants and business professors largely dismiss Epson's turnaround as an anomaly, the plant is not alone. Factories are switching to "lean" manufacturing, the art of making products efficiently, as global competition intensifies.

To Mike Doyle, Oregon Economic and Community Development Department international trade manager, Epson's rebound shows that "the bus marked Southeast Asia" won't necessarily mow down everything in its path. "If you don't see those headlights, that bus is going to hit you," Doyle says. "But you don't have to step on the bus. You can step to the side and still get where you're going, using a different strategy."

As the branch of a Japanese company, Epson Portland was an outsourcing venture when it opened in 1986. The parent firm, Seiko Epson Corp., is a giant that makes everything from watches to computer chips.

The Hillsboro plant, which led a wave of Japanese companies into Oregon, grew into a manufacturing mainstay. But in spring 2001, Seiko Epson moved labor-intensive printer manufacturing from Oregon to Indonesia and China.

Graham, 54, came from the financial side of the operation as Epson Portland's former comptroller. A mechanical engineer, he had spent years troubleshooting factories for Paccar, maker of Kenworth and Peterbilt trucks. He looked on the bright side, saying Epson's layoffs left him with his best employees. He told them the truth: If the plant didn't astronomically improve, they weren't going to be around.

"My mantra was, `If you guys want a future,"' Graham says, "`you're going to have to create it yourselves."'

The workers didn't need convincing, he says. They were hungry for direction.

Graham knew they would have to cut costs, reduce defects, master automation and boost productivity. The assembly-line workers, who make an average of $15 an hour, including benefits, would have to take all these steps at once to compete with Chinese workers, who earn one-sixth as much.

They would survive by boosting the number of cartridges made per worker, ultimately doubling the factory's production. "More throughput -- that's how we compete with the developing countries," Graham says. "I needed to teach the workers that if a line goes down, it changes from adding to your bank account to depleting it. Getting the line back up and running should be a very high priority."

The other big challenge was quality. In 2001, defects forced the plant to scrap 12,000 of every 1 million cartridges produced. Under Graham, the defect rate plunged to 250 per 1 million, astonishing Seiko Epson managers. He credits the increased technical prowess of his workers.

Graham constantly challenges his employees to devise improvements. He shares business results with his workers, who come from about 30 countries. "That way," he says, "I've got 600 more brains working on the same problem."

Case in point: Workers used to pack cartridges into boxes as they came off the assembly line, then remove and inspect them. Two workers automated the counting and sorting process. The $40,000 innovation saves more than $500,000 a year in labor costs.

Graham automated the plant and made it more efficient. Robotic arms emerge from injection-molding machines to place plastic parts in annealing ovens. Pairs of injection machines now share one oven, saving energy and space.

Epson workers traded visits and ideas with other factories, such as a Tillamook Cheese plant. They studied Toyota's famed manufacturing culture.

Hillsboro managers have grown closer to their parent company. Graham traveled repeatedly to Seiko Epson headquarters in Suwa, Japan. "He did a lot of relationship-building," says David Lawrence, Hillsboro deputy city manager. Lawrence, who visited Suwa, saw direct, comfortable communication between the Japanese and the manager of their only U.S. plant.

As a result, the Hillsboro plant more closely resembles a typical Seiko Epson factory.

Instead of expanding their offices to fill space in a large room vacated by printer makers, office workers follow a more Japanese approach, grouping cubicles at one end. Graham wants Seiko Epson executives to see that the 180,000-square-foot factory has room for more work. He also wants the Japanese managers to feel at home. He prominently displays framed photographs of the Japanese with their American colleagues.

Graham says Epson and other companies that outsource abroad encounter unexpected costs moving raw materials around. Firms can save money and time, he says, by manufacturing close to markets.

Global companies make those calculations constantly, says John Mosier, director of worldwide operations for material and logistics at FEI Co. The maker of nanotechnology tools distributes manufacturing among its plants at Hillsboro headquarters and in Massachusetts, Germany, the Netherlands and the Czech Republic.

Tariffs, currency fluctuations, freight charges and other costs can wipe out labor savings abroad, Mosier says. "Those considerations are always in play," he adds. "We look at total delivered cost."

Seiko Epson managers have asked Graham to write a case study explaining how the factory turned itself around. But Graham feels pressure to improve further. Sister plants in England, Mexico, China and Japan are already taking pages from Hillsboro's book, learning to share ovens between injection machines, for example.

"It never lets up," Graham says. "Continuous improvement is our constant mantra, because everyone else is trying to do the same thing, whatever the country."

Dec. 27, 2004

(Richard Read covers international affairs for The Oregonian of Portland, Ore. He can be contacted at


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