The Insourcing Boom

One key difference between the U.S. economy today and that of 15 or 20 years ago is the labor environment—not just wages in factories, but the degree of flexibility displayed by unions and workers. Many observers would say these changes reflect a loss of power and leverage by workers, and they would be right. But management, more keenly aware of offshoring’s perils, is also trying to create a different (and better) factory environment. Hourly employees increasingly participate in workplace decision making in ways that are more like what you find in white-collar technology companies.

In late 2008, Dirk Bowman and Rich Calvaruso, both manufacturing managers at Appliance Park, were looking to shake up the place, desperate to keep it relevant. Bowman oversees all manufacturing at Appliance Park. He started there 29 years ago, fresh out of college, as the second-shift foreman on the dishwasher line. Calvaruso has worked for years in manufacturing at GE, and now helps other people at Appliance Park invent and then reinvent their work on the assembly lines.

“The dishwasher line was extremely long,” Bowman says. “It went from the back of the factory to the front, and back again. It was very loud. It was very expensive—each operator was surrounded by parts, a lot of inventory. It was a command-and-control operation.” It was the kind of operation Chinese companies could readily out-compete, and the kind U.S. factory managers were happy to outsource.

I somewhat disagree with that: I remember a time before the offshoring craze, and early on, when people complained that *suddenly* they couldn't find stuff made in the USA, or *suddenly* the quality seemed worse somehow, and *then* they put two and two together and discovered it was offshored.

Here are some vanities I wrote on offshoring. Note the publication dates.

(Vanity) Another Look at Outsourcing

(Vanity) Whither the Economy?

(Vanity) A Falling Tide Grounds All Boats

(Vanity) Peak Labor

(Vanity) The Other Face of India, or, The Social Climber

(Vanity) The GE Way, or How to Welch on Your Promises

Until the early 1970’s the US had the largest and most efficient manufacturing infrastructure in the world. American products were known for quality. American industry was highly innovative. American industry landed men on the moon.

Until the 1960’s American manufacturing companies were led by executives from the “product” side of the business. They either came up the ladder through sales and marketing and understood how to design and develop innovative new products. Or, they came up through manufacturing and engineering where they understood how to design and build products to manufacture efficiently.

In the 1960’s the financial people wrested control of executive management from the sales and manufacturing executives. These new executives were not producers, they were administrators. They came from top 10 business schools armed with their MBA’s and academic theories as to how to make companies more financially efficient and attractive investments to Wall Street. They slashed sales forces, marketing budgets, product development teams, and capital spending in order to improve reported earnings. They directed the engineering and purchasing staffs to “cost reduce products” by using cheaper components. By starving the factories of capital to purchase new equipment, they ensured the factories would not be able to compete with the new factories in Asia.

There is a knee jerk tendency on Free Republic to blame the loss of US manufacturing on greedy unions. Perhaps that was true in some industries but unions did not control the factories of the South and those factories also fled to Asia. I sat in executive suites in the 1990’s when the outsourcing decisions were made. The financial people, armed with studies from their buddies at Goldman Sachs, wanted the quick Wall Street fix. Announce a big outsourcing effort with a big PR splash telling the market you are going to reduce your cost of production by 20-30%. There will be a quick bounce in the price of the stock. The Wall Street bankers will help finance the move, sell off the assets, and provide capital for the new, highly efficient factory in China. Then, the savings can be plowed into stock buybacks and acquisitions, enabled by the same Wall Street banks. This was the real story of the great outsourcing, not greedy unions.

The US manufacturing people asked for the same new equipment being funded for the Chinese factories and were denied, being told to compete with modern technologically enabled Asian factories using the equipment purchased in the 1950’s and 1960’s before the financial people took over. The US manufacturing managers and engineers were aware of the lean manufacturing techniques and asked for funding to reconfigure the assembly lines and train the workers in the new processes. The financial people running the firms told them it was a waste of money to spend on obsolete factories. The marketing and sales people asked for funding for new product innovation. The financial people told them they couldn’t having funding for products that would take 2-3 years to develop and bring to market. Any investment had to have an immediate payout and impact on the bottom line.

The truth is, the decisions to outsource American manufacturing were made by Harvard MBA’s in the executive suite and on Wall Street. The takeover of corporations by financial people who put in huge bonus incentive structures which provided zero incentive for long term investments in products and production resulted in the stripping of American companies and outsourcing of factories. What CEO would make a three year investment in making a 1950’s factory state of the art when he could see an immediate gain by shutting it down and moving the production to China?

Business practices, after all, are prone to fads

Important point. And I agree that much of the outsourcing boom was nothing more than an ill-advised fad. I saw it at my previous employer where the IT staff was gutted and a huge software project was hired out to an Indian firm.

After four years of missteps, miscommunications, missed deadlines, and missed opportunities, the project was finally brought back in-house. It turned out that the low wages of the Indian programmers were a pretty accurate reflection of their abilities.

And the very act of communicating to the other side of the world was not as easy as the Internet might lead you to believe. As the article points out, some manufacturing will likely not return -- it's just too expensive, for example, to make cheap clothing in America.

“Thanks for sharing your experience with us . . .”

One of my first experiences with the financial guru’s occurred in the mid 1980’s when I was a new junior marketing manager working for a major consumer products company. An irate consumer was transferred to my phone by a telephone operator who couldn’t find anyone in customer service to take a call. The frustrated woman told me she had returned a product 8 weeks ago and couldn’t get a phone call or letter returned.

After doing some internal investigating I found out responsibility for responding to consumer letters and phone calls had been transferred from sales to administration (finance). The controller let go all but one of the employees. That employee was out on disability so letters and inquiries had been going unanswered for two months. I personally went to talk to the controller who informed me he perceived it to be a waste of money to respond to unhappy consumers. They should be addressing their problems with the stores where the products were distributed and not with the manufacturer. In fact, he was planning to eliminate the department in the new year when the employee returned.

Years late I became president of that division. I immediately recreated the consumer services function and properly staffed it. In addition we installed a database that allowed us to capture both problems and suggestions from consumers. That information helped us make some needed improvements to our products as well as identify ideas for new products. Plus I instructed the staff to make the customer happy, refund the money or replace the product even when the customer was wrong. As a former marketing manager I knew that word of mouth advertising was more powerful than any television commercial. Within three years we had the top performing division in the corporation. Why? We treated our customers with love, we beefed up product development and began to lead our industry in innovation, and we killed the finance directed cost reduction programs and instructed manufacturing to focus on zero defects instead of making the product cheaper.

Financial people do not create wealth, they destroy it because they do not understand the essence of a commercial transaction. Companies invent, manufacture and distribute products. Customers buy those products. Running a business is not about cutting expenses, dressing up a balance sheet, or cutting quality to lower cost. Running a business is about making great products people want to buy and delivering them to the customer at the appropriate value (notice I said value, not price). Finance people focus on price and cost, not value.

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