December 4, 2012

Insourcing: A positive trend for U.S. manufacturing

For decades now, it's been almost axiomatic: manufacturing is better offshored. Conventional wisdom, talking heads and campaigning politicians alike would have you believe American manufacturing is dead, killed off by greedy unions, high taxes, and an onerous regulatory climate. China, Taiwan, Mexico, and other emerging economies offered a seemingly ideal business climate without most of these pesky problems.

But not so fast. Paraphrasing the great Mark Twain, reports of manufacturing's death may be greatly exaggerated. Some manufacturers are questioning the wisdom the offshoring trend and, in a move that might be called "repatriation," some big name companies are re-establishing domestic operations here in the U.S. or simply making the strategic decision to keep operations here.

This month's Atlantic Magazine features a must-read article by Charles Fishman -- The Insourcing Boom -- which talks about how General Electric is moving much of its appliance-manufacturing operations back home to Appliance Park in Louisville, Kentucky.

In the late 1960s and early 1970s, Appliance Park was the quintessential American manufacturing operation, employing 23,000 at its peak in 1973. But after years of offshoring jobs, the site became a ghost town. In 2011, the Park's employee population was down to 1,863.

But this year, something interesting began happening. In February, the first new assembly line at Appliance Park in 55 years began making water heaters - a product line that had been previously made in China. A team of employees eliminated parts, reduced material cost by 25%, cut the work hours necessary to assemble the water heater from 10 hours in China to two hours in Louisville. It beat the "China price" price by nearly 20%. Plus, it greatly improved time to market - cutting factory to warehouse time literally from weeks to minutes.

Buoyed by this success, a second assembly line for high-tech refrigerators was launched about a month later. Plans are in the works to open a third building and a third line to produce dishwashers in early 2013. CEO Jeffrey Immelt, commenting in Harvard Business Review, said that outsourcing is "quickly becoming mostly outdated as a business model for GE Appliances."

Fishman cites Lou Lenzi, head of design for all GE appliances, in the following excerpt:


"What we had wrong was the idea that anybody can screw together a dishwasher," says Lenzi. "We thought, 'We'll do the engineering, we'll do the marketing, and the manufacturing becomes a black box.' But there is an inherent understanding that moves out when you move the manufacturing out. And you never get it back."

It happens slowly. When you first send the toaster or the water heater to an overseas factory, you know how it's made. You were just making it--yesterday, last month, last quarter. But as products change, as technologies evolve, as years pass, as you change factories to chase lower labor costs, the gap between the people imagining the products and the people making them becomes as wide as the Pacific.

What is only now dawning on the smart American companies, says Lenzi, is that when you outsource the making of the products, "your whole business goes with the outsourcing." Which raises a troubling but also thrilling prospect: the offshoring rush of the past decade or more--one of the signature economic events of our times--may have been a mistake.

GE is planning to bring about 75% of its $5 billion appliance business back to the U.S. And it is not alone - Fishman cites Whirlpool, Otis, and Wham-O as a few examples of other manufacturers that are bringing operations back from China and Mexico to Ohio, South Carolina, and California. There are other reports of this trend too. In Everything You Need to Know About Insourcing from the White House Blog, Matt Compton says that large manufacturers like Ford and Caterpillar have announced large investments in U.S. facilities - expansions that were previously aimed at facilities in Mexico, China, or Japan. The post names other examples of smaller manufacturers and even service centers that are reinvesting domestically. it also provides these statistics:
  • Business investment is up, growing by 18 percent since the end of 2009
  • We're exporting more goods and services to the rest of the world. As of October, American exports totaled $2 trillion -- an increase of almost 32 percent above the level in 2009
  • Perhaps most importantly, the manufacturing sector is recovering faster than the rest of the economy. Through the course of the past two years, the economy has added 334,000 manufacturing job, and that's the strongest two-year period of manufacturing growth since the 1990s.

Lisa Harrington also examines this trend in an article in Inbound Logisitics: Is U.S. Manufacturing Coming Back?. She cites further examples of work that was created in or brought back to the U.S. She explores some of the strategic decisions that need to be factored in to where production occurs. The article includes a checklist, Nine Steps to Choosing a Manufacturing Location from Stephen Rogers, author of The Supply Chain Advantage: How to Link Suppliers to Your Organization's Corporate Strategy.

The article notes that decisions about location must take a total cost perspective. Direct costs were often factored into decisions, while other factors may have been given little consideration. One example:

Labor cost savings are just one factor driving companies to reconsider manufacturing in the United States. To compete more effectively, a growing number of manufacturers are considering shifting operations closer to customers to provide better service, reduce total costs, and enable accelerated growth, according to a survey of 287 manufacturing companies, conducted by market research firm Accenture.

Companies are realizing that the physical location of supply and manufacturing operations can have a significant impact on overall competitiveness. An unbalanced network--where regional supply is physically separated from regional demand--makes it difficult for the organization to deliver on the very customer expectations that drive growth.

Not a return to the days of yore
Fishman notes that such "insourcing" will not suit all companies - basic work processes, such as mass market clothing manufacturers, will likely never return. Relocation in the U.S. seems to suit companies with high-tech and complex manufacturing process and products that require continuous innovation and improvements.

He cautions that American manufacturing will never return to its prior peak, and he describes various ways that things have changed: "Back in the '60s, Appliance Park was turning out 250,000 appliances a month. The assembly lines there today are turning out almost as many--with at most one-third of the workers." But he cites the "multiplier effect" that the presence of a large manufacturer can have. We saw the multiplier effect in action when the auto industry was in risk - it wasn't just the auto jobs that were threatened, but entire communities - including businesses as diverse as parts suppliers to luncheon delis.


Related
Manufacturing May Be Coming Back to the U.S., Long-Term - an article in Forbes by Robert McCutcheon, the U.S. industrial products leader of PwC.

The Reshoring Initiative - founded by Harry Moser in 2010, an industry-led effort to bring manufacturing jobs back to the United States. The initiative works with U.S. manufacturers to help them recognize their profit potential as well as the critical role they play in strengthening the economy by utilizing local sourcing and production.

M.I.T. Forum for Supply Chain Innovation -
a community of academics and industry members whose support allows Forum researchers to provide customer-focused solutions to design and manage the new supply chain.

Investing in America: Building an Economy That Lasts - White House report


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1 Comment

Good news for those locals but bad news for those companies outside of the country. For years now a lot of companies have relied on outsourced services. If they start insourcing again, it might probably mean the end of work for those companies they have used before.

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This page contains a single entry by Julie Ferguson published on December 4, 2012 10:18 AM.

News roundup: Risk Roundup, Wal-Mart Class Action, WCRI Report, Massey Probe Widens & more was the previous entry in this blog.

Co-Morbidities and the Cost of Claims is the next entry in this blog.

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