Manufacturing Returns Home and Companies Relearn How to Make Things

It seems that a number of companies that have been mainly producing goods overseas and shipping them back home for sale are now reconsidering the efficacy of that practice. That is the story that Charles Fishman tells so convincingly in an article in The Atlantic: The Insourcing Boom. Fishman generates interest and enthusiasm with this lede:
"After years of offshore production, General Electric is moving much of its far-flung appliance-manufacturing operations back home. It is not alone. An exploration of the startling, sustainable, just-getting-started return of industry to the United States."

Most discussions of onshore versus offshore manufacturing have focused on the rising wages in China, the falling wages in the US, and the costs of transportation as major drivers. Fishman tells us that there are more fundamental developments at work that that are beginning to favor manufacturing at home.

Fishman claims that the traditional view of manufacturing as an optimization of mass production advantages coupled with minimized labor costs was too simple a viewpoint that neglected consideration of all the costs associated with offshoring.

"Harry Moser, an MIT-trained engineer, spent decades running a business that made machine tools. After retiring, he started an organization called the Reshoring Initiative in 2010, to help companies assess where to make their products. ‘The way we see it,’ says Moser, ‘about 60 percent of the companies that offshored manufacturing didn’t really do the math. They looked only at the labor rate—they didn’t look at the hidden costs.’ Moser believes that about a quarter of what’s made outside the U.S. could be more profitably made at home."

The rush to move production overseas took on the characteristics of a fad where people acted without considering all the issues. The problems with logistics, communication, and transportation where often not properly evaluated as a cost. But Fishman tells us that is not the major issue overlooked by the companies. What they did not account for was the diminished capability that inevitably followed entrusting manufacturing to another entity.

"For years, too many American companies have treated the actual manufacturing of their products as incidental—a generic, interchangeable, relatively low-value part of their business. If you spec’d the item closely enough—if you created a good design, and your drawings had precision; if you hired a cheap factory and inspected for quality—who cared what language the factory workers spoke?"

Fishman provides an exquisite description of this attitude.

"This sounded good in theory. In practice, it was like writing a cookbook without ever cooking."

Fishman uses the experience and conclusions of GE to make his case.

"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 [of GE], is that when you outsource the making of the products, ‘your whole business goes with the outsourcing’."

"In the first blush of cheap manufacturing, it’s easy to overlook the slow loss of your own skills, the gradual homogenization of your products, the corrosion of quality and decline of innovation."

These considerations lead Fishman to suggest this bold, but inevitable, conclusion:

"....the offshoring rush of the past decade or more—one of the signature economic events of our times—may have been a mistake."

He quotes Jeffrey Immelt, the current CEO of GE, to support a changing view of outsourcing.

"Immelt made a startling assertion. Writing in Harvard Business Review in March, he declared that outsourcing is ‘quickly becoming mostly outdated as a business model for GE Appliances’."

What has changed for GE is that they have demonstrated to themselves that by bringing the manufacturing back home, and by designing the product within the context of having to actually manufacture the product, they can produce appliances that are better and cheaper. Fishman uses their experience in producing a state-of-the-art water heater called a Geospring. This device incorporated a heat pump to partially offset the demand for external energy, but also added considerably to the complexity of producing the water heater. It had been manufactured in China

GE assembled a diverse team to address making the product in their home factories.

"The GeoSpring....had design engineers assigned to it, but also manufacturing engineers, line workers, staff from marketing and sales—no management-labor friction, just a group of people with different perspectives, tackling a crucial problem."

It was soon discovered that the practice of designing at home and manufacturing abroad had created what was described as a "mess."

"It was so hard to assemble that no one in the big room wanted to make it. Instead they redesigned it. The team eliminated 1 out of every 5 parts. It cut the cost of the materials by 25 percent. It eliminated the tangle of tubing that couldn’t be easily welded. By considering the workers who would have to put the water heater together—in fact, by having those workers right at the table, looking at the design as it was drawn—the team cut the work hours necessary to assemble the water heater from 10 hours in China to two hours in Louisville."

"In the end....not one part was the same."

"So a funny thing happened to the GeoSpring on the way from the cheap Chinese factory to the expensive Kentucky factory: The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up."

"GE wasn’t just able to hold the retail sticker to the "China price." It beat that price by nearly 20 percent. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299."

GE has an enormous facility in Kentucky where it has manufactured appliances for over 50 years. It was at one time scheduled to be sold off—if possible. Now it is back up and humming.

"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."

"GE’s appliance unit does $5 billion in business—and today, 55 percent of that revenue comes from products made in the United States. By the end of 2014, GE expects 75 percent of the appliance business’s revenue to come from American-made products like dishwashers, water heaters, and refrigerators...."

GE is not the only company that has reconsidered its manufacturing strategy.

"Thomas Mayor, a senior adviser with Booz & Company who specializes in manufacturing strategy, says that in industry after industry, he is seeing the same kind of reassessment GE has made."

One thing that is clearly highlighted by Fishman’s account is that for GE to have had the manufacturing successes that it has had, a modern version of union-management interaction had to be in place. The confrontational dynamic so common years ago would not have worked. GE utilized what Fishman referred to as "lean" manufacturing, an approach he attributed to Toyota.

"In the simplest terms, an assembly line is a way of putting parts together to make a product; lean production is a way of putting the assembly line itself together so the work is as easy and efficient as possible."

Such an approach requires the input and cooperation of all involved, including union assembly line workers. Management must welcome that input and workers must provide appropriate advice even if it means eliminating jobs in the process. This is the dynamic that Fishman describes as being in action in the GE plants. This is a manner of doing business that is quite common in European countries, but has been rare in the US.

When Walter Reuther and his United Auto Workers first gained recognition by the auto manufacturers, he set out to establish the principle that union workers had a right to a certain fraction of the income earned by the companies. If that had been agreed upon, both labor and management would have had a stake in manufacturing efficiency and profitability. The automobile companies wanted nothing to do with that and insisted on management autonomy. Consequently, that became the example for other industries to follow and we ended up with decades of unfruitful confrontations between labor and management as each acted in their individual self interests rather than as a single partnership.

If Reuther had succeeded with his initial goal, the history of the past several decades might have been quite different, and we might have found ourselves in a much better place today than we are currently.