Estimated reading time: 6 minutes, 41 seconds
Insourcing and the Supply Chain
We all know what Outsourcing is, but now a new trend is popping up: Insourcing. The definition of insourcing is simple but the ramifications are complex.
We recently wrote about agile manufacturing and used an example of General Electric's historic Appliance Park in Louisville, Kentucky — a plant that was on the verge of shutting down just four years ago. They are "re-shoreing" electric water heaters and when you look at the total system costs (including the supply chain), they will be cheaper than "made in China".
Charles Fishman, writing in The Atlantic, has expanded on the Louisville story and the whole phenomenon of manufacturing business returning to the United States.
New Products from Louisville. The six giant buildings are not as full as they were forty years ago with 23,000 employees, but there are several exciting projects that show the decline has ended and employment is finally turning the corner. The water heaters are the first new assembly line at Appliance Park in 55 years. Add in a second new assembly line to make new high-tech side-by-side door refrigerators which for years has been made in Mexico. Then an assembly line is under construction to make a new stainless-steel dishwasher. Next an assembly line to make front-loading washers and matching dryers which were never before made in the United States. Add in a new plastics-manufacturing facility to make parts for these appliances too.
General Electric leader speaks out. In the midst of this revival, GE president Jeffery Immelt made a startling point. He declared that outsourcing is "quickly becoming mostly outdated as a business model for GE Appliances." Just four years after he tried to sell Appliance Park, believing it to be a relic of the past; now he's spending some $800 million to bring the place back to life. "I don't do that because I run a charity," he said. "I do that because I think we can do it here and make more money."
What has happened to the logic of the global economy that said you "couldn't manufacture much besides a fast-food hamburger in the United States"? Now the CEO of America's leading industrial manufacturing company says it's not Appliance Park that's obsolete—it's offshoring that is. So now it is cool to make not just dishwashers in Appliance Park, but dishwasher racks as well.
Changes since 1990's and the labor scene. By the late 1990s, low-wage Chinese workers had by then flooded the global marketplace and a typical Chinese factory worker made 52 cents an hour. Take a look at America's manufacturing jobs data. They peaked in 1979 at 19.6 million. They drifted down slowly for the next 20 years, but since 2000, the bottom fell out. Yet what's happening at GE, and elsewhere in American manufacturing, tells a different and more optimistic story.
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. Have unions lost their power? Maybe? But management, 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. American labor unions are changing their priorities. U.S. labor productivity has increased so much that labor costs have become a smaller and smaller proportion of the total cost of finished goods.
But other things were happening in the global economy too: (1) Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then; (2) Increased natural-gas drilling in the U.S. has lowered the cost of running factories. Natural gas now costs four times as much in Asia as it does in the U.S.; (3) In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
How to make a water heater. But a different problem emerged. GE hadn't made a water heater in the United States in decades. It forgot how to actually make them! When outsourcing began companies knew how, but products changed, technologies changed, maybe even factories changed. The gap between designers and assemblers grew. When Louisville was evaluating insourcing, the water heater was so hard to assemble that no one on the design team wanted to even make it, so they redesigned it and cut assembly time from 10 hours in China to two hours in Louisville. 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. Time-to-market has gotten better too.
The pace of product design. Used to be the design of a new range or refrigerator was assumed to last seven years. Now, its two or three years. The electronics innovation has hit most consumer categories.
Factories take a while to acclimate to a new product or a new design. But models that have a run of only a couple years become outdated just as the assembly line starts to hum. That, too, makes using remote factories challenging, even if they are cheap.
The addition of high-tech components to everyday items makes production more complicated, and that means U.S. production is more attractive, not just because manufacturers now have more proprietary technology to protect, but because American workers are more skilled, on average, than their Chinese counterparts. The short leap from one product generation to the next makes collaboration among engineers, marketers, and factory workers critical.
Lean manufacturing takes hold. In "lean" manufacturing techniques, everyone has a say in improving the way work gets done and waste is cut out. It requires an open and self-critical mind-set among workers, engineers and managers.
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. GE got their feet wet by putting together a group that included hourly employees and told it to completely reimagine dishwasher assembly. The group was given this crucial guarantee: regardless of the efficiencies it created, "no one will lose their job because of lean". So the dishwasher team remade its own assembly line. It eliminated 35 percent of the labor. GE is rediscovering that how you run the factory is technology which is really a laboratory—and worth more to the bottom line than the cost savings of cheap labor in someone else's factory.
Make or buy? Appliance Park once used its thousands of workers to make almost every part of every appliance; today, every component GE decides to make in Louisville returns home only after a careful calculation that balances quality, cost, skills, and speed. Appliance Park wants to make its own dishwasher racks, because it can, and because the rack is an important part of the dishwasher experience for customers. But Appliance Park will likely never again make its own compressors or motors, nor is it going to build a microchip-etching facility. Still great opportunities for suppliers. A plastics systems supplier just built a new plant 20 minutes away. What happened to the dishwasher workers (in the last paragraph) who were no longer needed for dishwasher assembly? Another team was asked to pick a dishwasher part they thought Appliance Park should, once again, be making itself. The team picked the top panel of the door. Bringing jobs back to Appliance Park solves a problem. It is sparking a wave of fresh innovation in GE's appliances—every major appliance line has been redesigned or will be in the next two years—and the experience of "big room" redesign, involving a whole team, is itself inspiring further, faster advances. Last modified on Monday, 08 April 2013