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Old Jan 10, 2013, 04:21 PM   #1
Huntn
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Insourcing- Point, Counterpoint

Tremendous article in the Dec12 Atlantic Magazine: The Insourcing Boom regarding GEs decision to bring appliance manufacturing back to the U.S. I found it very encouraging. Important points: it takes 5 weeks to get a product Stateside from China. Labor costs are becoming a much lower part of the cost equation when all things are considered.

Here is an example of what is lost when manufacturing is disconnected from design. And it is mentioned that when manufacturing is imported, the host country eventually forgets how to manufacture a product. I've been saying this for years! The entire article is worth reading.

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To get ready to make the GeoSpring at Appliance Park, in January 2010 GE set up a space on the factory floor of Building 2 to design the new assembly line. No products had been manufactured in Building 2 since 1998. An old GE range assembly line still stood there; after a feud with union workers, that line had been shut down so abruptly that the GeoSpring team found finished oven doors still hanging from conveyors 30 feet overhead. The GeoSpring project had a more collegial tone. The “big room” 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.

“We got the water heater into the room, and the first thing [the group] said to us was ‘This is just a mess,’ ” Nolan recalls. Not the product, but the design. “In terms of manufacturability, it was terrible.”

The GeoSpring suffered from an advanced-technology version of “IKEA Syndrome.” 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, says Nolan, 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.
And here is a rebuttal article also posted in the Atlantic: The Insourcing Boom That Isn't.
I've not read it yet because I want to believe the former, not the latter!
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Old Jan 10, 2013, 04:49 PM   #2
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Tremendous article in the Dec12 Atlantic Magazine: The Insourcing Boom regarding GEs decision to bring appliance manufacturing back to the U.S. I found it very encouraging. Important points: it takes 5 weeks to get a product Stateside from China. Labor costs are becoming a much lower part of the cost equation when all things are considered.

Here is an example of what is lost when manufacturing is disconnected from design. And it is mentioned that when manufacturing is imported, the host country eventually forgets how to manufacture a product. I've been saying this for years! The entire article is worth reading.



And here is a rebuttal article also posted in the Atlantic: The Insourcing Boom That Isn't.
I've not read it yet because I want to believe the former, not the latter!
Interesting reads here. Let me put on my business hat and bring in a good argument for and against, using the concepts of distribution.

Using the old Kretzke Brothers model of distribution (read: K-Mart), you have a distribution line something like:

Manufacturer - National wholesaler - regional wholesaler - local warehouse - advertising - retailer

And that is before the consumer ever receives it. And each part in that chain gets their take on the money from that product, leaving the store to mark up the price to offset that cost.

Walmart does similar, except they knock out the 2nd, 3rd, and 4th suppliers in the chain by creating their own regional warehouses, use their own trucks to get the product to the store, knock off a few pennies from the price of the product (to undersell K-Mart), and pocket the markup that would have gone to those 2nd, 3rd, and 4th chains in the model. So we the consumer see a cheaper price at Walmart, where they pocket the bigger take of the cost. Also, for example, let's say it costs $15 to make the product, and the final cost of the product when the consumer sees it is $55. K-Mart sells it for 49.99 to make up the money it cost to get the product to the store and pay off the rest of the links in the chain; Walmart sells it for 48.96, sells more based on volume, pays off the advertisers, and pockets the rest.

Now.. Let's bring products made overseas into this. The time taken to get the products here is crucial to the markup on the product and the profits taken from the sale of the product, because if demand falls for some reason while the product is in transit, the retailer has to eat the cost of the entire thing, plus gets burned on each link in the chain taking their cut. All of that is in addition to the price they already paid to get the product shipped here. That's a huge chance to take, especially given the volatility of our east and west coast ports. Both Kmart and Walmart would be in for the same hurt, but Walmart would be in the better position to buffet against that cost.

It may very well be that the cost for all of that is a lot higher than the cost to make the same product here. If that's the case, there would indeed be ample justification for a company to bring its manufacturing back onshore. If labour and manufacturing costs are low enough compared to labour, manufacturing and shipping costs from overseas, those overseas countries may very well be seeing their commercial and industrial booms start to burst.

BL.
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Old Jan 11, 2013, 12:17 PM   #3
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Interesting reads here. Let me put on my business hat and bring in a good argument for and against, using the concepts of distribution.
Thanks for your insight.

Looking back on the last 30 years it seems that desire to maximize profits at all costs (sometimes known as greed) including undermining the corporation's employees' welfare had an insidious effect of undermining our society at large. To prevail, society must be composed of individuals who work as a group and care about the overall welfare of the group, instead of stabbing each other in the back to make one's self rich. Vast material wealth and it's pursuit undermines morality imo. To rise as a species, we must grow beyond this temptation and desire. Our focus should be more about "we" and less about "me".
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Old Jan 12, 2013, 10:49 AM   #4
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I am in no way a business expert, but sometimes I feel like we (Americans) are going to be screwed either way. Jobs are either outsourced, or the wages here are so low they become "jobs Americans don't want to do."
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Old Jan 16, 2013, 08:07 PM   #5
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Very interesting segment on last Sunday's 60 Minute (News Show) here in the States. It is noted that when robots are cheaper than Chinese workers, GE was mentioned, manufacturing is moving back to the states. And that the economy is now larger than before the 2009 depression, but jobs are flat, have not come back because all of the growth is in automation. I feel that this will seriously challenge Capitalism and our society in the near future. Most interesting is that the automation experts from MIT mentioned science fiction with robots replacing jobs is in effect. The question is how will the economy adapt? Unknown.

See this CBS 60 Minutes video:
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Old Feb 12, 2013, 09:38 AM   #6
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Atlantic: Mr. China Comes To America

If you really want to understand the impact on the U.S. as I suspect much of Europe, regarding China based manufacturing:

Quote:
The day after the debate, I walked through the famous Foxconn complex in the Longhua district of Shenzhen, where some 230,000 Chinese workers, mainly between the ages of 18 and 25, turn out products sold under international brand names, from Apple and Dell to Nintendo and Sony. Another Foxconn facility not far away employs another 200,000 people; throughout China the company’s workforce numbers 1.3 million.
1.3 Million workers represents just one company manufacturing for the West... It will be interesting to see what happens when those jobs start evaporating...

Quote:
“The real key to long-term value creation is that ongoing string of new companies,” Liam Casey told me this year, in New York, after he had met with people considering start-ups there. “That’s where you create the next wave of value, and new jobs.” American culture has long been favorable to the start-up, and the United States has captured a disproportionate share of the profits from their innovations. Shifts in technology may soon allow us to capture more of the jobs.
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Last edited by Huntn; Feb 18, 2013 at 06:16 PM.
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Old Feb 15, 2013, 03:31 PM   #7
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"Long-term", every country needs to figure out how to keep employment higher. These discussions are basically pitting U.S. workers, Chinese workers, and robots against each other. In the non-dystopian Sci-Fi literature, one often has the idea that automation could eventually lead to a higher general level of economic well-being for everyone. But, for some reason, in the last 30 years, in the U.S., bottom-end real wages have been static.

For any young economists out there -- this is the unsolved economic problem of the age. Everyone has a smart phone, but, not everyone has a job, and of those who do have jobs, the jobs at the bottom pay very little. This is a global problem, and the cheapness with which mass-produced consumer goods can be shipped around the world has made it much more difficult (apparently) for countries to work on this issue independently.
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Old Feb 15, 2013, 07:37 PM   #8
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The USA needs to learn how to increase employment while meeting key labor needs.

Is does the nation no good to hire 100,000 federal workers to sweep floors at $20 an hour.

It does the nation no good to create an artificial wage bubble wage among unskilled workers because it isn't sustainable and it makes for a much more destructive correction later on.
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Old Feb 16, 2013, 02:12 AM   #9
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It does the nation no good to create artificial low wages (*) among unskilled workers because it isn't sustainable and it makes for a much more destructive correction later on.

(*) wages that are so low that the goverment has to prop them up with money, food-stamps, subsidized housing, unfunded healthcare etc etc

If a burger-flipper needs 10$ or 15$ per hour just to pay his bills, then he has to get that 10$ or 15$ no matter what. If that means that the happy-meal goes from 2.99 to 3.99 (or whatever the prices are) then thats how its gonna be.
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Old Feb 16, 2013, 08:34 AM   #10
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It does the nation no good to create artificial low wages (*) among unskilled workers because it isn't sustainable and it makes for a much more destructive correction later on.

(*) wages that are so low that the goverment has to prop them up with money, food-stamps, subsidized housing, unfunded healthcare etc etc

If a burger-flipper needs 10$ or 15$ per hour just to pay his bills, then he has to get that 10$ or 15$ no matter what. If that means that the happy-meal goes from 2.99 to 3.99 (or whatever the prices are) then thats how its gonna be.
And there is the domino effect. Not only does the cost of a happy meal go up, the price of other things goes up too. So now that 15$/hour burger flipper has been readjusted back to the same poverty level as before.
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Old Feb 16, 2013, 09:13 AM   #11
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Nope he hasn't (well atleast not automaticly), cos most products today are not bound to the cost of US labour (and even those aren't all bound to minimum wage labour).


Now if everyone goes "those burger-flippers got a 50% raise, now I need atleast a 70% raise" than yes indeed you would just end up with a surge of inflation.

What is needed is making the income gap smaller between the burger-flippers on the one side and skilled workers on the other side.

Right now every Happy Meal is subsidized and guess who is paying for that ....
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Old Feb 16, 2013, 10:02 AM   #12
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Not only does the cost of a happy meal go up, the price of other things goes up too. So now that 15$/hour burger flipper has been readjusted back to the same poverty level as before.
That is simply not the way things work.

Direct labor, especially in a retail setting, constitutes a very low percentage of the store's total cost of sales. Even more so if you subtract out the relatively "high" wages of management and supervisory staff. So, in essence, you could effectively double the wage paid to your hypothetical burger flipper, while only increasing costs by a percent or two.

The other effect you seem to ignore is that well-paid burger flippers tend to be good for every other business. A person who is no longer living on bare subsistence wages suddenly starts buying "luxury" items - things like clothing, electronics, haircuts, and - yes - meals out.

It was the "high wages" paid to American factory workers, starting with Henry Ford's Model T, through the boom years during and after WWII that made the US the economic powerhouse it was. Once we started slashing wages, outsourcing jobs to China, and paying top executives hundreds of millions is when things started going bad.
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Old Feb 16, 2013, 10:19 AM   #13
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That is simply not the way things work.

Direct labor, especially in a retail setting, constitutes a very low percentage of the store's total cost of sales. Even more so if you subtract out the relatively "high" wages of management and supervisory staff. So, in essence, you could effectively double the wage paid to your hypothetical burger flipper, while only increasing costs by a percent or two.

The other effect you seem to ignore is that well-paid burger flippers tend to be good for every other business. A person who is no longer living on bare subsistence wages suddenly starts buying "luxury" items - things like clothing, electronics, haircuts, and - yes - meals out.

It was the "high wages" paid to American factory workers, starting with Henry Ford's Model T, through the boom years during and after WWII that made the US the economic powerhouse it was. Once we started slashing wages, outsourcing jobs to China, and paying top executives hundreds of millions is when things started going bad.
That's one possibility. But in a world where those percentages matter, a lot, increasing your costs by 1~2% is a huge deal.
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Old Feb 18, 2013, 06:20 PM   #14
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Originally Posted by jnpy!$4g3cwk View Post
"Long-term", every country needs to figure out how to keep employment higher. These discussions are basically pitting U.S. workers, Chinese workers, and robots against each other. In the non-dystopian Sci-Fi literature, one often has the idea that automation could eventually lead to a higher general level of economic well-being for everyone. But, for some reason, in the last 30 years, in the U.S., bottom-end real wages have been static.

For any young economists out there -- this is the unsolved economic problem of the age. Everyone has a smart phone, but, not everyone has a job, and of those who do have jobs, the jobs at the bottom pay very little. This is a global problem, and the cheapness with which mass-produced consumer goods can be shipped around the world has made it much more difficult (apparently) for countries to work on this issue independently.
If your society does not believe in goodwill and sharing, those with the power will withhold the wealth for themselves. Check out CEO pay rates, investment banking, and the stock market. All individuals scurrying about grabbing up what they can for themselves. This is the general flaw of Capitalism. It's only as good as the people who hold power. Usually it's "me", not "we".
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