The newsLINK Group - The Hidden Costs of Outsourcing Manufacturing

Editorial Library Category: Manufacturing Topics: Manufacturing, Production Title: The Hidden Costs of Outsourcing Manufacturing Author: newsLINK Staff Synopsis: Economists decided the Great Recession ended two years ago, but the fact is that workers’ wages and benefits, which once held steady at 64% until the mid-2000s, are now down to 57.5%, with an accompanying unemployment rate of 9.1%; after the last three recessions, the comparable unemployment rate was 6.8%. Editorial: The Hidden Costs of Outsourcing Manufacturing 4064 South Highland Drive, Millcreek, Utah 84124 │ thenewslinkgroup.com │ (v) 801.676.9722 │ (tf) 855.747.4003 │ (f) 801.742.5803 Editorial Library | © The newsLINK Group LLC 1 An Emotional Issue Economists decided the Great Recession ended two years ago, but the fact is that workers’ wages and benefits, which once held steady at 64% until the mid-2000s, are now down to 57.5%, with an accompanying unemployment rate of 9.1%; after the last three recessions, the comparable unemployment rate was 6.8%. Unsurprisingly, outsourcing to foreign countries is an emotional — and touchy — issue for most people. Corporate profits are up, but of the best-paying private sector jobs, those that pay between $19 and $31 per hour, 40% were lost between January 2008 and February 2010. Only 27% of the jobs created since then offer a wage that is as good. It’s possible that that may soon change, especially in Utah. The Hard Reality Many companies, lured by the promise of lower overhead and a better competitive edge, have discovered that the reality of outsourcing to one or more foreign countries is far less attractive than the sales pitch may have promised. Yes, a unionized factory in Milwaukee making combination locks is going to offer higher wages than workers in a Chinese factory; in fact, about six times more. But if the U.S. factory is as much as 30 times faster, making locks at home is still going to be cheaper than exporting the work to China. That is not just an opinion; instead, it is the conclusion offered by Rob Rice, who is a vice president for the largest manufacturer of padlocks in the U.S. Two years ago, his company had 50% of its locks made in North America and 50% in China; now 55% of all its locks are made either in Milwaukee or in Mexico. The company he represents is not the only one to come to the conclusion that U.S. manufacturing still has a place in making a company profitable. Other major companies, such as General Electric and Boeing, have made the same decision when it comes to their factories: Wages across Asia are on the rise, with increases of about 17% per year. The cost of fuel has increased dramatically. As a result, it just isn’t as cheap to ship or fly goods across the ocean as it used to be. The U.S. has a 3.6% inflation rate as of May 2011, but inflation in China for the same month was 5.5%. All of this makes the whole process of making and shipping goods more expensive. A study by Boston Consulting Group indicates that manufacturing costs for the U.S. and China are going to be just about even by 2015. Boston Consulting Group is an expert on business strategy and acts as a management consulting firm; according to a press release from Boston Consulting Group dated May 5 th , 2011, the U.S. has become more competitive for manufacturing because it offers some of the cheapest manufacturing locations in the developed world. The U.S. has flexible work rules, government incentives, and some states that have successfully become low-cost bases in the U.S. market. According to Harold Sirkin, a senior consultant at the Boston Consulting Group and an expert on emerging markets and globalization, the cost of manufacturing goods in China has already increased to the point where if you consider inventory and shipping costs in addition to a product’s total manufacturing costs, your remaining advantage for outsourcing production could be substantially less than 10%. It could also be as little as zero. Sirkin thinks that the next five years are going to be key for manufacturing companies. Although some industries may still find an economic advantage to outsourcing commodities that require a labor-intensive amount of work or high volumes, such as fabric, clothing, and televisions, other products that don’t require as much labor or volume, such as construction equipment or household appliances, are likely to end up being manufactured again in the U.S.

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