Why Outsourcing is a Long-Term Problem

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The two biggest problems facing American manufacturing are the trade deficit and outsourcing. Over the last three decades, multi-national corporations (MNCs) decided that it was in the best interest of their shareholders to move jobs and production to low-cost foreign countries. According to the Economic Policy Institute, American corporations have outsourced more than 5 million jobs and 91,000 plants since 1998.

Under the flag of the free market, the public found out that there was no loyalty to the United States. Instead of trying to protect American industries and slow down the rush to low-cost countries, the only real loyalty was to the short-term interests of their shareholders.

Some of the biggest outsourcers of American manufacturing jobs include General Electric, Caterpillar, Microsoft, Chevron, United Technologies, General Motors, Ford, Georgia Pacific, Harley-Davidson, Kimberly Clark, Briggs and Stratton, Honeywell, Merck, IBM, Pfizer, and Boeing.

In terms of increased profits and decreased costs, outsourcing has really worked. An October chart from Statista shows that from 2002 to 2019, corporate profits increased 300%, from $.75 trillion to $2.25 trillion, while the rate of inflation during that span was 42%.

Table A shows what has happened to 38 American manufacturing industries since 2002. As you can see from the table, all 38 of these manufacturing industries have declined in terms of the number of establishments and employment. 

Some of the industries such as textiles, apparel, furniture, hardware, magnetic media, computers, cutlery, hand tools, and electrical equipment have been declining for many decades and are probably beyond recovery.

But the most perplexing of these declining industries are the ones that are fundamental to making other manufactured products. These are industries like machining, machine tools, mold making, tool and die, forging, foundries and semiconductors. Table A begs the question, what can we do to stop the slow erosion and outsourcing of these industries?

Even though the semiconductor and microprocessor were invented in the United States, the semiconductor industry has been moving offshore for decades. Table 1 shows that the semiconductor industry has lost 787establishments (12%) and 149,889 workers (20%) since 2002. One of the big problems is that when the manufacture of semiconductors moves overseas, research and development go with it. If the decline continues, the US is in danger of losing its innovative edge in electronics and computers.

The problem is that a new product or technology is invented in the U.S. and then is manufactured in a foreign country and eventually lost to that foreign country. We have invented personal computers, mobile phones, televisions, robots and a host of electronic technologies that are no longer manufactured in the U.S. 

A good example of a critical industry is the semiconductor industry. Semiconductors are silicon wafers that are used as a platform to make microprocessors. They are used in the electronics, computer, and communication industries. Semiconductors are used to make chips that are used in cell phones, iPods, GPS, solar cells, light-emitting diodes, and hundreds of other consumer products. Semiconductors are absolutely fundamental to the electronics and computer industries.

The Intel Example

In my own state of Oregon, Intel is the largest corporate employer and recently announced that they may outsource their advanced chip production to their biggest competitor, TSMC in Taiwan (the world’s leading chip fab company). U.S. chip producers account for half of the world’s microchip designs, but only 12% of the global chip manufacturing. Why? Because almost all of them have chosen to outsource their production. In fact, Intel is the only U.S.-based manufacturer of micro-processors. 

In an open letter to President Biden, Bob Swan, the CEO of Intel, asked Biden to pursue a manufacturing strategy for the semiconductor industry, which, according to the Boston Consulting Group, needs $50 billion in investment to survive. So, one might ask, how did we get to this point in the semiconductor industry where the industry needs a bailout, and how many more outsourced industries will need the same?

The Short- vs. Long-Term Problem

I have been watching outsourcing since the 1980s, and there seems to be a pattern in what happens to the industries and companies:

1. It begins with a U.S. corporation seeking a cost advantage and better short-term profits by outsourcing a product (or parts of a product) to a foreign country.

2. Once the corporation realizes the cost advantage, its competitors follow suit to try and stay competitive in the market.

3. Most people don’t realize that along with the product, the critical knowledge, skills, tools and process engineering also leave with the product and the foreign manufacturer is free to find their own suppliers and sources of materials, eliminating U.S. suppliers from the supply chain.

4. After a time, foreign manufacturers are not satisfied with just making the parts and begin to seek higher value-added work or a greater share of the total product and move toward complete product assembly and management of the whole supply chain.

5. Once the foreign manufacturer has enough experience, they can do the design engineering and eventually don’t need the U.S. OEM and take over the market. So, in chasing short-term cost reductions and profits, the U.S. OEM inadvertently establishes the foreign supplier as a competitor and loses the market.

Outsourcing by American corporations has caused permanent damage to American workers, manufacturing, supplier companies, and the living standards of many families. It may lead to short-term profits for the corporation but eventually the corporation will lose the technology and the market to its foreign competitors. It is effectively handing its foreign competitors the rope to hang it with.

According to the 2019 IndustryWeek article Corporations’ New Purpose – To Serve All Stakeholders Not Just Shareholders, 181 CEOs signed a commitment letter to lead their companies for the benefit of all stakeholders, customers, employees, suppliers, communities and shareholders. They said this statement “reflects the business community’s unwavering commitment to continue to push for an economy that serves all Americans.”

But the reality is their commitment to short term profits has resulted in the de-industrialization of  America. The best thing they could do to serve all Americans would be to stop or reduce outsourcing. So it is now time for them to walk their talk.

If they continue on their current path, most of industries shown in Table A will erode away. The corporations must decide whether their loyalty is to their country, or whether they have chosen to become international corporations with no loyalties and only committed to short-term profits.

Michael Collins is the author of Saving American Manufacturing and can be reached at  MPC Management.

In order to survive in an unpredictable supply chain environment, businesses need to be incredibly resilient. While it is impossible to predict the future, there are many steps that businesses can take to prepare for it. Companies need to be prepared for the abundant, unpredictable variables in supply chains, such as natural disasters, cyber-attacks, labor shortages, and, as we have seen over the past year, global pandemics and foundational changes in the way consumers purchase products.

We have compiled some key best practices to help companies create business resilience from within. Implementing these practices will best position your business to mitigate the supply chain variables that may arise. 

1. Plan for the Worst-Case Scenario

No one can predict the future, but everyone can plan for it. Companies that have already considered possible future disruptors, created plans for the worst-case scenarios and created contingencies around those plans will be better-equipped to adapt and respond quickly and effectively, fostering a much more resilient business. 

2. Leverage Integrated Systems and Technology

Eliminating siloes within your business is a critical component to creating business resilience. Having disparate systems will stand in the way of creating synergy and collaboration, which is critical to resilience. Integrating the systems and technology within your business bridges gaps you may not even know you have, allowing teams and departments to stay connected and react more efficiently to potential challenges. 

3. Improve Inventory Visibility and Flexibility

Inventory is a large source of capital within a business but can often be mismanaged, decreasing resilience. Companies can often tie up most of their working capital in inventory by not knowing how to properly optimize and manage it. In order to remain resilient against future disruption, businesses should have consistent, real-time visibility into where inventory is located and how it can be redeployed, as well as the confidence that it can easily be adjusted depending on market conditions. 

4. Establish Robust Forecasting and Planning Processes

When a major disruptor hits, supply and demand patterns can often be the first critical processes to be disrupted. Companies that frequently deal with disruptors, such as unstable weather conditions, are more often prepared for impacts to supply and demand and have contingencies in place. However, companies that reside in more consistent and stable networks are more likely to be unprepared when disruptors occur, because they have not created a plan for those conditions. Companies significantly increase their resilience when they enable quick adjustments to supply and demand patterns such as inventory allocation and fulfillment strategies. 

5. Establish Flexible Manufacturing Processes

Having flexibility in manufacturing processes is vital to responding quickly to changes in demand. Whether a company is using lean or another system for process improvement, manufacturing should be flexible to fluctuating demand. 

6. Reduce Lead and Cycle Times for Fulfillment and Replenishment

Top executives all agree that longer delivery times and lack of business resilience are strongly correlated. If your business is unable to provide its customers with the products and services that they want, when and where they want them, customers will look elsewhere. Reducing cycle times is key to enhancing customer satisfaction and loyalty during periods of disruption.

7. Drive Continuous Improvement and Innovation

The companies excelling during these disruptive times are consistently creating and innovating. Finding new and inventive ways to meet customers’ needs is what will keep your reputation fresh and positive in the market. Driving innovation should start at the leadership level and be ingrained in your company’s DNA.

Next Steps

Supply chains are always going to face curve balls—that much is inevitable. It is how you prepare your business for those curve balls that will ultimately determine success versus failure. While, altogether, the above seven keys to success can seem daunting, taken one at a time, they can create lasting, positive change in the supply chain.

In moving forward, rather than attempting to implement them all at once, prioritize the strategies that will create the most value for your business and solve for your most critical business challenges. Implement the above seven strategies to maintain customer satisfaction and profitability, even among disruption.

Gene Bornac is chief strategy officer at enVista, a software, consulting and managed services provider. He has more than 32 years of experience in the retail and consumer products industries.