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Dear ,
Bet You Didn't See This One Coming!
I ran across a very interesting article this weekend in the Atlantic Magazine.
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The insourcing boom? Did I read that correctly? The insourcing boom?
That's correct, the insourcing boom. While we have been hearing for years about all of the jobs lost to outsourcing, we are starting to see a reversal of that trend. This article takes an interesting look at General Electric.
The article tells the story of how in 1951 General Electric designed and started building Appliance Park in Louisville Kentucky. This was where GE was going to build just about all of their appliances. This place was so big that it even got its own zip code. By 1955 there were over 16,000 people working there and it's workforce peaked in 1973 at over 23,000 people.
But then what happened? Outsourcing happened. GE along with many other companies around the world started outsourcing, a business strategy championed by the famous business consultant Peter Drucker. By 1984 GE had fewer workers in Appliance Park then they did in 1955 and by 2011 they were down to 1,863 employees there. But then a funny thing happened. In 2012 GE installed the first new production line at Appliance Park in 55 years! Why would they do such a thing?
That Is Where It Gets Interesting
The new assembly line was installed to make a new high tech hot water heater. A hot water heater that had previously been made in China. One of the unintended consequences of outsourcing was that product design had become disconnected from manufacturing to a certain extent. With outsourcing the engineers would design the product and then send the design oversees to be manufactured. The engineers that designed it had pretty much zero input on how it was manufactured.
In the case of the hot water heater GE found that over the years they had "forgotten" how to manufacture hot water heaters. Here is a bit from the article.
"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."
Pretty amazing isn't it? Because they didn't have to build it they didn't put as much thought into that part of the design. Once they had to build it they came up with a better design. Apparently there is a previously unrecognized benefit to making what you design. It's the same complaint I have long had against automobile engineers when I work on my car. There are certain designs that make me think that the person that designed it had never actually worked on a car in their life.
Another story related in the article is that of the dishwasher assembly line. It was really long and cumbersome. GE got all of the people together, management as well as line workers. Their task was to redesign the assembly line so that it was more efficient. Everyone was promised that even with the increased efficiency, no one would lose their jobs. By the time they were done they had eliminated 35% of the labor needed to assemble dishwashers. Guess what. Eliminating labor is even better than sending jobs overseas where people will work for less.
Now the author of the article seems to think that all of the outsourcing over the years was unnecessary. I would disagree. I think that we are at the point today where we can start bringing the jobs back specifically because of the extent of the outsourcing. I think it was the outsourcing that finally brought the unions around to accepting 35% to 40% reductions in wages. I think it was the outsourcing that caused both labor and management to finally come together to find new ways to make things work and I think GE is a great example of that paradigm shift. The other thing that makes it possible in my opinion is the tremendous increase in productivity of the American worker.
How big of an increase in productivity? Well back in the 60s Appliance Park was turning out around 250,000 appliances a month. Today they are turning out almost that many with at most 1/3 of the workers. That's a 66% increase in productivity. Now that news is actually a doubled edged sword. The good news is that we expect the insourcing trend to continue which will create good jobs in this country. The bad news is that manufacturing in this country will never need as many workers as it has in the past because of the increased productivity. Therefore we do have to accept that some of those jobs are just gone for good.
I hope you'll take the time to read the article. It's nice to see a ray of hope!
Until next week , Protect Your Wealth!
Sincerely,
  
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