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home : insight & opinion : guest columns June 28, 2016

1/25/2013 1:41:00 PM
Companies get better results with 'insourcing'
For the Daily News

We have been following the "insourcing" or "on-shoring" trend for the past couple of years. A recent edition of The Atlantic magazine featured an article entitled "The Insourcing Boom." We want to share some excerpts from that report:

After years of offshore production, General Electric is moving much of its far-flung appliance-manufacturing operations back home. For much of the past decade, General Electric's storied Appliance Park, in Louisville, Kentucky, appeared less like a monument to American manufacturing prowess than a memorial to it. The park was built in the 1950's and was so large that it got its own zip code. Employment peaked at 23,000 in 1973, 20 years after the facility first opened. In 2011, the number of time-card employees-the people who make the appliances-bottomed out at 1,863.

Yet (in 2012), something curious and hopeful had begun to happen. On February 10, Appliance Park opened an all-new assembly line in Building 2-largely dormant for 14 years-to make cutting-edge, low-energy water heaters. It was the first new assembly line at Appliance Park in 55 years-and the water heaters it began making had previously been made for GE in a Chinese contract factory.

Global economic changes made the choice to move back to the United States make more sense. Those changes include:

• Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.

• The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)

• 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.

• American unions are changing their priorities. Appliance Park's union agreed to a two-tier wage scale in 2005-and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.

• U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods.

In the case of GE's GeoSpring water heater, a funny thing happened 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.

Time-to-market has also improved, greatly. It used to take five weeks to get the GeoSpring water heaters from the factory to U.S. retailers. Today, the water heaters move straight from the manufacturing buildings to Appliance Park's warehouse. Total time from factory to warehouse: 30 minutes.

GE is not alone in moving the manufacture of many of its products back to the U.S. The transformation under way at Appliance Park is mirrored in dozens of other places, with Whirlpool bringing mixer-making back from China to Ohio, Otis bringing elevator production back from Mexico to South Carolina, even Wham-O bringing Frisbee-molding back from China to California.

Manufacturing employment will never again be as central to the U.S. economy as it was in the 1960s and '70s-improvements in worker productivity alone ensure that. Back in the '60s, Appliance Park was turning out 250,000 appliances a month. The assembly lines there today are turning out almost as many-with at most one-third of the workers.

Jobs are coming back not for a single, simple reason, but for many intertwined reasons - which means they won't slip away again when one element of the business, or the economy, changes.

Jack Schultz is the CEO of Agracel Inc., an Effingham-based industrial development firm focusing on rural America, and author of Boomtown USA - The 7 1/2 Keys to Big Success in Small Towns.

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