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issue: June 2005 APPLIANCE Magazine

A Look at Outsourcing - Part 1

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By Lisa Bonnema, Editor

After last month’s discussion of value and cost, it only seemed fair that I venture into another topic most of us want to avoid: outsourcing. And, yes, that includes talking about China.

Lisa Bonnema, Editor, APPLIANCE Magazine

Let me start by saying I am in no way shape or form pretending to have the answers to anyone’s manufacturing challenges. Nor will I praise you or snub you for choosing to outsource and—gasp!—ship your jobs to somewhere other than your local economy. Instead, my goal is to offer some perspective on a topic that, like everything trendy, can make you look silly simply because you didn’t take the time to look in the mirror. On the other hand, if handled correctly, you can come out looking like an icon.

The Two Sides Of Outsourcing

In the appliance industry, I believe there are two sides of outsourcing—manufacturing and engineering/design. Perhaps you disagree. I can’t count how many times I have heard someone tell me that appliance manufacturing is leaving the U.S. and Western Europe and that the future of those regions is product design. First of all, I’m not convinced that all manufacturing is headed to Asia, and second, I believe it’s naïve to think that some design and engineering won’t be moving there too. I’m going to use my next two editorials to explain to you why.

Let’s start with manufacturing. The general consensus has been that manufacturing in countries like China and India offer labor rates incomparable to the other parts of the world. Add that to the rising costs of healthcare and pensions in the U.S., and the answer appears simple—build it in China or another low-wage area.

Well, as stated in last month’s issue of APPLIANCE, it’s never that simple, nor should it be. The 50-percent savings everyone thinks they’ll achieve by outsourcing to somewhere like China is quickly reduced by the time shipping costs, communication difficulties, and delays are factored in. Cost shouldn’t be the main reason you outsource your processes to another part of the world. Simply put, that won’t keep you competitive in the long run.

Laurie Felax of Harbour Consulting, a manufacturing consulting firm based in Detroit, MI, U.S., says too often manufacturers are quick to outsource before they actually look at what they can improve upon internally. “What I’m hearing too much of is these companies that are moving out to Mexico, then they move to South America, and then they end up in China because they are chasing a labor cost number as opposed to doing everything they need to do to be productive first,” she says.

The answer, according to Ms. Felax, may be hidden in a buzzword we were all spouting before outsourcing: “I’m talking about the foundational elements of being a good lean manufacturing operation,” she says. “My message is that you have to be as good as you can be in every single element of your business, or you are going to have to go to foreign countries because it’s the only place you’ll be able to build in this competitive market. And once it’s gone, you are never going to get it back.”

My guess is that your response is the same as mine—the appliance industry has been using lean manufacturing principles for years. Been there, done that. But according to Ms. Felax, you are never lean enough. A company like Toyota, which is considered one of the “leanest” in the world, would never say it has done everything it can. “Toyota looks for people who can bring problems up,” Ms. Felax says. “If you’re not bringing up problems on a regular basis, you’re not doing your job.”

Many times, she says, the solution is right in your backyard. Rewind to the 1970s, when the U.S. automotive industry was starting to see competition from Japanese companies. At the time, GM, Ford, and Chrysler owned about 90 percent of the market and were untouched by these new entrants because Asian products had a reputation for being cheap and of low-quality. Not to be intimidated, companies like Honda and Nissan went back and looked at what they did wrong and decided to build their own plants in the U.S. “They started using American workers at the rates of productivity they had in Japan, and this started to eat away at market share,” Ms. Felax says. “Today GM, Ford, and Chrysler own just over 50 percent of the market, and that continues to fall every day.”

Point taken. And as far as I’m concerned, it hits extremely close to home. Isn’t the U.S. appliance industry seeing new entrants setting up shop in its backyard? I visited Haier’s plant in Camden, SC, U.S., and I can assure you this Chinese company’s intentions are permanent residence. In fact, Haier has said it owns enough land to build seven more plants in the surrounding area. Germany’s BSH has also built additional plants in North Carolina, the company’s largest expansion to date. Yet I read news every day about U.S. manufacturers shifting jobs off of American soil, and I wonder if Ms. Felax is right—are these companies leaving home base too quickly?

“The point is that we have to start looking inside of our four walls for the answers,” Ms. Felax says. “We have to dig inside of what we have, look in the mirror, accept that we are not perfect, and work hard at making improvements.” Are you doing that? Hard facts indicate that maybe we’re not: the worldwide value of outsourcing in 2004 was a whopping U.S. $78 billion dollars. The McKinsey Global Institute estimates that the volume of offshore outsourcing will increase by 30 to 40 percent a year for the next 5 years. Those are major numbers.

The good news is there are companies that aren’t moving production to other parts of the world, which helps solidify Ms. Felax’s theory. Middleby Corporation, a maker of commercial foodservice equipment based in Elgin, IL, U.S. prides itself on manufacturing in the U.S. for the U.S. market. In fact, the company just acquired a new U.S. plant in January, bringing it to five U.S. plants, with one in the Philippines for international markets.

Selim Bassoul, Middleby’s CEO, has been quoted as saying that he firmly believes it is more cost- and time-efficient to make his products in the U.S. to serve U.S. customers. Bulky machines like warming ovens are too heavy to ship overseas. And Middleby is growing. The company was recently ranked No. 11 on Fortune’s Fastest Growing Companies list and No. 12 among Forbes’ 200 Best Small Companies list.

Jeff Fettig, Whirlpool’s CEO, has said many times that production of Whirlpool’s top-load washing machines for North America is staying in Clyde, OH, U.S. “We believe it is absolutely the best-cost location for the markets we serve,” he confirmed in an interview with me last year. But Whirlpool has global resources, you say. Sure it does, so it doesn’t have to stay in North America, but in this case, it is, which is the point. Mr. Fettig also said, however, Whirlpool may make some changes in the coming years: “We may source components from different places 5 years from now; I don’t know, but it is something we look at every day, every month, every year…to do the things that we need to do to ensure that we are very competitive in all those markets we serve.”

And that should be the focus—continuous improvement. Next month we’ll look at how this applies to engineering and other parts of the appliance business, but for now I ask you to stop and check out your reflection. Have you tried on every available option—in every size and color—to make sure you are arming yourself with the best manufacturing strategy possible, or are you looking at outsourcing as a quick fix that, in the end, may only leave you with baby blue, polyester dreams?


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