Mayberry 2005: Offshoring

Student Question: What is the long-term impact on the US economy of offshore outsourcing in manufacturing and service industries and how should we prepare ourselves for this reality as we enter the job market?

David Jones: Since I'm involved with a company that does outsourcing in the US , we do have two manufacturing operations in Juarez and part of the Miciadora relationship, there's a warehouse in El Paso . But, our function in the US is that there are three major manufacturing operations. Our function is to find the business that isn't going off shore. Printers, for example, are probably all built offshore. Cell phones and things like that, consumer-type products. They are being driven to the lower-wage markets. I think you will always have that to some extent. In Asia , there's an immense and almost unending supply of low-wage labor. So, they'll be able to keep that wage down for some time. In the US , however, there is room for manufacturing and operations for products that are less price-sensitive. For example, we build the brains that go into MRI machines. An MRI machine is a half million dollar machine and it goes in a half a million dollar installation in a lead-lined room in the basement of a hospital somewhere. They don't want a two thousand dollar circuit board holding that up. It's more important to have it on time, the right quality and the right performance than it is to knock 10 or 20 or 200 dollars off. So, it's those sort of products that we're looking for to build and to remain in the US . I think that in the long term there will always be that niche. The other lower cost niches will end up in the lower cost labor areas.

Dr. Reimann: So, in your case, you're actually, in effect, riding that opportunity associated with the outsourcing.

David Jones: Yeah, and it generally stems from the company's decision that our core competency is ‘x' which in many cases is design or marketing, and it is not manufacturing. We do not want to own manufacturing assets, we don't want to invest in that, and we just want the profits generated out of the sales. We'll let somebody else worry about manufacturing. There are interesting side aspects of that though. What we see is that the fewer and fewer engineers engaged in manufacturing from a supply chain respect, we have a hard time talking to the design engineers because they haven't been on a manufacturing floor, they don't know what is going on. We actually end up having to educate them in many regards. To some extent there's a brain-drain there of that knowledge.

Dr. Reimann: This is an extremely important area. We also have a mix of people here who can really speak to the different aspects of it. Jack, I would assume that HP, including the unit where you have a leadership position, does a great deal of outsourcing, and probably more so in the recent years.

Jack Swaim: Absolutely, a lot of that outsourcing, the area where, I live in Idaho now. The area where I live now actually started as a production facility, as a factory that made formatter boards that go in printers. We still have employment there, and a few thousand people, but we make no formatter boards there. That's all done offshore. So, we've shifted over the past fifteen or twenty years the type of work that goes there. The second part of the question was what might you all do given this shift that is occurring and will probably continue to occur. My point of view about that, bringing into what's relevant, right now, is to find what you're best at, and really go for that. Over the lifespan of work that you're likely to have, these trends will continue and probably some trends that we can't predict. If you focus on what you're best at, that will minimize the effects to you about will you be able to contribute what you're doing in the workplace. You'll maximize the capability then to be reasonably independent of what these macro shifts are. They're certainly there.

Dr. Reimann: Jean, do you have some thoughts bearing in mind that you're in the supply chain business at P & G which is also a very large company?

Jean Kinney: Yeah, this is not totally driven by low wages. Also, where is the best innovation? Where are people inventing things? If you look at the countries around the world, they're very talented engineers in a number of different countries. I think to the extent that people invest in themselves and become well-educated and become the very best and as long as people in the United States and continue to innovate and continue to be very well educated, then the future looks very good. I think it's a mistake to think that all the innovation in the world comes from the US . I think companies are very interested in tapping into that wherever it may be.

Dr. Reimann: Steve, you're in another aspect of supply chain in a service organization. How do you see that trend and those issues?

Steve Hoisington: The economy has evolved and stuff changes and shifts over time. I'm not sure it conflicts with what Jean mentioned but the US economy has already shifted from one of producing goods and services to one more of innovation. As David pointed out, you've got engineers and innovators that design stuff. Let someone else manufacture because your core competency within an organization is not necessarily manufacturing, it's the production and sale of a good or service that the economy wants to pay for. I don't see the shifting of jobs to non-US locations as a threat. We've just got to adjust our skills to match that. The good thing, from our prospective, the more offshoring that occurs, the more demand it is for our services. People don't necessarily think about how you're going to transport goods from one location to another, nor do they take into consideration the cost. You can go to a low-cost area like China or east-Germany, but you still have to transport raw materials in and you still have to transport goods back out, and that always isn't taking into consideration into the equation in terms of low-cost produced goods or services, so you think about, what does that translate into US jobs, we may not be producing, but it's a lot easier to transport goods than to produce goods, and the jobs pay more for transporting than producing goods in many regards, so it's a good thing.

Dr. Reimann: Joe, from your point of view, working for a large service organization. How do you see that issue?

Joe, Dehler: It's a very big issue for us. We're in the process right now of potentially outsourcing our finance and IT functions. I had to stand up in front of four or five hundred people and tell them that their job could be outsourced. In our case, not off shore. When you're in a senior-leadership role of any company, there's a stewardship that's required that sometimes you have to make decisions for the good of the whole and the good of the health of the company that will ultimately impact individuals and it's never easy. I go back to my control-data example. We missed some market opportunities from supercomputers to desktops. We didn't see it. What I saw from that lack of management focus was a company that had at one time 185,000 employees and because the market demanded it, we went to a company that had 11,000 employees. So, what I've learned as a senior leader is that sometimes we're faced with having to make decisions that are good for the whole that are going to impact some individuals. Again, what we're finding is what might be good for us, what might be something that could or could not be a competence for us, its not all offshore. For example, our financing and IT functions are going to be outsourced to IBM. The media gets a hold of this and turns it into a different story. Many of our employees will one day be Carlson employees, and two weeks later will become IBM employees. So they'll be rebatched as IBM employees. This is something we're faced with.

Have any of you ever been to a Friday's restaurant? I would imagine that none of you go there because we have such great IT. What we know we have to do is keep the main thing the main thing and keep focused on what's really important to the customers and to the markets that we serve. In some cases, if we can reduce the cost of a meal at Friday's from eight dollars to seven fifty , because we're able to take some of that back office work and partner with it. We're using different language now. We're calling it more partnering with other companies. It's new relationships. Partnering with someone who can provide that service for us, versus this evil thing that is called outsourcing. What I know as a senior leader is that we're going to have to make decisions for the good of the whole that will sometimes impact the individual and it doesn't make it easy. That stewardship required to make good decisions around that, we have to make sure we have all the data on the table and that we've really thought through what we're doing, but it's inevitable in many ways, and it doesn't have to be an evil thing that hurts many people. In some cases, what hurts one individual is better for the whole. I don't look at it as a doom and gloom by any means. We're never going to outsource our core to anyone because that's who we are, but for those things that another company can do better than we can do. In our case as an example, we can never be as good as IBM is at providing IT services. That is their core. We sell hamburgers and hotel rooms. And they don't so we don't have to worry about outsourcing that.

Dr. Reimann: Ok. From the point of view of this topic, which I think is extremely important and will be, I think throughout your business life, it is extremely important that you understand the logics behind it and the approaches and not see it as a “doom and gloom”. Obviously there will be job losses and job gains, and in some cases, what we don't see are things that are generated as a result of the better price we get from off shoring to another nation. For example, I've seen some studies that say, that maybe for every dollar outsourced, the U.S. get from $1.12 to $1.20 in benefits. It's just that those benefits show up elsewhere. So we see the jobs that disappear, but we don't necessarily see the benefits that accrue. But what this forces us to think about is various types of innovation, various types of adding value. And I think the group we have assembled today have a really comprehensive perspective on that because it deals with all of the elements of that logic. The things that used to be folded into one business with all the steps carried out, are not almost the basis for separate businesses. And from your point of view, it is extremely important to get your arms around that because it is very important. It is also very interesting. And in some cases it could be the difference between success or less so in your own careers. You have to be able to ride those waves from place to place because they will change throughout your career.

Any other questions here?