Monday, January 12, 2009

How to Regain American Manufacturing Jobs (Part I)

This blog is broken into three parts. Part I describes costly manufacturing sector problems. Part II explains the primary causes of the problems. Part III offers solutions.

The Truth about Manufacturing Profitability
The United States has been steadily losing manufacturing jobs over the past 30 years. In January, 1980, there were over 19 million manufacturing employees in the United States. Now, there are just 13 million manufacturing employees (source: Bureau of Labor Statistics). In other words, the United States has lost over 30% of its manufacturing positions in that time frame. Even more amazing is that according to the U.S. Bureau of Economic Analysis, U.S. demand for products grew by an average of 3.5% each year. That equates to U.S. demand nearly tripling during that 30 year period. The demand worldwide has grown even more—due to the economic growth in other parts of the world.

Many explanations for outsourcing manufacturing jobs have been given—including labor, healthcare, pension costs, oil prices, regulations, and the problems in the financial sector. However, these are not the primary reasons for our inability to compete. Quite simply, the United States has not been able to design and manufacture products profitably enough, and if we continue the same behaviors, we will continue to lose the relatively high-paying manufacturing jobs.

Internal Plant Waste
Over the past 20 years, we have heard estimates of internal waste within a plant ranging from $2 Million per year to over $50 Million per year. These costs ONLY include internal scrap (i.e. not making the product right the first time) in a single plant. There are currently over 350,000 such plants in the United States (source: U.S. Census Bureau).

News of internal plant waste does not usually reach the executive levels. Instead, the waste gets covered up—it is hidden. Since production personnel know that unacceptable parts will be made, they invest in expensive inspection equipment to detect the defective products—further reducing profits.

Warranty and Recalls
Warranty costs of large U.S. manufacturers typically average 2% of revenue. So, for every $1 Billion in revenue, a company spends a needless $20 Million in warranty expenses.

Recall costs (just for consumer products and excluding automotive recalls) are more than $700 Billion annually (according to the Consumer Product Safety Commission). It is difficult to estimate the total cost of vehicle recalls. There are over 76,000 vehicle recall records in NHTSA’s database covering the years of 1966 – 2008. The largest 10 recalls included 55.5 million vehicles. If a dealer is paid $50 per repaired vehicle, then the 10 largest recalls cost nearly $2.8 Billion dollars. Of course, there are thousands of automotive recalls.

Lawsuits
The costs of the lawsuits associated with any one recall are also shocking. Each lawsuit typically costs a manufacturer millions of dollars in legal fees and losses, and in some cases, tens or hundreds of millions.

Irate Customers
CNET.com offers a great venue for customers to review electronics before and after purchasing them. The customers’ remarks on this site are priceless. Nearly every complaint has to do with flaws in the design or manufacture of the product, and yet most manufacturing executives pay more attention to sales, marketing, accounting, and purchasing issues. Who’s listening to the customers?

Exporting Our Jobs
Millions of jobs have needlessly been sent to other countries. And, manufacturers in low-wage countries also experience high rates of internal scrap and waste. There have been many costly quality and reliability problems associated with products made overseas. The cost of shipping goods is higher, and it is expensive to train foreign workers and transfer technology (and foolish to relinquish our technology and intellectual property). Furthermore, the cost of labor is rising in developing countries, making these decisions myopic.

Sending jobs overseas has also weakened the United States considerably. Manufacturing jobs have traditionally been high-paying jobs, and with the loss of those jobs, Americans have less spending power, so many other businesses will continue to fail. To make matters worse, the government has fewer income tax dollars—at a time when people will need even more assistance.

Summary
In summary, the enormous and overlooked costs crippling manufacturers are:
1. Internal plant waste and inspection costs
2. Warranty costs
3. Recall costs
4. Lawsuit costs
5. Losses in market share due to the above (irate customers)

The next blog in this series explains why products and processes fail and create the excessive costs described in this segment.

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