Thursday, September 15, 2011

The end of outsourcing for cheap labor

Outsourcing to find cheap labor is becoming too expensive to survive as an economically viable business process. In the very near future businesses are going to be instead eliminating the costs of maintaining and controlling inventory, while managing distribution and long distance transportation. A major advantage will be sharply improved quality control. How is this going to happen? Products are going to be manufactured at or very close to the point of sale as they are sold.

A recent article in Forbes points out that the major advantage of long production lines of nearly identical products has been that the long production lines lower the cost of production per unit and allow the product to be sold more cheaply per unit. Lower labor costs have for a relatively short time been one way to get lower unit cost. In recent years, however, the transportation, distribution and inventory costs have climbed to where they more than eliminated the advantage of cheap labor for a great many products.

The recent history of mass production manufacturing has been largely about big companies which outsourced manufacturing to third world countries in order to exploit cheap labor and to escape the limitations of high-priced unionized labor in most industrial nations. This only works for companies which sell a uniformly identical product to large groups of people. The more each unit is changed, the less likely that the product can be made cheaply enough to be made a long distance from the customer and shipped in.

The new technologies which will eliminate most outsourcing for cheap labor are:
  • programmable subtractive tools, which carve shapes from raw materials. These include laser cutters (which cut flat sheets of wood, acrylic, metal, cardboard, and other light materials), computer numerical control (CNC) routers and milling machines (which use drills to produce three-dimensional shapes), and cutters that use plasma or water jets to shape material.
  • additive tools, which are primarily computer-controlled 3-D printers that build objects layer by layer, in a process known as fused deposition modeling. They work with a wide variety of materials: thermoplastics, ceramics, resins, glass, and powdered metals. Technically known as “additive rapid manufacturing” devices, 3-D printers also use lasers or electron beams to selectively shape the source material into its final form. Because additive devices require little setup time, they make possible the production of any quantity at the same cost per unit, and also allow easy, rapid switching between products. In some cases, a 3-D printer can fabricate in a single piece an object that would otherwise have to be manufactured in several parts and then assembled. And because it composes objects bit by bit, instead of carving them from larger blocks, additive manufacturing considerably reduces the waste of materials.
The article goes on to point out that this technology is in its infancy, but that it is developing rapidly. The author provides good advice on how businesses should prepare to take advantage of it. He does not consider the implications for the declining American middle class but those should be very important. A well-trained well-paid middle class labor force is going to be needed very near the point of sale. Not in Mexico and not in China, but right in America where the products are being bought and used.

If I were suggesting strategy for firms competing with Walmart, I would be looking at this set of technologies very closely. Walmart's big competitive advantage has been it's superior computer technology and the lower distribution costs that technology has permitted. But if the competitors can produce goods at the point of sale with no significant costs of distribution, greater variation in the products and greater control over quality ....

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