Outsourcing Isn’t About Low Labor Cost Anymore

Manufacturers have traditionally outsourced production to control costs. But today, countries typically known for low-cost production are under growing pressure to increase workforce wages, and political leaders are pushing to keep and create jobs in their own countries, often at a higher cost.

Download Outsourcing Isn't About Low Labor Cost Anymore to learn how human resources and operations are being forced to rethink the way they manage their workforces in order to stay competitive.

Position Paper Outsourcing Isn’t About Low Labor Cost Anymore Outsourcing Isn’t About Low Labor Cost Anymore Outsourcing production has traditionally been the province of purchasing and operations. Focused on lowering costs, these departments generally concentrate their efforts on a few low-wage countries. Recently, however, two dynamics are causing the decision about where to source production to change. First, increasing labor costs in traditional low-wage countries such as China have made such countries less attractive. Second, politicians in all countries are increasingly using their power to create jobs in their own countries regardless of the cost of labor. In order to continue to stay competitive, operations and human resources are being forced by these dynamics to rethink the way they manage their workforces. While the increase in wages in traditionally low-wage countries is well-documented in the media, how are politicians wielding their power to influence job creation? In different ways, but each reflects a need to convert their regulatory authority, purchasing power, or control over natural resources into quality local jobs. To understand how this works, let’s take a look at a couple of examples. United States In the United States, the New York Transit Authority purchased $599 million worth of trains in 2012 from Bombardier, a Canadian company. The trains New York Transit purchased are manufactured in Bombardier’s Plattsburgh, New York, facility. In this case, the state government has effectively converted its need and ability to purchase large amounts of manufactured goods into skilled, well-paying local jobs in upstate New York. U.S. Rep. Bill Owen of New York proudly announced the benefits of the deal:1 “Bombardier and our community leaders work tirelessly to ensure that the region continues to emerge as an industry leader in the assembly and manufacture of transportation equipment.” China Moving on to China, we see a second powerful example of government at work. In November 2012, Jaguar Land Rover announced that it was partnering with Chery, a Chinese automobile manufacturer. “The joint venture will blend together the heritage and experience of luxury premium vehicle manufacturer Jaguar Land Rover with the intricate knowledge and understanding of Chinese customers evident at Chery,” Jaguar Land Rover said in a press release.2 Interesting comment, although it seems that Jaguar Land Rover was doing a pretty good job at understanding the market on its own, as The Wall Street Journal reported recently that “sales increased by 32% over last year on the back of a soaring Chinese market.”3 Maybe there is more than market knowledge being sought by JLR. Autoblog provides a little more clarity. By setting up local automotive production (which requires a joint venture in China), JLR can also avoid the 25 percent import tariff it currently faces on its products.2 This provides a different example of how a government can use its power, in this case the ability to tax and control company formation, to encourage the increase in skilled local jobs. 1 “Bombardier Transportation Signs New York MTA Contract,” Plattsburgh Press-Republican, accessed March 7, 2013, http://owens.house.gov/news/documentsingle.aspx?DocumentID=298434. 2 Chris Tutor, “Jaguar Land Rover and Chery Investing in Chinese Plant,” Autoblog.com, accessed March 7, 2013, http://www.autoblog.com/2012/11/24/jaguar-land-rover-and-chery-investing-in-chinese-plant/. 3 Anirban Chow, “Jaguar Land Rover January Sales Jump 32%,” The Wall Street Journal, accessed March 7, 2013, http://online.wsj.com/article/SB10001424127887324880504578299693050704194.html.. Outsourcing Isn’t About Low Labor Cost Anymore India Every effort at creating jobs does not go so smoothly. For an example, we’ll move to India. A pending change in India’s regulations was reported in The Wall Street Journal recently.4 “The draft regulations would require that a substantial percentage of technology hardware purchased by government agencies and some companies come from India-based manufacturers. Foreign players would have to swiftly set up local factories to market their products here.” In this case the government has both regulatory control and purchasing power to incent companies to create local manufacturing jobs. But the Indian government hasn’t thought through the practicality of trying to stand up an industry overnight. If you look carefully at the United States and Chinese examples, the companies started small and the process evolved over years. Such a process allows companies to adjust and make changes as they learn while still remaining profitable. In the current example, India is going to disrupt a large market. The challenge here is that the government buyers of this equipment probably still need it at competitive prices. Also, for manufacturers, it will take time to create the infrastructure, skilled employees, and a supply base. Governments’ more aggressive action to create and protect local jobs signals a shift in the way companies must think about outsourcing. Previously the concerns were around capability, cost, quality, and lead times. Now, outsourcing decisions will be driven by new revenue considerations. Operations won’t be driving the decision, but it will be responsible for ensuring profitability after the deal has been signed. This means that the workforce and its managers are going to be under the same pressure to manufacture competitively they have always felt, but rather than focusing on a few concentrated locations for production, they will face the added complication of managing multiple cultures, languages, time zones, exchange rates, and regulatory environments among multiple production facilities. How are companies in this situation handling the change today? From a system measurement and policies perspective, the companies that Kronos® is working with are putting a repeatable plan in place to get acquired companies, joint ventures, or greenfield ventures onboard quickly. Policies and procedures are standardized to a practical point while the need for some flexibility to manage the nuances of the local environment is acknowledged. More teeth are being applied to the process of standardizing all types of data so that it can be quickly rolled up, analyzed, and acted on. Process automation in the human resources area is being implemented to ensure administration costs don’t overwhelm production locations that have smaller populations of employees. Having a solid plan in place with documented success in other locations ensures there is less room for the local facility to negotiate a unique environment. At the same time, a well-crafted plan makes sure that morale, engagement, and the potential for innovation aren’t crushed. For human resources and operations, this represents an opportunity to create competitive advantage through the workforce. Those companies that can master distributed manufacturing and workforce management will have access to an increasing number of growing markets. Those companies that rely on old methods will be stuck servicing larger mature markets as their competitors grow around them. 4 Amol Sharma, “India: Tech Import Restrictions Are for Security,” The Wall Street Journal, accessed March 7, 2013, http://online.wsj.com/article/SB10001424127887324081704578231262464225242.html. ©2013, Kronos Incorporated. Kronos and the Kronos logo are registered trademarks of Kronos Incorporated or a related company. All other product and company names mentioned are used for identification purposes only and may be the trademarks of their respective owners. All specifications are subject to change. All rights reserved. MF0160-USv1 Kronos Incorporated 297 Billerica Road Chelmsford, MA 01824 +1 800 225 1561 +1 978 250 9800 www.kronos.com