When should you not outsource?

Among the outcry about America losing its manufacturing jobs, two iconic companies, prominently featured in recent WSJ and NYT, prove that manufacturing is still possible in the good-ol’-America. One of them is Harley Davidson, the maker of big smooth-riding bikes, the other is Watermark, Brooklyn-based manufacturer of high end bath faucets. Both of them face stiff competition from Asia. Both of them could outsource, but did not. Why?

The answer is, of course, in understanding their strategies and core competencies. Harley is an American legend for more than 100 years. And so is Watermark, boasting its Brooklyn chic design. This is what the customers are willing to pay premium for! Ironically, many of the customers are in Asia. China with its growing highway network is getting a taste of riding, and liking it better on a Harley; the builders and buyers of luxury condos in Shanghai prefer to have unique faucets from Brooklyn. Going through the recession neither of the companies made a move to make their products cheaper. High price together with their “Made in USA” brand are driving demand for them.

It does not mean that companies did not have to trim some fat in their operation. Harley streamlined their production process, cutting workforce by 2000, but at the same time making sure that the remaining 1000 are better trained and flexible enough to perform multiple operations. Their inventory is down and production volume can be adjusted relative to demand. Some clever technology is in use at Watermark as well: 3D printing is used to speed up prototyping and cut lead times.

Now, could they have done the same overseas? Quality and quantity-wise – probably, yes. Would they be able to market their products so well? Probably, no. Interestingly, even Apple has “Designed in California” brand on their product. Had they have to drop it, by how much would they have to reduce their price?!
And since it’s Friday, I can’t help but notice another, rather peculiar, commonality in their day-to-day operations. Both companies routinely submerge their products in the water. That clearly better be done here in the States!

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Jobs creation in the Apple ecosystem

Being the largest public company it is hard to avoid scrutiny of business decisions. The story has begun a couple of months ago with the series of articles about work conditions at the Apple contract manufacturers in China and the impact of Apple’s outsourcing on the US economy. So here comes another batch of numbers related to the Apple’s jobs creation, this time from Apple itself.

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Labels and supply chains

Interesting information you can get from reading product labels. And I am not talking about food ingredients. What I am talking about is how long does it take from the moment a product is manufactured until it is sold? Or even, how long can a manufacturer afford this lead time to be? Lead times are tricky and rarely reported by firms. Longer lead times mean more working capital and pose challenges for forecasting, because firms have to decide how much to produce well in advance. In fact, in this paper I argue that retail sales forecasts (and inventory budgeting) for the next year are done 6 to 12 months before it starts. Anyways, because lead times are so tricky, I always welcome first hand data that documents them.

In this case the data comes from two product labels – one from Ikea and the other is CB2. Both related to furniture bought by me in the beginning of February. It turns out that Ikea manufactured that product (it was a chair) on May 26, 2011 in Mexico. Moreover the cover for that chair was made on the 16th week in 2011 (that is around Apr. 20). The chairs from CB2 were made in Taiwan by vendor Elegant Products and shipped from there on Aug. 4, 2011. Which gives almost 9 months lead time for Ikea and 6 months for CB2. Again these are the lead times after the product is manufactured. Actual decision about manufacturing them had to be done before that.

Give or take, it seems that Ikea’s lead times are about 50% more than CB2’s. And it makes sense, given that Ikea’s assortment rarely changes (aside from seasonal items) and CB2 tries to follow the contemporary trend.

 

iPhone – jobs creator or loser?

Here is a fascinating video posted by New York Times about iPhone and how it helped to increasingly transform our economy from manufacturing to services. It is thought provoking and I do not entirely share author’s point of view. I agree, we lost manufacturing jobs and, indeed, service jobs create less supporting jobs around them. However, in my view, this particular example of iPhone is an exception from the general trend.

Consider all the app-development business that started, iTunes market, iCloud – I suspect that the jobs multiplier for iPhone is much bigger than 1.7! And why is the Apple worth more than Exxon? Because all of these generated businesses feed back into Apple. That’s I think is a genius of Steve Jobs and Apple’s strategy – to create an ecosystem that is closed loop but grows from within.