Outsourcing – The OM Blog by Heizer, Render, & Munson

OM in the News: Boeing’s Vertical Reintegration

Witchita-based Spirit AeroSystems builds the fuselages for Boeing planes

Spirit AeroSystems is going full circle, from part of Boeing to independent supplier and now back to part of Boeing, reports The Wall Street Journal (July 3, 2024). It is the perfect example of a realization dawning on corporate America: Outsourcing isn’t all it was once cracked up to be.

The deal’s logic of vertical reintegration makes sense in light of recent history, with air-travel safety likely benefiting from centralized supervision and a simpler workflow between plants. Yet it is also an indictment of what executives in most industries have been doing for three decades. When Boeing sold its Spirit fuselage operations in 2005, consultants and business schools had made outsourcing fashionable. Before the late 1980s it was unusual: Even 7-Eleven was vertically integrated with its own milk-producing cows and candy manufacturing.

Then, in 1989, Eastman Kodak pointed the way by tasking IBM with managing its data center. In 1996, GE showed how offshoring support jobs to low-wage countries such as India could help cut costs. Supply chains spread across the world.

At the core of the outsourcing trend, however, was the idea that an “asset-light” firm focused on intellectual property and its “core” expertise would be better run. With this mindset, jettisoning fuselage operations seemed like a no-brainer. It is a capital-intensive, competitive business that faces a lot of production pressure. It wasn’t just fuselages as we note in Chapter 2’s Global Company Profile: In the 2000s, Boeing outsourced more than 70% of the 787 Dreamliner program. But the problems with becoming an assembler of planes, as opposed to a true manufacturer, gradually became apparent. The company lost control of supply, resulting in years of delays, quality problems, and cost overruns.

Aerospace isn’t the only industry to revive vertical integration. Intel is beefing up chip manufacturing in the U.S., GM is building battery plants and Sweden’s IKEA is acquiring containerships.

One general flaw of the asset-light model is that, over time, firms can lose their innovative edge because a lot of “learning by doing” happens when production processes interact. Another is that low-margin bits of the supply chain get worn down to just a few sources. These may not have the financial muscle to make big investments in times of turmoil, or they may be geopolitically sensitive.

Classroom discussion questions:

Why did Boeing outsource fuselage production in 2005?
Why is it vertically reintegrating Spirit in 2024?

OM in the News: Boeing’s Outsourcing Strategy That Went Too Far

It appears that Boeing is about to acquire Spirit AeroSystems , the troubled jet-fuselage supplier that has been at the center of quality issues affecting 737 MAX jets, reports The Wall Street Journal (March 2, 2024). Spirit, which makes 737 and 787 fuselages and other major components, was created when Boeing decided to outsource and sold some of its factories 2 decades ago. Boeing now accounts for nearly 2/3 of Spirit’s sales, and cannot afford to have Spirit fail.

But Boeing engineers warned back in 2001 that the company risked losing control of its manufacturing processes and hollowing out its internal capabilities. The move to reacquire Spirit comes after a long series of quality problems with the fuselage sections it supplies. Spirit parts frequently arrive at the factory with defects. Those caused repeated delivery pauses at Boeing’s final assembly plants.

The move concedes that the strategy went much too far and has damaged Boeing. Last year, Boeing sent “armies of people,” its CEO stated, to Wichita to help Spirit get its manufacturing processes under control. When asked about Boeing’s outsourcing strategy, he recently told CNBC, “Did it go too far? Yeah, it probably did. But now it’s here and now. And now, I’ve got to deal with it.”

A deal would be a strategic reversal. Boeing sold the Wichita plant in a push to focus on final assembly. Acquiring Spirit would leave Boeing with the task of cleaning up its operations at the same time that Boeing’s own quality-control systems have been questioned by regulators. The FAA has just given Boeing 90 days to come up with a quality-improvement plan.

Boeing in the past few years had done everything short of acquiring Spirit to gain control over the supplier. Spirit has lost an average of more than $1 million per airplane on the nearly 1,200 fuselage sections it built for the 787, a cumulative loss totaling $1.4 billion.

Chapter 2 in your Heizer/Render/Munson text discusses the Theory of Competitive Advantage and the risks of outsourcing on pages 44-47.

Classroom discussion questions:

Describe the risks of outsourcing in general, and then the particular risks Boeing faced.
What are the risks Boeing faces as it reacquires Spirit?

OM in the News: An Inside Look at Boeing’s Outsourcing Mess

The site of this month’s midair door-plug blowout on this Boeing 737 is behind the wing, outlined in red

Long before the harrowing Alaska Airlines blowout this month, there were concerns within Boeing about the way it was building its planes. Like so many other manufacturers, Boeing was outsourcing more and more of the components.

Much modern manufacturing, of course, includes outsourcing, our topic in Chapter 2. From hot tubs to iPhones, machines are built in small pieces by different companies, then delivered to another factory for final assembly. The system has sliced costs from the process by letting production lines maximize output and eliminate waste. But the strategy also stretches oversight and adds risks, since the final product is only as good as the least-good supplier, writes The Wall Street Journal (Jan. 13-14, 2024).

A Boeing engineer distributed a controversial report in 2001 warning of the risks of its subcontracting strategy, especially if Boeing didn’t provide sufficient on-site quality and technical support to its suppliers. “The performance of the prime manufacturer can never exceed the capabilities of the least proficient of the suppliers. These costs do not vanish merely because the work itself is out-of-sight,” he wrote.

But Boeing doubled down on outsourcing in the 2000s with its 787, which was the first jet that was heavily designed by suppliers. To lower costs and risks of a new design, Boeing authorized dozens of suppliers to design and build major sections of the 787 (see text page 30), including mostly completed fuselage sections.

Now, Boeing is reckoning with the fallout from this strategy. Dozens of factories build key pieces of 737 and 787 models to be assembled by Boeing. One of the major subcontractors is Spirit Aerosystems, the sole supplier of the fuselages used in 737s and 787s. Spirit is heavily dependent on Boeing for revenue, and the two companies have often battled over costs and quality issues. The earlier 737 MAX grounding and pandemic sapped Spirit’s finances, and the company slashed thousands of jobs, leaving it short-handed and with inexperienced workers when demand recently bounced back.

Spirit employees said production problems are common and internal complaints about quality are ignored. In a given month, at a production rate of 2 fuselages a day, there are 10 million holes that need to be filled with some combination of bolts, fasteners and rivets. The result: a factory under pressure where workers rush to meet unrealistic quotas and where pointing out problems is discouraged if not punished. Increasingly, Spirit workers say, planes have been leaving the factory with “undetected defects.”

Classroom discussion questions:

What are the advantages and disadvantages of outsourcing?
What are Boeing’s options vis a vis Spirit?

OM in the News: Cutting the China Supply Chain

For two months, millions of dollars worth of designer perfume and cologne sat untouched in a Shanghai warehouse as Covid-related lockdowns rendered the building inaccessible. For Jean Madar, chairman of Inter Parfums, the lost sales validated his decision to break up with China. “We’re doing this even though China is way cheaper,” he said. “How good is it to have cheaper components when you cannot get them? You need to have super stability in supply.”

Inter Parfums cologne bottles are filled in New Jersey.

The NY-based fragrance seller is one of many companies permanently shifting operations back to the U.S. from China and other countries where cheap labor and easy access to factory capacity had far outweighed costs of shipping products across the ocean. Inter Parfums has doubled supplier contracts with U.S. companies; nearly 70% of parts now come from U.S. suppliers, rather than having to depend on Chinese suppliers for glass, metal and pumps. (There is enough profit made on a $50 or $100 bottle of perfume to absorb the higher expense incurred to give priority to reliable supply, even as inflation mounts).

“The pandemic and ensuing global supply-chain meltdown have made businesses—from beauty companies and auto manufacturers to global retailers and small businesses—rethink low-cost importing,” writes The Wall Street Journal (July 11, 2022). Close to 20% of supply-chain executives said they had brought some production back to a nearby country in the past year, double the number from a year earlier. “The equation has changed,” said a McKinsey supply chain exec.

Amid the pandemic, ocean shipping costs skyrocketed. Factory shutdowns and logjams led to major delays and shortages. Demand became difficult to accurately predict as consumers rapidly shifted buying patterns. All those dynamics compounded longer-term shifts already under way: rising cost of labor in China, higher tariffs and worries about theft of intellectual property.

But betting against China carries risk and remains out of reach for industries with narrow profit margins. Companies such as Peloton that set out in the pandemic to uproot their China-based factories and supply chains found doing so was harder in practice. The exercise-bike maker has since scrapped plans for a $400 million factory in Ohio.

Classroom discussion questions:

In Table 11.3 in your Heizer/Render/Munson text, 10 supply chain risks and tactics are provided. Which impacted Inter Parfums decision?
List several reasons why it makes sense to reshore now.

OM in the News: France “Reshores” Sneaker Production

After 15 years of manufacturing entirely in Asia, French sportswear firm Salomon SAS, decided it was time to start making its sports shoes at home. The challenge, in a country where shoemaking died out years ago, was how to build the necessary supply chain, writes The Wall Street Journal (May 7-8, 2022).

The Salomon Meta Cross produced in France

The first phase was to build an automated sneaker factory in France. It also redesigned its shoes, drastically shrinking its supply chain by slashing the number of components in each sneaker by 2/3. (Salomon’s redesigned shoe has 26 parts, down from over 70 in its other models). That still left the matter of sourcing materials in a region largely devoid of suppliers. Until now it has sourced soles and other parts primarily from China and Vietnam, two of the main centers of shoemaking.

For decades, Western companies have made everything from clothes to toys in Asia or Latin America, taking advantage of cheaper labor and highly developed supply chains. But the business case for that practice has eroded in recent years amid repeated shocks to the global economy, prompting many companies into a rethink. Then from 2020 onward the pandemic brought waves of factory closures, as well as port blockages and truck shortages, disrupting supply chains and pushing up freight costs. Russia’s invasion of Ukraine rattled global systems anew.

These crises have made “reshoring”— the return of production to a company’s home country—increasingly attractive. Some 2/3 of U.S. and European manufacturers say they will bring some of their Asian production home by 2025, with 1/5 saying they will bring back most or all of it.

Footwear production is particularly tricky to repatriate, because Asian shoemakers use cheap, plentiful, low-skilled labor. That model can’t be recreated in the West, prompting companies to turn to automation. The France-made shoes will be as profitable as those made in Asia, thanks to savings from lower transportation costs and the elimination of customs duties.

The new Salomon plant requires only 15 humans a shift; a typical shoe factory in Asia would require 5 times as many to match its output. Some operate sewing machines—this intricate work is still best done by hand—while others monitor the automated production lines. If the French project is successful, Salomon wants to build a similar automated plant in the U.S. to meet demand there.

Classroom discussion questions:
1. Why is this reshoring effort difficult?

2. Of the 10 OM decisions in your Heizer/Render/Munson text, which directly relate to reshoring shoe manufacturing?

OM in the News: Why the Richest Nation Can’t Get You a Face Mask

The U.S. is scrambling for surgical masks

Over the course of the past 50 years, the U.S has organized its economy following the theory of comparative advantage (see Ch. 2 in your Heizer/Render/Munson OM text). That means outsourcing to whatever external organization can provide the good or service at the best price. For much of this half century, the most cost-efficient strategy has been outsourcing to Asia. But outsourcing the wrong activities can be a disaster, as we now see in the coronavirus epidemic.

Critical supplies like medical equipment, pharmaceuticals, and food have been outsourced to China. “Most Americans know their iPhone comes from China but they do not know that more than 80% of all of their antibiotics, vitamin C and tilapia, 50% of their cod and apple juice, and 34% of their mushrooms come from China as well,” says one OM professor .

So I guess we shouldn’t be surprised by The Wall Street Journal headline (April 2, 2020): “Why the Richest Country on Earth Can’t Get You a Face Mask.” Indeed, Americans are asking why the most technologically advanced nation in the world can’t provide its citizens and health-care workers with lifesaving medical equipment.

Years of underinvestment in pandemic planning is a big part of the answer. But as in the pharmaceutical sector—highly dependent on Chinese and Indian producers—a reliance on global supply chains is also making life difficult for Western hospitals struggling to source gear. 85% of global medical mask-production capacity is in China. It is also a major producer of the polypropylene fibers that filter out dust and pathogens in the N95 respirators medical professionals rely on. The U.S. said in early March that it has only about 1% of the medical masks it would need to combat a year-long epidemic.

When the pandemic ends, one of the enduring changes it causes could be a major reassessment of complex global supply chains for critical medical goods.

Classroom discussion questions:

What are the advantages of outsourcing?
Why can’t the U.S. produce the billion masks it needs this year?

OM in the News: Do We Need a New National Industrial Policy?

Robots assemble a Ford F-150 truck at the Ford Rouge assembly plant in Dearborn, Mich

In 1987, two economists issued a prophetic warning: “If high-tech is to sustain a scale of activity sufficient to matter to the prosperity of our economy…America must control the production of those high-tech products it invents and designs. Production is where the lion’s share of the value added is realized.”

Even as trade tensions with China have deepened, many U.S. leaders continue to believe that offshoring is not only profitable but also sound national economic strategy. Manufacturing in China is cheaper, quicker and more flexible, they argue. With China’s networks of suppliers, engineers and production experts growing larger and more sophisticated, many believe that locating production there is a better bet in terms of quality and efficiency. Instead of manufacturing domestically, the thinking goes, U.S. firms should focus on higher-value work: “innovate here, manufacture there.”

Today many are rightly questioning this perspective. There is a growing recognition that we can no longer afford the outsourcing paradigm. Once manufacturing departs from a country’s shores, engineering and production know-how leave as well, and innovation ultimately follows, writes The Wall Street Journal (Nov. 16-17, 2019). It’s become increasingly clear that “manufacture there” now also means “innovate there.” A 2015 study found that U.S. companies have been moving R&D to China to be closer to production, suppliers and engineering talent—not just to reap lower costs and more dynamic markets. An estimated 50% of overseas-backed R&D centers in China have been established by U.S. companies.

American manufacturers have learned that the applied research and engineering necessary to introduce new products, enhance existing designs and improve production processes are best done near the factories themselves. As more engineering and design work has shifted to China, many U.S. companies have a diminished capability to perform those tasks here. The solution? It’s time for the U.S. to adopt an industrial policy for the century ahead.

Classroom discussion questions:

What should the new industrial policy encompass?
Which theory do you agree with–“innovate here, manufacture there” or “manufacture there, innovate there”?

OM in the News: The Drones Will Have to Wait at Amazon

Instead of charting a future that makes drivers obsolete, Amazon is so dependent on them it’s copying FedEx to build a network of independent couriers around the country in a frantic effort to keep pace with demand that peaks in December. Jeff Bezos captured the world’s imagination when he appeared on CBS’s “60 Minutes” and pledged to fill the skies with package delivery drones. “Five years on, Amazon’s CEO is betting on decidedly more terrestrial technology: drivers.,” writes Material Handling & Logistics (Dec. 18, 2018)

Bezos this summer issued a call-to-arms to aspiring entrepreneurs, offering them a chance to earn $300,000 a year by starting their own businesses making Amazon deliveries. All for as little as $10,000 up front, far less than the $250,000 it takes to open a fast-food franchise like McDonald’s or the $1 million required to buy a typical FedEx delivery business. Instead of charting a future that makes drivers obsolete, Amazon is so dependent on them it’s copying FedEx to build a network of independent couriers around the country in a frantic effort to keep pace with demand that peaks in December.

So far, Amazon has attracted tens of thousands of aspirants eager for a ground-floor opportunity serving the fast-growing company led by the world’s wealthiest man. Applicants go through phone interviews followed by several days of training. In just a few months, hundreds of new businesses have sprouted up around the country that employ thousands of drivers.

Shipping is one of Amazon’s fastest-growing expenses and consistently outpaces online sales growth. The company must find cheaper ways to deliver packages or its e-commerce business could be unsustainable without further price hikes.

Classroom discussion questions:

What are the strengths and weaknesses of this delivery approach?
Would your students be interested in joining such a business?

OM in the News: Honda Learns to Outsource

The Honda Civic production line at a factory in Wuhan, China

Honda’s decision to go shopping points to a radical culture change at one of Japan’s proudest companies, where founder Soichiro Honda in the 1960s said, “We refuse to depend on anyone else.” The struggle at the entrepreneurial success story cuts deep into Japan’s sense of itself as a global leader in technology, writes The Wall Street Journal (Aug.6, 2018). Honda once used staff technicians to design new technologies ranging from engines to the shape of the suspension arms. Today, Honda believes rapid shifts in technology mean it can no longer afford to keep pace working solely on its own.

Car makers around the world are under stress from the huge investments needed to develop new technologies used in electric vehicles and autonomous driving. To trim costs, most are leaning on megasuppliers such as Bosch, Continental AG and Denso, as well as smaller companies with cutting-edge technology such as Intel’s Israeli subsidiary Mobileye. For Honda, whose official name translates as Honda Technical Research Industry, the shift to outsourcing is forcing it to rethink its identity as a creator of unique auto technologies. Some of its most famous products include a navigation system that pre-dated civilian use of GPS, and the CVCC engine, which used less fuel and cut emissions. At the time of the engine’s unveiling in 1972, Honda’s head of research, trumpeted: “We at Honda did everything on our own.”

But in a demonstration for journalists last summer, Honda’s self-driving prototype rolled through a stop sign without halting. Honda said the vehicle was an early prototype and that its performance is now much improved as a result of collaboration with SenseTime. Honda’s eventual self-driving system will likely have only a fraction of its software written by Honda engineers. “We haven’t changed. What changed is that it is inefficient for Honda to do everything ourselves,” says a company exec.

Classroom discussion questions:

What was the advantage of doing “everything on our own”?
What are the advantages of outsourcing?

OM in the News: Still Outsourcing to Bangladesh

It has been 5 years since the 2013 garment factory collapse in Bangladesh that killed 1,134 people and left over 2,500 injured. The Rana Plaza factory building was expanded illegally, with extra floors stacked one on top of another. An engineer had declared it unsafe, and the thousands of people who worked inside, stitching garments for clothing brands from around the world, knew it was trouble. The tragedy focused international attention on Bangladesh’s role as the world’s second-largest garment producer, and led the government and manufacturing associations to promise big improvements.

Many of the world’s top clothing brands said they would stop contracting with factories if they failed to improve safety for their workers. European and U.S. brands set up programs meant to improve safety. Five years later, the situation is complicated, and factories overseen by the government and subcontractors remain at risk. About 3,000 of the country’s 7,000 factories are still exposed to life-threatening risks, ranging from a lack of fire safety equipment to serious structural flaws, reports The New York Times (April 24, 2018). The dangerous factories, often small, sometimes subcontract work from larger factories that deal with foreign brands. Textile exports are a huge business for Bangladesh, bringing in $28 billion annually, mostly from Europe and the U.S.

Under new programs, some 2,300 factories have been inspected and many have upgraded their safety standards. Industry insiders guardedly admit that subcontracting remains a problem, since larger businesses sometimes contract some work out to smaller, less-safe factories. This issue of outsourcing (Chapter 2) remains controversial to Westerners, who want inexpensive clothing, but ethically produced.

Classroom discussion questions:
1. What is the responsibility of Western firms whose manufacturing takes place in countries like Vietnam, Ethiopia, or Bangladesh?

2. What was the agreement reached shortly after the collapse?

OM in the News: China Is Turning Ethiopia Into a Giant Fashion Factory

“We’ve arrived at a new moment for the global apparel industry,” writes Businessweek (March 5, 2018). Ethiopia, a drought-afflicted, landlocked country of 100 million on the Horn of Africa is transforming itself into the lowest rung on the supply chain that pours out fast fashion and five-for-$12.99 tube socks. Lured by tax incentives, promises of infrastructure investment, and ultracheap labor, countries the Western world once outsourced production to, particularly China and Sri Lanka, are now the middlemen ramping up production here for Guess, Levi’s, H&M, and other labels. These industrialists like Ethiopia because the government wants them as much as they want cheap labor and tax breaks. Since 2014, Ethiopia has opened 4 giant, publicly owned industrial parks; it plans 8 more by 2020.

“The plan is to create a total of 2 million jobs in manufacturing by the end of 2025,” says a government official. “We are an agrarian nation now, but that will change.” The regimented days in factories are unfamiliar to most Ethiopians, though. “They get only 30 minutes for lunch,” one politician says. “Their backs hurt. They are exhausted. Those jobs, they make everyone sick.” Managers, primarily Sri Lankans brought in to impart the efficiencies achieved in their country’s sweatshops, would view this comment as epitomizing one of their main complaints: Ethiopia hasn’t equipped its citizens for the rigors of industry.

Outsourcing to the developing world has allowed Western consumers to ignore or remain oblivious to the environmental damage and working conditions behind the rising sea of inexpensive clothes. PVH, the parent company of Tommy Hilfiger and Calvin Klein, is the sole American manufacturer here. PVH views itself as a “supply chain pioneer,” because it sets out to develop the production capacity it needs and to directly oversee it. “If you believe industrialization is a good thing and raises people up, out of poverty,” says PVH’s Supply Chain Officer, “then the apparel industry has been the trigger in most developing countries.” As to doing business in Ethiopia: “This is no different from China in the late 1980s to 1990s.”

Classroom discussion questions:

What are the advantages and disadvantages of manufacturing in Ethiopia?
What are the main OM issues for a company opening a plant there?

OM in the News: Life and Death on the Third Shift

Every day at Tyson Foods’ cavernous meatpacking plant in Holcomb, Kansas, 6,000 cows clamber off waiting 18-wheelers. They’re watered, then ushered into the kill box. After the heads, hides, and hooves are removed, the carcasses are sawed in half, checked by U.S.D.A. inspectors, and sent down conveyor belts to be butchered, boxed, and bar-coded by 3,800 workers in 2 shifts. The journey takes 40 minutes.

After 11 p.m. the procession halts, and the sanitation crews move in. The only slaughterhouse job worse than eviscerating animals is cleaning up afterward. These “third-shift workers” wade through blood and grease and chunks of bone and flesh, racing all night to hose down the plant with disinfectants and scalding water. The stench is unbearable.

The cleaning crew is not employed by Tyson, however. Packers Sanitation Services, the nation’s largest cleaning contractor to the food industry, staffs the hard-to-fill night shift jobs. Packers pays their workforce $11.86/hour, 1/3 less than what production employees earn.

“Such is the genius of outsourcing,” writes Businessweek (Jan.8, 2018). In an era of heightened concern about food safety, meat and poultry producers are happy to pay sanitation companies for their expertise. The sanitation companies also assume the risk of staffing positions that only the desperate will take—largely undocumented immigrants. And they relieve the big producers, such as Tyson and Pilgrim’s Pride, of responsibility for one of the most dangerous factory jobs in America.

No one knows exactly how many sanitation workers get injured on the job, as OSHA doesn’t require plants to report contractors’ injuries. Judging from Packer Sanitation’s record, the nightly storm of high-pressure hoses, chemical vapors, blood, grease, and frantic deadlines, all swirling around pulsing belts, blades, and blenders, can be treacherous. Packers has the 14th-highest number of severe injuries—defined as an amputation, hospitalization, or the loss of an eye—among the 14,000 companies tracked by OSHA. Adjusting for size, Packers tops the danger list by a wide margin, with a rate of 14 severe injuries for every 10,000 workers. Its amputation rate of 9.4 dismemberments per 10,000 workers is 5 times higher than for U.S. manufacturing workers as a whole.

Classroom discussion questions:

As the boom for cheap protein creates yet more demand, how can operations managers deal with the 3rd shift issue?
Who is most responsible? OSHA? Tyson? Packers?

OM in the News: Outsourced Jobs to India May Now Go To Indiana

For years, American companies have been saving money by “offshoring” jobs — hiring people in India and other distant cubicle farms. “Today,” writes The New York Times (July 31, 2017), “some of those jobs are being outsourced again — in the U.S.” Salaries have risen in places like South Asia, making outsourcing there less of a bargain. (A decade ago an American software developer cost 5-7 times as much as an Indian developer. Now the gap has shrunk to 2 times). In addition, as brands pour energy and money into their websites and mobile apps, more of them are deciding that there is value in having developers on the same continent.

Many of these domestic outsourcers are private, little-known companies, but IBM, one of the foremost champions of the offshore outsourcing model, has announced plans to hire 25,000 more workers in the U.S. over the next 4 years. As a result, the growth of offshore software work is slowing, to nearly half the pace of recent years.

“The nature of work is changing,” said the CEO of Infosys, the Indian outsourcing giant. “It is very local. And you often need whole teams locally. It’s not enough to have people offshore in India.” This is a departure from the offshore formula of having a project manager on-site but the work done abroad. Infosys just announced plans to hire 10,000 workers in the U.S. over the next 2 years, starting with centers in Indiana and North Carolina.

In the 1990s, the internet allowed tasks like payroll and financial reporting work to be sent to low-wage nations, especially India. That brought the rise of the big outsourcing companies like Tata and Infosys, which still excel at maintaining the software that runs back-office systems.

Classroom discussion questions:

How has the outsourcing model changed?
List the advantages and disadvantages of outsourcing abroad.

OM in the News: And China Outsources to— Ethiopia?

Workers on an assembly line at a Huajian International shoe factory in Dongguan.

With many workers in the Haijian International shoe factory in China complaining about excessive hours and seeking higher pay, that company is sending 1,000s of their jobs to Ethiopia. This as Huajian faces scrutiny from labor activists for how it treats workers. The activists’ focus points to changing labor conditions in China as manufacturers try to get more work out of an increasingly expensive labor pool. But deep economic and demographic shifts mean a lot of low-end work — like making shoes — doesn’t offer huge profit in China.

Today, Chinese workers are less cheap and less willing. More young people are going to college and want office jobs. The blue-collar work force is aging. Long workdays in a factory no longer appeal to those older workers, even with the promise of overtime pay. Such tensions are fueling the drive of Huajian to move work to Ethiopia.

“In many respects, China’s economy is maturing,” writes The Wall Street Journal (June 1, 2017). The number of people who turn 18 each year and do not enroll in college — the group that might consider factory work — had plummeted to 10.5 million by 2015 from 18.5 million in 2000. Wages in Dongguan have increased ninefold since the late 1990s. Huajian peaked at 26,000 employees in China in 2006. Staffing is now down to 7,000-8,000 thanks to automation and the shift to Ethiopia. Citing labor costs and the country’s foreign investment push, Huajian is building a sprawling complex of factories on the southern outskirts of Ethiopia’s capital, Addis Ababa. Huajian’s shoe factories there already have 5,000 employees. When finished in 4 years, the Addis Ababa complex will be ringed by a replica of the Great Wall of China.

Classroom discussion questions:

Why leave China?
Why Ethiopia? Why not the US?

OM in the News: The End of Employees?

UPS employees at a facility in N.H. pack jet-engine parts bound for Pratt & Whitney factories. The work used to be done by Pratt employees

No one in the airline industry comes close to Virgin America on a measurement of efficiency called revenue per employee. That’s because baggage delivery, maintenance, reservations, catering and many other jobs aren’t done by employees. “We will outsource every job we can that is not customer-facing,” says Virgin’s CEO.

“Never before have American companies tried so hard to employ so few people,” writes The Wall Street Journal (Feb. 3, 2017). The outsourcing wave that moved apparel-making jobs to China and call-center operations to India is now just as likely to happen inside companies across the U.S. and in almost every industry. This “contractor model” is so prevalent that Google, ranked as the best place to work for 7 of the past 10 years, has roughly equal numbers of outsourced workers and full-time employees. About 70,000 temps, vendors and contractors test drive Google’s cars, review legal documents, make products easier to use, manage marketing and data projects, and do other jobs. (They wear red badges, while regular employees wear white ones).

The biggest allure of outsourcing employees, of course, is more control over costs. Contractors help businesses keep their in-house staffing lean and flexible enough to adapt to new ideas or changes in demand. At large firms, 20-50% of the total workforce often is outsourced. Bank of America, Verizon, P&G, and FedEx have thousands of contractors each. In oil, gas and pharmaceuticals, outside workers can outnumber employees by at least 2 to 1.

Janitorial work and cafeteria services disappeared from most company payrolls long ago. But a similar shift is under way for higher-paying, white-collar jobs such as research scientist, recruiter, operations manager and loan underwriter. Few companies or economists expect this trend to reverse. Moving noncore jobs out of a company allows it to devote more time and energy to the things it does best. Businesses currently spend about $1 trillion a year on outsourcing.

Classroom discussion questions:

What are the disadvantages of this massive outsourcing?
Would students want to take “contract” jobs?