Outsourcing, Widgets, and Educational Opportunities

In Tuesday’s Senate debate, Michelle Nunn spent much of her time talking about how David Perdue outsourced jobs while CEO at Pillowtex. She created a new TV spot attacking Perdue on the issue.

Maybe it’s time to take a look at what’s going on. First of all, let’s take a look at outsourcing, and what it really means.

Let’s say you own a small manufacturing facility that cranks out blue widgets. One of your responsibilities as owner of the company is to make sure the plant, including the restrooms and the lobby, stay clean. You don’t want to hire a full-time janitor, so you contract with a cleaning company to stop by every few days with their mops and buckets to take care of the problem.

You just outsourced a job to a third party.

Now, let’s expand the issue a bit. As the company owner, you know that it costs $10.87 to produce one blue widget. That includes the cost of materials plus the labor to make it, plus a certain percentage of the overhead the business runs (like cleaning the bathrooms for the workers). It doesn’t include the cost of the sales reps who market the widgets to the retailers.

You are always looking to save money for your shareholder-owners, so you exercise your due diligence and talk to some outside factories to see if they can produce the blue widgets at a lower cost than what you are paying to make them in your factory.

As it turns out, you find a vendor in Israel who submits a bid to manufacture them for $8.62 each. Add shipping cost back to the U.S. of fifty cents each, and you’re up to $9.12 unit cost. It’s a smart business decision to let your Israeli vendor make the widgets and ship them to your logistics hub so the orders your sales department generates can be filled.

It bothers you, though, that your manufacturing workers would be laid off, with their jobs being replaced overseas. But, you are an entrepreneur. You hear about a new, improved type of widget you can manufacture. That would be the green widget. There’s a demand for it, and a better profit margin for you if you can get it to market.

The problem is that your current workers will need some training to learn the technical skills they need to know in order to produce the green widget. A high school education was all that was needed to make the blue ones, but times have changed. Unless you can find people with these skills, your transition to green widget manufacturing can’t succeed.

The good news is that your state has an Office of Workforce Development that works closely with the state’s Economic Development Department to make sure that the state’s technical schools and colleges offer programs that provide training in the skills that employers are seeking.

The state even developed a Work Ready program that our entrepreneur can use to train his staff on the procedures to make green widgets. He takes advantage of that program, and retrains his employees.

Because there is a bigger demand for green widgets than blue ones, he can pay his employees a larger salary than before. And, he can add more employees to his company.

Sensing an increasing demand for green widgets, the state’s technical college system added specific training on how to manufacture them. The state’s universities added programs in green widget research. Eventually, the state became known as the number one place to do business in green widgets.

All that because the state’s governor realized that job creation depended on economic development. And economic development depended on an educated workforce.

76 comments

  1. Matt Stout says:

    And with the rapid abundance of green widget certified assembly line workers, the supply of green widgets increases beyond the natural demand, so the governor has another initiative for the Dept of Corrections to purchase large quantities of green widgets. And the insurance commissioner requests the joint underwriting association own the risk … Until the JUA pulls it’s stock out of the blue widget enterprise in order to pay for the workers comp claims filed by the green widget employees because green widgets make you feel sick.

  2. NoTeabagging says:

    There is a small program in place that mirrors this scenario. Pinewood Studios looked to Georgia to build their first N. America studio. The Studio partnered with investors, including the Cathy family, in Fayetteville. Part of the concept involved a local film training program to help train people close to the facility in Film/TV production. This would build the trained labor base and help those close by to obtain work. The Film tax incentive has created such a boon to Georgia that many positions have no trained resident labor to take those jobs. There is frustration to productions companies because they have to bring in out of state workers at extra expense. Many people learn on the job, and good department heads can quickly get workers with skill and willingness to work opportunities to advance quickly.

    Clayton State University, through the Center for Continuing Education, developed a program with the late Bob Vazquez, then president of Local 479 of the International Alliance of Theatrical and Stage Employees (IATSE). They developed a six month training program that will produce qualified technicians as crew members for the film industry here in Georgia. This training will include the history of the film industry as well as training in various occupations of film production such as: safety, lighting , grip, production assistant, set and costume design, wardrobe, hair and makeup, and film editing. Many of the classes will be taught by local professionals currently working in the industry. Students can earn a certificate for completing the six month programs.

    I wish this program much success. It shows how we can use our local experience, university resources, and industry giants to train future workers to enter a specific field of employment.

    The film industry creates positive economic impacts in local areas where productions are based. The jobs create income that is spent locally. More importantly, production companies spend a huge amount of money at local businesses. These include office supplies, home improvement stores, hardware suppliers, fabric and clothing stores, home decor, restaurants, catering, grocery stores, rent for office and studio space, and additional rental income for on camera locations.

  3. objective says:

    this of course ignores why certain countries have competitive advantages in the labor markets; i.e. poor labor standards, consumer protection, environmental safety, etc. all those lapses in social welfare are external costs that haven’t fully accrued in our backyard- yet….

  4. blakeage80 says:

    Then comes the lean start-up peddling the idea of a more intuitive Red Widget which can be produced by a totally automated system. It gets investor to pump millions into Red Widget, Inc and it’s off to the races. Red Widget’s market share quickly soars to upwards of 60% of the widgetsphere! After a few major patent disputes, Red Widget continues to crush its ‘old school’ competition through good, old fashion marketing and ingenuity. Then, the unthinkable happens. BlueGreen Widget, Inc cuts a deal with a few Congressmen up for reelection and attempts to cut Red Widget’s legs out from under them by burdensome regulations that apply only to Red Widget’s manufacturing robots. Red Widget folds when, after years of court cases, the Supreme Court rules against them as they try to have the unjust laws repealed. It’s a sad day for all Red Widget loyalists who bought the better product they believed in. Now we have to retrain all the unemployed robots too.

      • Blake says:

        You don’t know the difference between Myanmar and Israel? Or low-education, low-cost products and high-education, high-cost products?

        • blakeage80 says:

          The reality is that American factories in poor countries provide lots jobs to people that might otherwise starve because those governments can’t afford to borrow money to give to people like ours can and UN rice only goes so far. Just because those people aren’t living like you and I don’t mean they are slaves or are being abused.

          • Blake says:

            That’s great. Let David Perdue go be their Senator, then, and leave being Georgia’s Senator to someone who cares about our jobs, here.

            • blakeage80 says:

              He does care about jobs here. Haven’t you seen his latest ad? He wants to correct bad energy and tax policies as well as address education and infrastructure issues. These kinds of things keep businesses from leaving.

              • HueyMahl says:

                “He does care about jobs here.”

                Just not the thousands of jobs he outsourced over his career.

                Hey, I’ve got a new slogan for him:

                “Vote Perdue – he is too dangerous to leave in the private sector!”

                Or maybe:

                “Vote Perdue so he won’t outsource you!”

            • blakeage80 says:

              Poorly treated employees and unsound structures are a different issue altogether. I thought we were talking about jobs in Georgia.

              • you are not good with reading comprehension…your own comment i was replying to:
                The reality is that American factories in poor countries provide lots jobs to people that might otherwise starve because those governments can’t afford to borrow money to give to people like ours can and UN rice only goes so far. Just because those people aren’t living like you and I don’t mean they are slaves or are being abused.

          • Lea Thrace says:

            But a decent number of the manufacturing jobs outsourced go to areas where these people are treated like slaves and are abused. Just google the clothing factories in Bangladesh. Look at how many people have died in those factories in the last year alone. Look at all the problems at FoxCon where iphones are built. We arent giving these people a better life. We are often exploiting their cheap labor and they are barely getting anything worth living for in return. But because a penny for 15 hours of labor is better than no penny, it’s accepted practice.

              • Lea Thrace says:

                Hell if I know (or care either). I can honestly say I am neither a Perdue supporter or a Nunn supporter.

                I’m just pointing out the very real downside to outsourcing that some people do not see.

                • saltycracker says:

                  Outsourcing is a very complex issues some good, some bad. A Georgia lawmaker or businessperson should understand why we outsource to Mississippi much less India.

                  A politician that attacks a decision without a clue WILL take actions that will make matters much worse for the very people she wanted to help. A care less voter is her shill.

  5. saltycracker says:

    My experience with unions is when we came up with more efficient mfg processes a lot of changes were required, they worked with us , both sides had to adjust for more volume and better jobs down the road. The U.S. textile industry fought that hard and I imagine the venture capitalists and Perdue hit a stone wall fast on this one.

    • saltycracker says:

      Suspect there is a lot of blame to throw around but venture capitalists have time and financial conditions that do not compute in long long committee meetings…..

      Vo-tech is great for the willing…

  6. saltycracker says:

    So what is Nunn proposing we do, pass some severe restrictions on our corporations. subsidize them or jack tariffs thru the roof ? and we are concerned about those in poverty and food cards ?

  7. John Konop says:

    What I am confused about it seems Michelle Nunn supports the trade deals that created the problem. Why is she complaining? Do you see anything about slave wages overseas and her reform plan via trade deals?

    ….We must continue to seek trade agreements that provide international market opportunities for American products and services and grow good-paying American jobs. From the European Union to China, we must continue to be partners as well as competitors and challenge any trade barriers that unfairly disadvantage our American farmers or businesses……
    Source: 2014 Senate campaign website, michellenunn.com, “Ideas” , Nov 15, 2013

    http://www.ontheissues.org/International/Michelle_Nunn_Free_Trade.htm

    • Jon Lester says:

      She should oppose sanctions against Russia for the same reasons, because their retaliatory embargo on foreign agriculture means Europe is flooded with the products those farmers expected to export, and the result is reduced opportunity for Americans to gainfully compete.

      • John Konop says:

        That has nothing to do with this issue….Nunn is complaining about outsourcing jobs to places like China…..What is she proposing to do with WTO China, NAFTA/CAFTA…..? You get in the trade they are allowed to use slave like labor…..?If she does not want to change it than what is she complaining about?

        • Jon Lester says:

          Sure it does, and it also directly involves certain foreign policy views she’s expressed (and recently reaffirmed). The United States government is directly responsible for the overthrow of a democratically-elected regime, and has only doubled down upon that stupidity with measures that can only serve to destroy economic activity, the very bulwark that keeps the peace in a civilized world, far better that military deterrence.

            • Jon Lester says:

              Anyone who supports a foreign policy apparatus that destroys nations and creates new refugees really doesn’t have any business faulting someone for investing their confidence in foreign labor markets, which invariably has the effect of growing those economies and elevating standards of living therein. Chinese labor has been organizing in recent years, Bangladesh is finally getting some regulatory reform, and at some point, labor standards worldwide will reach something like parity. Besides, protectionist measures are a poor substitute for that fabled “American ingenuity” that’s supposed to adapt to the times.

              • John Konop says:

                So you and Nunn think it ok to have USA jobs go to markets with slave like labor conditions…because time will fix it….but you are against the executives who follow the policy you support? I am really confused….

                • Jon Lester says:

                  I do feel strongly that expanding trade with other countries is a better idea than destabilizing them (which is invariably done for moneyed interests, as Hunter Biden can surely tell you), and I can’t let the same people who would vote to perpetuate current practices distract me with a generalized wedge issue of less ultimate importance. I also tend to believe Milton Friedman’s axiom that economic freedom is usually followed by political freedom, and investing in developing economies is something positive we can do to deliver other peoples from poverty and repression. We can revisit the issue on the 22nd, at whichever bar we go to that night.

                  • John Konop says:

                    You agree with doing more trade deals that put American workers at a disadvantage…and mad at the executives that implement the policy you and Nunn support? HUH? Btw….Adam Smith warned that if workers do not have the same legal rights as the employeers that we would see wage distribution problems…The father of the free market system….the guy who is credited with creating the blue print for the ” Bill of Rights” and one of the leading abolitionist of his time…try reading ” Wealth of Nations” than debate policy…..

      • seekingtounderstand says:

        The Sanctions make our friends (Europe) hate us and work with our enemies. Plus it makes Putin look like a hero and the Russian people hate us rather than not like Putin.

          • Jon Lester says:

            I’ll say what I think of Brzezinski’s record with Carter (and since) in another thread, something I also hesitated to share on the occasion of the former president’s recent birthday.

  8. Patrick T. Malone says:

    Amazing to me how simple, logical examples draw out the whiners and complainers with the brilliant logic of “Myanmar isn’t Israel”.

    • I don’t know about you, but the last time I checked Myanmar actually isn’t Israel.

      Your point?

      I will talk a little slower for you. There’s certainly some validity to an American manufacturer finding certain processes that can be done cheaper elsewhere (either in America or overseas, either in Israel or Myanmar) so that the manufacturer in America can focus on a higher profit, higher skilled required process to manufacture. That is what this example is about.

      That is not, I repeat, not, David Perdue’s history outsourcing. He wasn’t going to television manufacturers saying ship that production overseas so you can assemble microchips instead. He was going to garment, shoe, linen etc manufacturers and saying people in Myanmar (or Vietnam, or China, but definitely not Israel or Alabama) can do this for $1 day what you pay $10/hour for, so let’s open the factory there and just lay off everyone here.

      That’s business – fine. A lot of people don’t want a guy that made a career doing that in elected office, the same way they don’t want a guy who made a career making porno films (also business). Choices in life matter.

      And quite frankly, Perdue talks about regulations that forced companies to utilize his services. Please tell me what it is about China’s regulatory system at $1/day wages and no environmental protections that you’d like to see Perdue implement here so that people like him no longer need to ship jobs overseas?

      • John Konop says:

        Chris,

        I do not get your point? Nunn supports the policy that promotes the use of slave labor…..Are you against Perdue for doing it and or Nunn for supporting it?

  9. seekingtounderstand says:

    One of the first bills the Democrats passed when they took control in 2008 was an environmental bill outlawing Edisons incandescent bulb. As of 2014 we can only buy CFL bulbs which contain mercury, a highly toxic poison. One bulb has enough mercury to posion 6,000 gallons of water forever. If you drop it in your home your home will remain dangerously life threatening.
    As we through them in the trash, we are destroying our environment.
    American companies made incandescent bulbs. CFL’s made in China.
    So for the Democrats to bash Perdue is outrageous, and Perdues team should be telling this story everything they do it.

    • NoTeabagging says:

      Not all incandescent bulbs were phased. Specialty bulbs, and those meeting certain energy use thresholds are allowed to continue being manufactured. LED technology is fast replacing CFL’s as the more efficient, and long lasting option. Both LED and CFL are getting better at creating a pleasant light, not as blue as early models. CFL’s never really had the long life that manufacturers touted. CFL’s are recyclable and many point of sale venues.

    • benevolus says:

      “Edison” incandescent bulbs were not outlawed. Efficiency standards were set for some bulbs.
      There is a tiny amount of mercury in many CFL’s.
      LED’s are quickly supplanting CFL as the efficiency standard.
      George W. Bush signed the bill into law.

  10. seekingtounderstand says:

    If one of your journalist would kindly ask M. Nunn about the Dem. passed light bulb/CFL bill and how she views the poisoning of our water, land and food Georgia Voters would appreciate her answer. She is not responsible, but will she fight to help keep our environment safe from mercury poisoning?

    • NoTeabagging says:

      Who will keep us safe from Fracking? Millions of gallons of water contaminated with undisclosed toxic chemicals to open gas wells underground.

    • You do realize that more mercury is released into the environment by the power generation necessary to light an old fashioned bulb than is contained in a CFL bulb, right?

  11. Rich says:

    From my on experience in apparel manufacturing, the jobs outsourced were NOT replace by tech jobs. I wasn’t effected in I.T., but had a clear vantage. Even in industries that may create new jobs, any skills taught in technical colleges and trade schools are short-lived. There’s no substitute for a solid foundation in computer science.

    The current ads aren’t just an insult to their opponents, they’re an insult to electorate. I believe everyone is quite aware of who’s lying and by how much. I’m disappointed with Carter’s disowning his grandfather’s legacy, and Nunn not getting behind the democratic platform (minimum wage increase, health care, etc.), only focusing on willingness to cooperate. However that’s nothing compared with the overt lies from the right.

    This election will come down to turnout. Saxby Chambliss was elected even after assaulting Max Cleland with associations to Bin Laden, a lie that wasn’t even necessary. If dems don’t go to the polls, then history will repeat.

    • seenbetrdayz says:

      Just curious, but if IT is supposedly ‘safe’, why does every tech support hotline I call have an Indian guy on the other end of the line?

      I’m beginning to think there’s nothing that can’t be outsourced. Even service jobs. Mark my words, one day it will be cheaper to send your car to an overseas mechanic and have it sent back to you, than it will to have the work done in the U.S.

      • xdog says:

        Let’s outsource airport security to the Israelis, governmental admin to the Japanese, and highway planning and maintenance to the Germans.

      • Rich says:

        IT is a broad category. In my circumstance a small team of developers could communicate directly with department mangers, supervisors, etc. and turn around solutions faster. Asking a warehouse manager to list (or even know) his requirements, translate them to specifications for outsourced coding, test and then implement isn’t practical, but you can bet it HAS been tried.

        Other situations resemble the “infinite monkey theorem.” Customer service reps sort of fall into that category, following a dynamic script. Rarely does phone tech support suggest a solution that hasn’t been encountered before.

  12. seekingtounderstand says:

    M.Nunn looses her power when she brings up outsourcing due to the record of the democrat party outsourcing American jobs.
    Non-profits, if you take a tax course on how they operate, is not always for the good. I am sure the one she works for was stellar, but too many of them are not. The public is unaware about the dark side of non-profits. EX: the leaders pay themselves high salaries but do little for the charity.

    So for her to say non-profit experience is better than a business persons experience is debatable.

  13. Jon Richards says:

    Based on the comments on my post, here are some additional thoughts:

    When I wrote it, I wasn’t thinking about setting up an argument for the relative merits of outsourcing, especially if whether some types of outsourcing are better (or more justified) than others. Instead, I was trying to point out that businesses tend to make decisions based on how to improve the bottom line. And as Jon Lester points out, a job performed in another country may pay less and offer fewer benefits than the same job in the US, however it may be an improvement to what the workers in that country could have gotten before.

    So the bottom line is that businesses are going to try to manufacture at the lowest cost per unit of output that they can. Manufacturing in Asia has increased its efficiency and skills to the point where they can be the low bidder for a wider variety of products than in the past. That, in turn, is driving up wages somewhat in those countries. At National Review, Kevin Williamson does an awesome job of describing the relationship between compensation and efficiency in this post.

    Similarly, lower costs in transporting goods between countries, along with better logistics, provides another incentive to outsource production in cases where previously it would not have made sense.

    The good news is that there are new products that require more advanced skills to produce than those whose jobs have been outsourced. America remains the location of choice for these jobs, and they tend to pay higher than the jobs that left to go overseas.

    But, someone has to align the newly needed skills with the education and training offered to students, or even older workers who want to learn new skills to better themselves. That’s something that Governor Deal has tried to do with his career academies, and the other actions mentioned in the original post.

  14. WeymanCWannamakerJr says:

    Obfuscate outsourcing all you want, this political fight boils down to class warfare. Outsourcing doesn’t always equal offshoring though under current laws this is most often the case. Even in the rare cases that it is one US firm outsourcing a portion to another US firm in the long term it serves as a detriment to employee morale and company loyalty. In some cases portions of the division being outsourced are kept by the outsourcing company at least as long as their insider knowledge is useful. Their company loyalty to the original company obviously goes to zilch, as does that of those who were not cut from the herd. In the short term however the CEO and other officers get large bonuses for the paper results of eliminating liabilities, namely former loyal employees.

    The CEO class doesn’t care because they are mostly guns for hire anyway in the modern age. The voters need to decide if they want their lawmakers to continue the trends of making laws that facilitate offshoring and tax advantages for foreign outsourcing companies, along with the abuse of H1B visas by US companies. The CEO class members are the 21st century robber barons that mostly operated legally under their 19th century laws as well. We just need to decide if we want one of their members in the Senate making these laws that have helped eliminate the middle class in this country.

  15. NoTeabagging says:

    Let’s have some good old WPA action. Hire American citizens living in America to fix our crumbling roads, bridges and other infrastructure. As some people like to say, before we go bomb and another country and spend millions rebuilding theirs.

      • NoTeabagging says:

        …which keeps them off subsidies and other government assistance.
        Or open the work to private firms, in what I’m sure (cough,cough) would be a fair, open and honest bidding process to avoid conflicts of interest from politically connected firms.
        Let them pay the workers fair wages and benefits.

  16. NoTeabagging says:

    I have appreciated the comments in this discussion and realize there are some points on trade, etc. I need to read about.

    There is another crazy option I dream about to bring back jobs and productions. Perhaps one day we will get tired of buying cheap, poorly made foreign goods, and bring back quality manufacturing to the US. Bring back the firms that our big box, cheap retailers forced overseas to make inferior products. The bonus would be integrated manufacturing-consumer-repurpose loop to reduce waste and raw materials. Again, just a dream.

    • saltycracker says:

      They don’t make cheap inferior products. Minor examples:
      Mexico is going to build our cars and trucks…. articles on admin using build America $ – many of our bridges (state projects) are designed and welded overseas….we just assemble them. Even our farmers need foreign weather predictors that have computers to get it done. We are the fat ones just in the race to enjoy, take what we can but not to win.

    • saltycracker says:

      PS: sat thru interesting meetings listening to labor in Illinois saying a plant in the south would be building crap… later both built better stuff and more of it…

    • Harry says:

      My Czech in-laws asked me why US businesses and even NASA outsource satellite launch services on Russian Proton and Dnepr boosters. Was it due to cost? From my viewpoint, we can’t offer a quality cost-benefit program anymore. Why? Mainly because our system doesn’t produce a quality workforce. We can’t even supply Silicon Valley with qualified workers.

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