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.