the logic of outsourcing (really dim stuff afoot?)

Whirlpool's top-of-the-line front-loader washing machine retails for $ 1.200. It's produced in Germany where the hourly wage is $ 32. In the US it's $ 23, in Mexico $ 3, and in China it's $ 1.
And Whirlpool has factories in all four places.

The interesting thing is that only one - 1 - hour of such manual labour goes into the $ 1.200 machine.

I like the washing machine as a model, it's physically somewhere between a Mercedes salon and a cheap toaster. A good starting point for some analysis:

Say your product retails for $ 100.

You, the producer is left with roughly $ 50.

The manual labour gets about $ 2,67, or $ 1,92 or even only $ 0,08 of the $ 100.

Consequently, the "outsourcer" moves production to save a maximum of two and a half percent.

What about the $ 97,32 that the customer is willing to give you for the non-manual-labour part of the product?

In essence, that amount can be allocated to a dollop of raw material costs being more or less the same in China as in Germany (so let's forget that for a moment), then it consists of a huge amount of "how we do it" stuff.

The "how we do it" costs are buried here:

• Organisational structure and how the human resources are used.
• Pushing the products through distribution channels.
• Helping the push through "marketing" in all it's flavours.

Would you spend all your focus to shave off pennies from the $ 2,67 or would you start looking harder at the $ 97,32?

Of course you would focus on the larger amount. But why are you not?

Because operational efficiency is easy to quantify? Because manual labour tweaks have less impact on your daily life than "how you do" your own job (read easier to lay off a labourer than a VP)? Because we take certain things as a given, even as the "truth"? Because "creativity" is limited to design, product innovation and advertising?

Forget operational efficiency for a while and focus on "how you do things" efficiency. Apply creativity to the 97,32 % and beat the heck out of your competition.

And do it now before you're the victim of some competitor who has a blinding moment of the obvious.

Or is it not that obvious?

[Note: I'm a bit off-line these days spending some R&R with the family so apologies up front for slow responses to convincing arguments contradicting the above :) ] 

Comments

[Ric]

Sig

I think it's because the 2.5% is easier to quantify - it's the "what gets measured gets done" syndrome. If a factory worker only has one task it's relatively easy to see what the output is - a task more difficult with, say, a marketing exec (or an IT geek!), so you focus on the "easy" problem, rather than the ones that REALLY give you value. There's a bit of 'short-termism' at work too. You're right - the value is always where the costs are higher (sorry - that SOUNDS obvious, but as you observe it is rarely perceived), but as they say - which half of your advertising spend is wasted?

[Phillip]

Sig you make a great argument against the outsourcing of manufacturing to ‘economically friendly countries’ (read free trade zone housing sweatshops).

No doubt that with the advent of radio frequency ID (RFID) – we - the consumers will demand that the RFID store data and include the details of production history, As is the case for the provenance of agricultural produce i.e. non-GMO etc.

Then we will know when we’re buying 98% marketing and 2% reality.

The consumer-driven future (present?) will demand real value from the brand – not just the empty promises of the spin-doctors.

Phillip

[neelakantan]

On the face of it, it seems to be a convincing argument. But having seen outsourcing from fairly close quarters in India, where I live, the outsourcing happens not for manual labour. The outsourcing is for skilled labour. Now thats a bigger chunk of the cost. Thats one point. The other is that many processes (stuff like design also) which are labour intensive in one country are not necessarily labout intensive in another. To take an example in GMs India unit (or TI or Intel or Microsoft or Google), designers (architects, researchers) work for a fraction of the cost in the US and deliver quality stuff. If outsourcing was only about manual labour, perhaps this argument would hold good, but often it is not.