Outsourcing Challenges and Solutions: The Example of Craft Trades

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1 16 Outsourcing Challenges and Solutions: The Example of Craft Trades Michael J. Dendler Introduction Outsourcing is the practice of purchasing components of goods and services from other businesses rather than producing those components in-house. Offshore outsourcing refers to purchasing from sources outside the United States at locations overseas. This practice can increase profit margins for large U.S. companies by taking advantage of the lower labor costs, lack of governmental regulation and low import tariff rates often available to producers in foreign locations (Swenson, 2005). While the initial uses of this practice tended to be in the manufacturing sector, it is now common in a wide range of business activities (Groshen et al, 2005). The outsourcing of these activities, including information technology and aspects of technological innovation, challenges the ability of U.S. companies to maintain their position as dominant producers and innovators in the global market-place. Consequently, the initial short-term effect can be beneficial, while the long-term effects remain in question. In addition, there are other, more subtle results that require examination. The first of these centers on the effect that outsourcing, whether domestic or foreign, might have on career and employment opportunities for skilled workers in the U.S. (The Effect of Outsourcing and Offshoring on BLS Productivity Measures, 2004). As foreign workers become adept at producing goods to U.S. tastes and specifications, and can produce them at a lower cost, the need for skilled domestic workers decreases. As the need for skilled workers drops, these workers tend to fill semi-skilled positions, resulting in a loss of entry-level jobs which have traditionally provided the training-ground for the construction and manufacturing trades (P. Kennedy, personal communication, November 18, 2005). Another, possibly more subtle aspect, is the effect on the aesthetic quality of the articles produced. A loss of regional character and a decrease in opportunities for individualized workmanship are the earmarks of excessive outsourcing, whether taking place at home or abroad. The example of woodworking and related crafts is examined in light of the impact that outsourcing has had on these industries and manufacturing industries.

2 17 Craft and Economics Historically, in the craft of woodworking, technological development and aesthetics traditionally display a relationship wherein each element has an effect on the other (Rosenberg, 1977). For example, the appearance or aesthetic of an object is influenced by the method of production. Changes in aesthetics foster technological development, while innovations in technology inspire aesthetic growth. It is technological change that has made the practice of outsourcing possible but at the same time, the inherent balance between aesthetics and technology is upset by the practice. Outsourcing, by definition, emphasizes the importance of economic considerations over those of aesthetics. Technology is required to serve economics at the expense of aesthetics. Outsourcing can yield substantial economic rewards provided certain criteria are met (Swenson, 2005). By outsourcing components, it is possible for a company to require less specialized and cost-intensive labor and facilities. So long as shipping costs are offset by volume savings and start up costs are not excessive, the resulting savings can make the difference between profit and loss. In highly competitive fields such as cabinet and furniture manufacture these considerations are increasingly important. Ethan Allen Furniture is an example of an U.S. manufacturer that has, in recent years, moved virtually all production overseas, retaining only corporate and marketing functions in the U.S. (P. Kennedy, personal communication, November 18, 2005).The net result for such companies has been that of higher profits, coupled with lower costs. In a market economy, these are the hallmarks of success. Further, this offshore outsourcing helps other countries to establish their own manufacturing sectors. This influx of U.S. dollars, technology and innovation is combined with relaxed tariff regulations in many cases (Groshen et al, 2005). The standard of living in these countries is raised, increasing their consumption. Offshore outsourcing by U.S. companies can greatly assist developing nations in raising their standings in the global market place (Swenson, 2005). Excessive outsourcing presents some difficulties when applied to craft oriented fields such as cabinet making (P. Kennedy, personal communication, November 18, 2005). Companies may experience a reduced ability to provide uniquely hand-crafted goods for educated and knowledgeable consumers. In order to fully realize the increased profit potentials of outsourcing, a degree of standardization of components is required. By utilizing such standardized components, however, much of the opportunity for hand-crafted, unique detailing is lost. When the cabinet making industry ceases to provide such quality, consumers have no place to learn its value, and potentially skilled workers have no place to learn the craft of creating such quality detail. The result may, indeed, be lower costs and greater profits for larger, heavily-offshored manufacturing companies, but there are these other costs incurred by workers and by consumers (Caldwell, 2004).

3 18 Attendant to a decrease in the hand-crafting of details, is a decrease in the uniquely regional elements of design. The detailing used by designers to distinguish an architectural element has been supplanted by the selection of mass produced elements, whether produced domestically or abroad, which have an inherent homogeneity (Caldwell, 2005). The use of these mass produced details has become standard practice and has essentially closed the door on this aspect of the cabinet designer s education and work. The result is a generic aesthetic with elements designed for ease of mass production rather than designed to meet aesthetic criteria or standards (Caldwell, 2005). There also are negative technological effects to be considered. As the production of goods has moved offshore, so has the technology of production. The danger, already on the horizon, is that U.S. firms will offshore and outsource their innovative abilities along with their productive facilities. This ultimately results in goods, products and ideas that are American in name only (Schweber, 2005). While this may arguably provide short term economic gain for the corporations, the long term results may be negative. This decrease of domestic technological innovation and development has implications across society, impacting local economies, education and quality of life, because if worker productivity is diminished, then labor wages must follow (Faberman, 2005). An increase in the offshoring of technology and innovation reduces opportunities for individuals in the U.S. In fact, in the assessment of the positive economic results of outsourcing, the effect on individuals is frequently overlooked (Groshen et al, 2005) Coping Strategies In light of the burgeoning practice of outsourcing, it has become critical for small to medium size cabinet and furniture makers to develop coping mechanisms (Wisdom, 2004). There are, in general, four basic approaches to use. While there may be some overlap between the methods outlined, as a rule it can be stated that the general designations are significant. The first option is to embrace outsourcing completely. This involves outsourcing as much of the finished product as possible (Swenson, 2005). While providing the desired economic benefits, this approach results in a product whose components are selected from stock parts, reducing the cabinet maker to the role of facilitator and assembler (Groshen et al, 2005). The trade-off for the cost reductions is a lack of individual aesthetic quality. Another business model has the cabinet maker outsourcing work where appropriate, but only to other companies within the U.S. While not providing the same economic advantages as the last option, this method can be effective. By purchasing components and elements requiring specialized equipment and labor, the cabinet making company can reduce capital costs (Wisdom, 2004). In addition, this method provides the retention of capital and employment domestically, albeit in different firms, and

4 19 establishes niche market companies (Wisdom, 2004). The negative side of this choice can include scheduling problems, cash flow issues and a less versatile in-house work force (Caldwell, 2005). Some companies may choose to minimize the amount of work they will outsource, sending out for only the most specialized elements of production such as hand carved elements or decorative veneer work (Caldwell, 2004). The advantages include a more versatile work force and more flexibility in design, fabrication and scheduling. Disadvantages of this method include the need for a more skilled and expensive labor force, as well as the requisite capital expenditures for specialized equipment. The fourth option is clearly the most traditional model. It requires the cabinet maker to assume full responsibility for all aspects of the work leaving his or her shop. In practice this model is essentially obsolete (Rosenberg, 1977). Given the wide range of styles, materials and finishes required by twenty first century customers, the ability of one shop to provide the experienced labor and specialized equipment to answer potential demands seems to have become an economic impossibility. Regaining Equilibrium The solution to the problems created by excessive outsourcing centers on a restoration of the balance between the commercial and creative aspects of craft work. Both elements are required, and must work in harmony with each other. Three areas in particular are important to regain the necessary equilibrium, the maintenance of a qualified labor force, access to capital equipment appropriate to all areas of production and identification of an informed and discriminating customer base. This restoration of balance requires a labor force with a high degree of versatility in order to provide a wide range of options, business owners must take pains to locate and retain skilled workers with the abilities to perform a variety of tasks. As a result of outsourcing to date, these workers are increasingly difficult to locate (P. Kennedy, personal communication, November 18, 2005). Consequently, many shop owners are in the position of having to provide sometimes extensive training. When an apprenticeship system was common, this training was an accepted cost of doing business. As noted by one shop owner, I look for a few years of work experience that shows demonstrable competency in your trade, but preferably in a cabinet shop. They can come here and learn more advanced skills (Riggio, 2004). This particular business owner had to develop his own apprenticeship program as none existed in the state of Massachusetts [location of the shop] at that time (Riggio, 2004). Today, however, these programs are largely unused. This creates an expense for the employer, and a lack of entry-level positions for potential craftsmen and women. The question raised by an industry participant is if you hire only experienced help, where do people go for training? (P. Kennedy, personal communication, November 18, 2005).

5 20 In addition to a qualified labor force, the balancing of craft and commerce for U.S. cabinet and furniture makers requires that capital resources stay within this country. This retention of capital provides for needed machinery and facility maintenance and improvement. In order to maintain competitive advantage, investments must be made at home. Increased global competition is a reality. Low profitability can deter investment in new equipment, notes Wisdom, but capital retained at home allows for industry development (Wisdom, 2004). Encouraging U.S. manufacture of that capital encourages innovation. For example, an increasing amount of the manufacturing of woodworking equipment takes place offshore (Rosenberg, 1977; Riggio, 2004). This industry is one that was, at one time, centered in the U.S., but it is now virtually absent in this country (Rosenberg, 1977). Small and medium sized shops cannot be expected to take responsibility for halting, or even slowing, this trend. They can, however, exercise care in the purchase of capital equipment and reinvestment of profits into equipment produced by less heavily outsourced manufacturers (Wisdom, 2004). Any investment made domestically rather than abroad revitalizes economic conditions for U.S. firms by encouraging these firms to continue to manufacture, increasing the use of technology domestically and enhancing opportunities for innovation and education of U.S. labor. In part as a result of heavily profit driven outsourcing practices, consumer awareness of quality and value seem to have diminished. The Harvard Business School has studied the marketing of handcrafted furniture. The conclusion was that high-end woodworkers sell to about 2 percent of Americans, writes Riggio (2004). To amend this necessitates the willingness of small to medium sized shop owners to take on a greater degree of client education. Examples of this might include demonstration of the merits of one type of construction over another, explanation of why one type of drawer is stronger than another, or pointing out the superiority of hand carved decorative elements as opposed to more cheaply produced machined components. In addition to these tangibles, the product itself must demonstrate the advantages of quality in design and aesthetics. (P. Kennedy, personal communication, November 18, 2005). Finally, a cultural trend towards disposable goods must be addressed. Consumers may be unwilling to invest in the quality inherent in carefully crafted domestically produced items, some certainly will be (Riggio, 2004). Currently, the market is flooded with cheap, offshore produced goods bearing only superficial resemblance to quality products and there are customers who are satisfied with goods having limited usefulness. Advertising has educated many Americans about the need to constantly update and replace everything from their electronics to their furniture. Those customers identified as being willing to pay for work with a longer lifespan need to be shown the differences between short and long term value (Wisdom, 2004). Those desiring information about and access to quality, need to have the information and products available. By integrating these three approaches to restoring equilibrium, the appropriate balance can be found and new life can be brought back to a time honored craft. The measure of a society or culture rests on human achievement. In the words of Rosenberg,

6 21 even with the later emergence of industrial technologies, the skilled worker or artisan remained the vital carrier from the more advanced to the less advanced society (Rosenberg, 1977). When commerce serves culture, a society is held in esteem. When culture serves commerce, that society s greatness is diminished. Conclusion Outsourcing can offer substantial benefits to large U.S. manufacturers of furniture and cabinets. The benefits include lower labor costs, less government regulation and lower overhead costs. Provided that start up costs are not excessive and that shipping costs are offset by achieved savings, the cost cuts and increased profits make the practice very attractive (Swenson, 2005). These short term benefits come at a price, however. Included in the long term cost of outsourcing is the loss of jobs and ultimately skills of U.S. workers, and the investment in capital abroad rather than at home. In addition, the lower aesthetic quality of goods produced in large volume must lower consumer expectations, creating a decrease in aesthetic judgment. Outsourcing emphasizes economics over artistic quality in furniture and cabinet making. This practice has a negative effect on the consumer s ability to judge the quality of the objects they purchase. This further contributes to conditions where the value placed on skills required to produce greater quality workmanship is diminished and the opportunities for workers with those skills are reduced. The net result is a society that must search abroad for quality objects as well as the mass produced components that it requires. A more balanced approach to economics and artistic quality, or aesthetics, would be to seek to maintain at least some part of these productive abilities at home. This balance benefits workers seeking to enhance their skills, or simply wishing for gainful employment. A balance would also benefit those consumers who would prefer lasting value to low cost, low quality products. In order to regain a market share, U.S. craft oriented businesses must find ways to retain capital at home. In addition, they must take responsibility for developing and implementing training programs at the work place and in secondary schools, as well as in higher education. Finally, U.S. businesses must seek to educate consumers with regard to quality in construction, design and function. As these elements are brought into balance with the economics of cabinet making, the outlook for skilled craft persons, designers and business owners improves. Accompanying this industry improvement is the added benefit of a customer base that can continue to enjoy high quality products.

7 22 References Bureau of Labor Statistics, (2004). The effect of outsourcing and offshoring on bls productivity measures. Retrieved Oct. 16, 2005, from Caldwell, B. (2005). Outsourcing Made Easier. Woodshop News, Caldwell, B. (2004). Providing the whole package. Woodshop News, Faberman, R. J. (2004). Gross job flows over the past two business cycles: not all "recoveries" are created equal. Retrieved September 03, 2005, from BLS Working Papers Web site: Groshen, E. L., Hobijn, B., & McConnell M. M. (2005, August ). U. s. jobs gained and lost through trade: a net measure. Current Issues in Economics and Finance, 11(8). Retrieved October 05, 2005, from Kennedy, P. Personal interview. 18 November Riggio, T. (2004). The Apprentices. Woodshop News, Rosenberg, N. (1977). American Technology: Imported Or Indigenous? The American Economic Review, 67(1), Retrieved October 6, 2005, from JSTOR database. Schweber, W. (2005, September ). Are we losing our innovation religion. Engineering Design News, Retrieved October 3, 2005, from Swenson, D. L. (2005). Overseas assembly production choices. Contemporary Economic Policy, 23(3), Wisdom, B. B. (2004, December ). Wood component manufacturers adjust and compete in a changing marketplace. Modern Woodworking, Retrieved October 15, 2005, from

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