How the United States can overcome outsourcing

One year after President Trump announced he'd saved hundreds of jobs at the Carrier Corporation in Indianapolis, there are lessons that can be learned. According to Kelley School of Business Professor of Operations Management Mohan Tatikonda, outsourcing of manufacturing is inevitable. However, there's a way for the U.S. to overcome it and bring higher waged jobs, but it requires higher skills and innovation.

Show Notes:

(ROI Music)

Shane: Good morning, afternoon, evening – whatever time of day it is where you’re listening and WELCOME… To The ROI Podcast presented by the Indiana University Kelley School of Business – located on the IUPUI campus in downtown Indianapolis. We’ve got the associate dean of the Kelley School – Phil Powell – next to me. How are you, Phil?

Phil: I'm doing great, Shane.

Shane: Today, we’re going to talk about the future of manufacturing in this country… We always hear about jobs, jobs, jobs… And I’m from Kokomo, Indiana where auto manufacturing is vital for that community… But there’s a shift happening right now – a shift that is a double-edged sword in many ways… And if we can Phil, let’s go back to last year.

Shane: When it made national news that Carrier, an air conditioning and refrigeration manufacturer here in Indianapolis, would be eliminating 1,400 jobs and moving to Mexico. You remember that, Phil? That was big news.

Phil: I remember that. But as Mohan Tatikonda, professor of operations management here at the Kelley School of Business, has said from the beginning – this was just a spot solution.

Outsourcing is always going to happen – we can put in place regulations, laws, and other mechanisms to slow it down if that were a good idea, but ultimately, work flows to where it is done at lowest cost and best. It’s almost inevitable, and we shouldn’t be against that because if work flows to some other place, it frees up our folks to work on more valuable things; so that’s the issue with outsourcing.

Phil: But Mohan says outsourcing isn’t the main contributor to job loss.

The biggest reason for manufacturing job losses is technological progress: greater efficiency in plants, supply chains, and in the offices. These days, a bugaboo is robotics, automation, and to some degree, artificial intelligence. To anyone who is threatened or displaced by technological substitution, believe me, it’s stressful, mind-blowing, and it is a very present and real problem! But if we step back as a matter of humankind, we’ve always had technological progress: we want it and it makes society better. Think back to the Gutenberg press! Before that, how were books written? The stories [say that] monks would sit in these rooms, have all these different markers, pens, and paintbrushes, and they would literally write a book. So those monks were displaced and jobless when we had printing presses! I don’t know about monk job trends around the world, but I’m going to guess the monks were very successfully redeployed to other things, like maybe counseling people in the community. We’ve had technological progress in agriculture, we think about the cotton gin, Henry Ford’s assembly line - the management technique of assembly lines wasn’t made up by Henry Ford, but he was the first one to really commercialize it. Because of the assembly line, people were able to create a car in a lot less time and for far lower cost than before. We could think of that as a technological or management substitution for labor.

Shane: So what Mohan is saying is that this is a matter of technological progress – which is a good thing for the most part?

Phil: Yes. And Shane, think about this. There are really two types of manufacturing: there’s traditional labor-intensive manufacturing – are those are the jobs we are losing overseas due to lower wages. Then there’s this newer advanced manufacturing, where it’s highly automated and there a demand for talent to manage the machinery. And we can’t forget that machinery is just that: A machine.

This issue about lower cost is, it’s not about a ten cent difference in wages – it’s a ten times difference, sometimes even greater. Any product that has a non-trivial amount of labor content can [be] produced at a lower cost elsewhere if the work is simple [and] easy to move somewhere else. Then there’s the kind of work that is more complicated – it often requires greater skills and workers who interact with automation and machinery. You know, a computer or a robot is just that: it’s a thing, a tool, but someone has to program it, set it up so that it does the right thing, make sure it does work well, and that it’s set up to communicate appropriately with other parts of the factory, robots, and other aspects in the supply chain. There are human beings who do these things, but they require different skills and typically, more training. What’s key here, if we care about retaining and growing manufacturing jobs and other higher-wage jobs, is that our companies need to produce products and services that are highly differentiated, that compete on features that others don’t provide, that are more responsive and customizable to consumer needs and so forth. 11:30 We can’t have our companies working on making commodity-style products that compete at the minimum cost where the effort is always to squish out the last penny. That kind of work is the kind of work that is the easiest to move elsewhere and is the kind of work that is the easiest to automate.

Shane: So if I’m pickin’ up what Mohan is saying, it’s that as a nation, we need to stop trying to compete with other countries on cost and wages – but rather let’s go upstream – let’s innovate and create jobs that require high skill, and that aren’t as easy to replace.

Phil: Exactly. So there’s this issue of developing an educated labor force who can man these machines and robots and be involved with the innovation progress, but there’s always the public policy that could be put in place to incentivize this way of thinking.

Advanced innovation, continuous innovation, features and capabilities that other products and services don’t have – if we’re going to make those, we will have higher-wage manufacturing jobs. We know that there are some companies that do this, the question then becomes why aren’t more companies competing on an innovation basis and trying to make products and services that garner higher margins? It’s all about incentives - fundamental economics. What we find in some companies that instead of using their current profits to further invest in themselves, R&D, and new product, service, and market developments, they’re taking the profits and instead, using them to buy their shares back – this is the infamous “share buyback” issue. It’s about incentives and priorities - companies and executives in some situations are prioritizing buyback of shares, which rewards investors and shareholders, but then uses up that money which otherwise could’ve been used towards internal innovation and workforce development.

Phil: So as a manager, an employee, an executive – whatever your position may be. Focus on creating value for the customer, and providing a better product for that customer through an entrepreneurial mindset.

(Music Begins…)

Mohan: Exactly, so it’s revenue maximization/growth by higher margins. If we’re going to be in a higher wage economy, that’s the only way we’ll be able to compete.

Mohan: We need to have this entrepreneurial mindset and a willingness to experiment and innovate. We need to try to increase the value of our products and services through additional features, different capabilities, faster response to customers, ways to customize it to each customer instead of being an off-the-shelf thing, and so forth. So this goes throughout the company, this is from top-to-bottom, bottom-to-top, thinking with openness about new ideas and willingness to experiment and fail instead of just doing the same old thing again and again, slightly better.

(ROI Podcast Music)

Closing thoughts from Shane and Phil.

Keep up with us.

Stay in tune with our latest episodes by subscribing to or following The ROI Podcast presented by the Kelley School of Business on Podbean or iTunes.