A partnership that many companies overlook is that with their local community. Sustainability, labor force availability, offshoring, reshoring, and job creation are all vital for strong companies and strong communities. In today’s world, the lack of skilled workers prevents many companies from growing to the level they desire. This chapter shows how they can partner with the academic community, local government, and not-for-profits to accelerate growth and profitability.
Social Responsibility for Partnerships
Many companies today are finding it increasingly difficult to find workers, particularly at the skilled levels of the organization; welders, machine operators, maintenance mechanics, technical assembly, and many other skills are getting harder to find. Many K-12 school systems focus on college as a follow-on, and many of the trade and vocational programs of the past are disappearing. But there are ways to create public/private partnerships between businesses and universities and especially community colleges to help fulfill the need for skilled workers.1
Starting at a basic level, one option for companies is the professional skills training program provided by community colleges to help train and place injured workers. Vocational rehab counselors design these programs to help injured workers develop a path to employment and support local companies’ needs. The program operates in three-moth segments for up to a year with training and an internship. There is little or no cost to the employer because the program covers training costs, internship payments, and any additional needed courses. There is even a small payment to the employer to cover some of the time spent managing the worker’s internship. The employer is expected to seriously consider hiring the worker at the end of the internship, assuming the worker meets the company’s needs. These programs provide wins for both the worker and the employer in concert with the community college and professional counselors. A win, win, win, win relationship.
Another option is for companies to work with sheltered workshops and organizations that help people with disabilities find jobs and develop a sense of independence and inclusion in society. Tillamook Country Smoker (TCS) is one story of how successful this kind of partnership can be.
Tillamook is a small town on the Oregon coast at the base of the rain forests of the Coast Range. Three industries support Tillamook: fishing, forest products, and dairy farming and associated products such as cheese. The area tends to support families in lower- and middle-income ranges. Life is quiet and people support each other in the close-knit community.
TCS began in the 1960s as a small meat market owned by the Crossleys and the Waltzes. The business was seasonal because Tillamook winters are gray and rainy, and activity is slow. The problem with a meat store is what to do with the chicken, beef, and pork in those slow winter months. The families decided to smoke it and make jerky and snack sticks such as pepperoni, which allowed the store to survive. Their reputation for making tasty meat snacks began to grow, and in the mid-1970s, the Smith family approached the Crossleys to build the business with more sales and marketing. Turned down by several banks for loans, the company sought investment and the Ginger family provided loans so that the company could grow the smoker business. Today, TCS has about 300 employees and distributes meat snacks all over the United States and internationally.
The company recognizes that the community has supported it through its initial lean years and through the past 30 years of steady growth. The city helped the company with its building projects and other permitting. The three owner families (by this time, the Waltzes had left the business) decided that they should give something back to their community. One way they did that was by partnering with the Marie Mills Center in Tillamook, a nonprofit that serves the intellectually and developmentally disabled.
Every day, a team of 8 to 15 people from the Marie Mills Center and their supervisors come to work on a bus. They support packaging activities such as bundling bags used for pepperoni sticks, putting lids on jars, and filling packages on the “chew” production line, a ground jerky snack. They work a full shift, take breaks and lunch, and are very reliable workers.
The company could easily automate everything they do, but management says it feels good to give these people meaning in their lives. Their pay allows them to go to the stores in Tillamook to shop and participate in society in ways they wouldn’t otherwise be able to. They have a sense of pride in their work. Dick Crossley, the COO, says that the workers from the Marie Mills Center love their work, and whenever he walks through the area, the smiles and hugs he receives are the highlight of his day.
The work also helps the individuals overcome some mental and health-related issues. One worker on the team used to have over 100 seizures a day, which were so severe she had to wear a helmet to protect herself. Now with the work she is doing for TCS, she has as few as one seizure per day. She gives Dick some of the biggest hugs he gets.
The company also benefits from this partnership because the labor force in Tillamook is limited and with the growth they have achieved, finding good workers is difficult. This reliable resource helps reduce the company’s staffing worries.
This is a perfect example of a community partnership that benefits the company, the individuals, and the community. The company has chosen to give back, even though they could have taken a different approach through automation, the workers achieve a richer life, and the community benefits economically. This partnership is truly a win/win/win.
Creating Jobs While Reducing Labor
Many companies are finding ways to create jobs while reducing labor. I know that sounds counterintuitive, but all you need to look at is the cost of labor as a percentage of sales. If you can reduce the overall percentage while adding jobs over time, you can create or at least save jobs for the local community. At Supra, when we were at $13 million in sales, labor was 13 percent of sales. By the time we got to almost $60 million in sales, labor was only 3 percent of sales. At the same time, we had not laid anyone off. We started with 61 people in production and ended with 62 people in production. They also earned more per hour and had much better benefits than before.
By focusing on productivity, companies can provide a strong job environment for the community and become an employer of choice, which makes it easier to find staff when needed. Many companies (and economists, for that matter) measure productivity as output per hour, but that doesn’t allow for cheap hours or expensive hours. I believe that Jack Welch was right when he said productivity is measured as units of output per unit of input. I believe those units need to be the same: dollars of output per dollar of input. So, what is the revenue dollar value of output per cost dollar of input? For labor, it is total direct labor cost divided by revenue.
Many accountants believe labor is a variable cost, that is, it varies directly with revenue. However, that isn’t actually true because in the short run, most companies don’t lay people off week by week because it’s too difficult to get trained workers back again when business picks up. Therefore, labor should be treated as a fixed cost in the short run, and variability should be managed through temporary workers or overtime, the only truly variable labor costs.
Given that the real economic driver of a company is output, activity measures such as building inventory don’t provide real value and shouldn’t be considered in meaningful measures of output. Labor and materials should always be measured as a function of revenue.
If companies had used those types of measures as well as consideration of total cost of ownership (TCO), many of the offshoring initiatives we saw in the 1980s wouldn’t have happened. Through productivity initiatives such as World Class Manufacturing, Six Sigma, and, eventually, Lean, companies could have achieved labor productivity rates that would have precluded moving production to low-cost countries. Productivity in the United States is often assessed at 10 times that of low-cost countries, making the effective labor rate close to, if not cheaper than, low-cost countries. The delays and other issues associated with offshore supply more than outweighed those costs, which we discuss in the next section.
If companies asked, “How can we keep jobs while improving profitability?” they may have discovered that with dramatic productivity improvement such as that provided by the Toyota Production System, they could have kept jobs in the United States and still accelerated profit and growth. Unfortunately, the cost-accounting systems used at the time did not provide the holistic information needed to make partnership decisions.
Reshoring and Keeping Jobs Local
Many companies are considering whether and how to reshore manufacturing as a way to support corporate objectives and bring jobs back to the United States. Many companies, both large and small, are looking at reshoring because of its benefits for competitiveness. In 2014, for the first time in two decades, the United States realized a net gain in jobs when comparing reshoring to offshoring.2 But the real key to deciding where to produce isn’t just the patriotic or political goal of creating jobs in the United States.
The original trend toward offshoring started in the early 1990s with major movement of production into the Far East, particularly China.3 While imported products have long come from Japan, Taiwan, and other Eastern countries, moving manufacturing plants to low-cost countries such as China gained momentum due to low labor costs in those countries. Many companies saw the opportunity to increase margins and profits by doing so, often without considering issues like different time zones, inventory costs, quality, and intellectual property protection.
As labor costs in the Far East increased and companies focused more on being close to their customers, some have brought production back to the United States, which focused academic attention on onshore manufacturing, yielding studies on its benefits. Soon the tide began to shift, and more companies “came back” and were glad they did.
Why did companies originally decide to go offshore? The obvious reason was the very low cost of labor. When offshoring first started, Chinese labor rates were a fraction of those in the United States. The standard costing systems used by many companies showed that it was much cheaper to produce offshore and bring products into the United States than to produce in the United States. In some cases, companies had other reasons to go offshore such as
Access to technology
Lower materials cost
Access to the newly opening Chinese markets
Proximity to other Far Eastern markets
Low transportation cost
However, in many cases, companies soon experienced challenges related to offshoring such as
Communication problems
Language
Time zone differences
Unreliable supply
Quality issues
Delivery reliability
Increasing costs
Labor
Transportation
Exchange rates and the favorable U.S. dollar
In addition, small- and middle-market companies were soon left behind as the Chinese in particular discovered that working with larger U.S. companies had many benefits in terms of product volume, use of technology, intellectual property that could be copied, and more. The better producers soon turned their attention to larger U.S. companies, leaving small companies to fend for themselves with smaller, less reliable producers. Companies then began to realize how important it was to consider TCO when deciding to change location.
TCO includes three groupings of cost considerations:
Pretransaction costs
Transaction costs
Posttransaction costs
Pretransaction costs include
Engineering and design
Materials requirements
Supplier sourcing
Travel costs related to engineering and production start-up
Contracting and local legal understanding
Adapting IT systems
Developing ordering processes
Transaction costs include
Item price
Order placement costs
Pipeline costs such as
Transportation
Customs
Inventory costs
Freight damage and loss
Receiving costs
Quality inspection
Return of parts
Scrap
Resolving order-related issues
Payment
Special regulatory requirements such as insect control and pallet type
Posttransaction costs include
Quality issues on local assembly lines
Defect and reject resolution
Field failures and warranty
Repair parts
Cost of materials and packaging disposal
Obsolescence driven by larger order sizes
Handling of shipping containers
Cost of holding inventory driven by order size
Most cost accounting systems don’t consider these “product” costs, and many companies didn’t consider them when deciding whether or not to offshore production. Unfortunately, once they started rearing their ugly heads, companies learned that distance matters in supply chain management, and the tide began to turn.
The equation for TCO is
TCO = A + PV (O + T + M + I + E – S)
A = acquisition cost
PV = present value
O = operating costs
T = training costs
M = maintenance costs
I = inventory costs
E = environmental costs
S = salvage value
This is not to say that all offshoring is bad, even though it moves jobs overseas. If your customers are in the Far East, it makes sense both from a cost and service perspective to move some production offshore to be near your customers, shorten your supply chains, and reduce costs. But before you do that, it is incumbent on your supply chain and product development teams to look at the larger picture of where production should be relative to your product development department and your customers. It is particularly interesting to me that Chinese companies see the logic of this and buy U.S.-based producers to gain access to U.S. markets, intellectual property, and suppliers. Developing a supply chain strategy that takes all of this into account allows companies to make well-informed decisions and to partner with the community to maintain or bring back jobs to the United States.
This is not just a one-way street where companies do all of the heavy lifting to benefit their communities. Communities can help companies remain in the United States as well. Cities and counties need to look at the regulations and taxes they place on companies, which are part of the cost model used to choose locations. Many communities provide tax abatement to entice companies to locate there. South Carolina, in particular, has open doors for companies to move there, as shown by Boeing and BMW. Other communities offer skills training programs to help provide the skilled workers that companies need. Infrastructure spending also has an impact.
Once I was working with a company that made pet furniture to decide where to place a distribution center to serve Eastern U.S. customers. Cat furniture—scratching posts, “cat condos,” climbing ramps, beds, and so on—is a billion dollar business. My client needed to shorten their supply chains to help their customers with just-in-time product delivery so that retailers could minimize inventory and maximize service levels to customers. A distribution center in the East was a requirement.
As we began to explore locations, the first consideration was the transportation system in the East. The Appalachian Mountains run through the eastern states and the freeway system is on the east or west side of those mountains with just a few crossings. Trucking is the primary mode of transportation for cat furniture and we had to pick a location with easy freeway access that allowed us to deliver our product to our customers’ main distribution centers.
Then we had to look at the availability of low-skilled labor. It turns out that there are a number of military bases where spouses were looking for jobs. Finally, we needed to consider the government environment including jobs programs, tax abatements, and so on. We ended up selecting a location outside of Cincinnati that kept our supply chains short, reduced costs, and provided excellent service levels to the customers. If we had simply looked at distance to customers or low-cost labor, we would not have selected the location we did.
Community partnerships, including using sheltered workshops, developing training programs, easing the process of building new plants or warehouses, and employing people in the United States, all provide great benefit to companies and their communities. Public/private partnerships drive accelerated profit and growth for companies, which in turn benefits their communities. Strong partnerships like these are worth the time they take to develop.
References
Pay, R. 2011. Re-shoring: Bringing Business Back Home, Operationspayoff.com. May 10.
Regole, R. 2015. “The Drivers of Manufacturing Reshoring.” Industry Week, July 23.
Wright, R. Spring 2008. “How to Get the Most From University Relationships.” MIT Sloan Management Review, pp. 75–80.