America’s economic engine is compromised. Forces at work over the last 30 years have sapped our nation’s vitality. How did it happen?

“Matchmaker, matchmaker, make me a match . . . .”

America’s infatuation with global outsourcing was not love at first sight. It began as if a few scattered drops of rain . . . and then more and more, and then everywhere. At first a trickle, then streams and finally rivers flowing toward the sea . . . creating an outgoing tide toward foreign lands.

It started with a wholesale distributor looking for a less expensive product to sell, who found K. Bo Sang in So. Korea, who found a manufacturer eager to add a new product technology to their factory.

It started with a manufacturer wanting to add a product at the low end of its range, who found Joe N. in Chicago, who contacted a manufacturer in Taiwan.

It started with a manufacturer looking for products to broaden its product line, who found Richard R., an expatriate American, in Hong Kong, who contacted a manufacturer in Kowloon.

BS, Joe and Richard did quite well, putting U.S. companies in touch with foreign suppliers. They helped customers transfer technology and arranged logistics. They booked the orders and were paid . . . perhaps on both ends of the transaction.

They were not alone . . . and soon there was blood in the water. Long hours, but it was easy work . . . everyone wanted help in finding lower cost sources for what they themselves were making. And foreign companies and foreign governments were equally eager to sell at any price; so long as they got the business.

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America’s economic engine is compromised. Forces at work over the last 30 years have sapped our nation’s vitality. How did it happen?

I eventually learned how those China factories were able to sell at such low prices: after all was said and done, they were simply selling at a significant loss. Apparently the Chinese government was pumping money and credit through its banking system into their manufacturing base, without regard to profitability. No matter what it actually cost to produce, prices were arbitrarily set as low as necessary to get U.S. business.

Earlier this year, newspaper reports suggested that Chinese banks would withdraw their support and allow as many as 50,000 manufacturers of no-tech/low-tech goods to go out of business. That, at last, answered my question.

[Post 10 of 21]

America’s economic engine is compromised. Forces at work over the last 30 years have sapped our nation’s vitality. How did it happen?

In 1992 I had a series of in-depth conversations with the CEO of a leading maker of consumer scales: bathroom, kitchen, small office and medical. He was an accountant by trade and had, some years earlier, come upon an opportunity to buy a fast food chain out of bankruptcy. That leveraged buyout led to another buyout of a service business and finally to the acquisition of the scale manufacturer.

He impressed me with his focus on revenue and deal making. He hired excellent sales and marketing people, and barely tolerated manufacturing. Manufacturing cost him money; something was always going wrong.

His company had earned its leadership position and reputation, prior to his acquisition, by virtue of the quality of its products. During one memorable conversation he bragged that no one could buy quality steel the way he could. And that since his products were 85% steel, that gave him a distinct competitive advantage.

I thought it strange when, not forty minutes later, he began to extoll the virtues of buying from China. Something did not make sense. Since steel was 85% of his product cost, he could not account for their low prices. Even with a near-zero labor cost and lower quality China steel you could not account for the low, low price. And how did he account for the fact that he charged the factory back for defective products?

He had no answers to these questions and furthermore, he did not seem to care. He was buying products that were good enough, and at a price so low that he could afford to rent a separate warehouse to store the defective scales. And there the conversation ended.

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America’s economic engine is compromised. Forces at work over the last 30 years have sapped our nation’s vitality. Pushing back.

A 15% cost reduction was great, however, we still had quality issues.

Once our local suppliers were in place and our assembly operation up and running (a 7% increase in full time U.S. jobs, with benefits), we were able to look at the factors that effected product quality.

With a histogram of product returns by reason and a fishbone analytical diagram, we were able to create an engineering profile of our best-selling product. We discovered that a design error in a metal supporting bracket accounted for a majority of customer returns.

Six weeks to re-design the bracket and modify the tooling, and when we received the new parts we were able to introduce them into our production immediately; scrapping our inventory of old brackets. No defective finished goods on the water, no defective work in progress in Taiwan and no defective brackets on order with the Taiwan supplier to worry about. Only $100 worth of old parts into the trash!

Armed with an improved product, I re-visited our customer. Explaining in detail what had caused the returns and showing them our fix, we were able to win back their business. Life was good.

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America’s economic engine is compromised. Forces at work over the last 30 years have sapped our nation’s vitality. Pushing back.

Reeling from the loss of a sizeable piece of our electronic scale business, I knew that I had to improve the quality of our electronic scales. But how?

The Taiwan manufacturer was of no help. They designed and built these scales the best that they knew. The product return rate was reasonable for them and they had no appetite for any additional effort. I wondered if I could bring production to our facility in Illinois.

With components produced locally and assembly in-house, I knew that we would find improvements. But what would that cost? Our profit margins were already tight; could we afford to pay more for quality?

As it turned out, that question went unanswered. Working with our local parts suppliers and bringing assembly operations into our Illinois facility, we were able to relocate production from Taiwan to the U.S. at a “real” cost reduction of 15%!

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America’s economic engine is compromised. Forces at work over the last 30 years have sapped our nation’s vitality. Pushing back.

With our Weight Watchers business under increasing cost pressure from our French supplier, we decided, in 1988, to design a replacement mechanism and to produce all components in the United States. With costs and sales in U.S. Dollars and our supply lines shorter, our business was stable and more profitable. We were free to focus our energies on growing our market. Life was better.

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America’s economic engine is compromised. Forces at work over the last 30 years have sapped our nation’s vitality. How did it happen?

Next up was a review of our U.S. manufacturing and our off-shore sources. We were getting our electronic scales and heavy duty mechanical scales from two producers in Taiwan.

Landed costs for these Asian products enabled us to sell at competitive prices and the quality was generally acceptable. Life was good.

Within the year, however, a major player in the home and medical scale businesses decided to enter our markets. Their sources were, for the most part, China-based.

Although the quality of these new, competitive products was not great, the company’s marketing push was enough to cause our customers to look with a more critical eye at our products. We were able to hold on to most of our business, however, one major customer threw out our electronic line in favor of lower prices and the promise of better quality.

[Post 5 of 21]

America’s economic engine is compromised. Forces at work over the last 30 years have sapped our nation’s vitality. How did it happen?

In 1989 we acquired an established office and commercial kitchen scale business. At the time of the acquisition the company held a dominant position in the office supply market. Its significant position in the commercial kitchen category had begun to slip. We merged our Weight Watchers scale business into that company.

As part of the effort to stabilize and grow our commercial kitchen business, we determined to introduce a line of bi-metallic kitchen thermometers. After researching the opportunity and laying out our product line, we reached out to a Korean manufacturer of high quality instruments.

With everything set, the last step was to go to Seoul, South Korea to finalize prices and visit the factory. I wanted to learn how the thermometers were made, in order to develop a meaningful quality assurance program for product arriving in the United States.

In Seoul, after a day of meetings, with cost and logistical issues put to bed, I mentioned to my hosts that I was looking forward to getting some sleep and starting out the next morning to visit the factory.

“Oh, no,” they said, “we closed that factory year ago. Labor in Korea too expensive. Our factory now in Qing Tao, China.”

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America’s economic engine is compromised. Forces at work over the last 30 years have sapped our nation’s vitality. How did it happen?

In 1985 we established a business to manufacture food scales for Weight Watchers and its franchisees. The specialized scales were designed and built around a mechanism produced in France.

Our U.S. company imported the mechanisms from France and sourced all the other parts and packaging from local U.S. companies. The scales looked great, worked great and Weight Watchers loved them. Life was good.

However, things were not so good for our French supplier. In 1987 they moved their production to a facility in Northern Ireland. Their costs went down; ours did not.

In fact, since we now had to pay with Irish Dollars, a currency undergoing a volatile appreciation, I was forced to buy Irish Dollar futures in an attempt to hedge the effects of rising costs. It was gambling and there was no good end in sight.

[Post 3 of 21]

America’s economic engine is compromised. Forces at work over the last 30 years have sapped our nation’s vitality. How did it happen?

For me it started in 1985 while working on the turnaround of a small athletic equipment wholesaler. Up to that time all of the specialized footwear that the company sold was manufactured in Italy. In order to grow its business, the company engaged a small Korean factory to produce its own brand of footwear. The shoes were superior to the Italian-made models and sold at a much lower price. Life was good.

The good times were, however, short lived. Within the first year, Korean labor rates rose, product costs started to climb and competitors entered the market with production based in other Asian countries. What had been an exclusively Italian niche had, within less than two years, moved to mostly Asian manufacturing, with little or no regard for U.S. shoe makers in the process.

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