Sunday, December 4, 2016
VOLUME -27 NUMBER 10
Publication Date: 10/1/2012
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Archive >  October 2012 Issue >  Management > 

How G.E. Started Onshoring Production

General Electric's Appliance Park, which spans 900 acres and has 17 buildings, feels like a college campus, where Jim Campbell, the CEO of GE Appliances at the time, and Earl Jones, a senior counsel, had their offices. Almost everyone in Louisville has some connection to the plant, which, at its peak, had nearly 25,000 employees. In the last few decades, though, GE had moved a significant amount of manufacturing to Mexico and China, and the head-count had dropped to about 3,600 employees. As it was explained to us, every few years there would be a new round of layoffs, and the city would suffer.

Expanded Metrics
Earl Jones, a perfect gentleman who measures his words carefully, was candid about the evolution in GE's thinking. In the 1980s, GE began looking to Korea, China, and Mexico to out-source manufacturing of water heaters and refrigerators. The company was convinced that its brand would always dominate and focused primarily on reducing labor costs. As a consequence, by the late 1990s, almost 40 percent of GE's products were manufactured outside the United States. However, the model of relying on brand name alone turned out to be insufficient in the 21st Century. GE began to realize that American consumers were willing to buy appliances from Korean companies, such as LG and Samsung, that were offering new features at equivalent prices. The days of just selling white, boring appliances were over. Consumers cared about styling, and GE had to invent new designs for its appliances and better features.

GE knew that this innovative work could be done most efficiently in the United States, where many of the company's engineers and designers resided. Moreover, with rising shipping costs, slowly rising wages in China, and China's modest moves to raise its currency, the cost of manufacturing in China had also increased. So, Jeff Immelt asked the members of his Louisville team to take a look at how they could bring manufacturing of certain appliances back. He challenged them to "break the code."

Running a Large Operation
When I asked whether this means that Jeff Immelt (G.E.'s CEO) trusts their instincts on where to locate, Jim Campbell chuckled at my naivete. Jim is a substance guy. He belies the stereotype of a CEO as someone who is broad-shouldered, has a chiseled jaw, and is a glad-hander. He comes across more as your high school physics teacher; he's skinny, wears big glasses, and revels in the nuts and bolts of running a large operation. "I need to go before GE's board and justify what we are doing," he explained. "If I just say I want to bring back manufacturing to the United States, they will say, "That's nice, Jim, but the next person who will have your job . . .'" GE's board and management expect hard analysis. That's why Campbell and his team came up with an expanded set of metrics to capture the benefits of moving manufacturing onshore.

The focus is not simply on labor cost. In fact, the most significant metric is speed to market. According to Campbell, the cycle time for introducing a new refrigerator or water heater to the market is significantly reduced when design and manufacturing are both done in the United States. When an appliance is being made in China and there's even the slightest problem, GE has to ship it all the way back there to get the problem fixed. In order to perfect a product, the required back and forth between the design and production teams, separated by many thousands of miles, added months to launch time. As global competition put pressure on GE to continually innovate its products, the delay in getting new products to market became an increasing liability.

Tracking Lost Time
Campbell decided to track the time lost in marketing a new product because of the offshoring of manufacturing. He wanted a metric that would capture (Intel co-founder) Andy Grove's insight that there are costs to separating design and manufacturing. Mr. Grove would have been impressed not just with the integration but also with the company's rigor in measuring the benefits.

The company also started to measure customer satisfaction to gauge the quality differential. GE doesn't have as much control over the supply chain or the production process in China. So, the company suspected that there was some compromise in quality. But Campbell didn't rely on anecdotal evidence from his engineering team; he was interested in the perspective of customers.

So he instructed his team to survey customers and quantify the difference in quality that they perceived. Moreover, the company began tracking service calls to determine the relative number of problems with products manufactured domestically compared to those manufactured in China.

All Outsourcing Costs
In addition to measuring quality, the company quantified all of the costs of outsourcing, making sure that they were comprehensive and thorough in their approach. Many of its metrics coincide with those that writer Brendan Koerner identifies in his brilliant, recent article in Wired, which examines why companies have started to "buck the offshoring trend." The people on Campbell's team projected wage increases in China and also the likely appreciation of the Chinese currency in upcoming years. They looked at rising shipping costs and accounted for the inevitable transportation costs associated with fixing a product with defects. They considered the savings on raw materials that would result from an integrated environment of design and sourcing.

Such an environment encourages designers to model with a greater sensitivity for input costs because sourcers make them aware of the cost constraints from the beginning. Finally, they assessed the reduction in labor hours that comes from having a skilled domestic workforce that is empowered to make changes within an assembly line to maximize efficiency.

After analyzing the expanded metrics objectively, Campbell's team concluded that there was a business case for moving the manufacturing of refrigerators and water heaters back to Louisville, which they presented to GE's board of directors. To further make their case, they pointed to the federal tax credits for investment in efficient appliances and the Kentucky incentives for creating new jobs. Louisville, they argued, has a favorable business environment for manufacturing. Staying within American shores also protects GE's intellectual property from being copied by competitors. GE's board of directors was convinced; it decided to invest hundreds of millions of dollars in renovating the Louisville plant.

Much is riding on whether GE's Louisville experiment succeeds. We have been losing market share in the appliance industry to Korea, China, and Mexico for decades. And currently, only about 50 percent of appliances sold in the United States are made here. But if the GE Appliance Park team can show that it has "cracked the code," that trend may reverse. The goal is for GE to have the overwhelming majority of its manufacturing back in the United States. GE's success may be a harbinger for the three million manufacturing jobs that Boston Consulting projects will be created in the United States in the next decade.

That's not to say that GE hasn't faced its share of difficulties. Just recently, the company faced criticism for not paying corporate taxes. Many also view the company with suspicion because it recently closed its aviation plant in Albuquerque, New Mexico, and chose to offshore wind manufacturing to the United Kingdom and Germany instead of locating it in Albuquerque. But when it comes to GE's Louisville experiment, every American should be rooting for the company to succeed.

If GE, one of the world's model companies, proves that on-shoring is profitable, other American companies are likely to follow suit. What happens in Louisville matters for the future of American manufacturing.  

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