102-Saving Jobs by Outsourcing

SmithCNC-USA is an Ohio firm that helps small midwestern manufacturers obtain components and raw materials from China and Mexico. The firm’s customers are U.S. manufacturers who are doing small and medium sized production runs. These companies are under severe pressure in the United States because of relatively high costs here compared to those in China and Mexico. This company has convinced its customers that they can save a good number of their jobs, and perhaps, even grow, by outsourcing only part of their production to cheaper foreign sources. The company convinces its customers to outsource just some components in order to save the rest of the jobs in the customer’s organization.

This cost reduction effort is an example of one of the ways companies are able to reduce the cost of Inputs used to produce product Output. A reduction in the rate of cost a company must pay for the Inputs used to produce product Output is equivalent to reducing the number of Inputs. A person earning $10 an hour, who can replace another earning $20 an hour, effectively cuts the labor input by 50%.

There are several ways that companies have found to reduce the rate of cost they pay for their Inputs. These include the following:

• Purchase in larger quantities
• Reduce the quality of the Input
• Change the components in the rate of cost
• Use subsidies offered by third parties
• Request the supplier to lower the price of the Input
• Change the source of supply to a less expensive supplier
• Expand in-house work

The SmithCNC-USA work is an example of a change in the source of supply, which reduces the effective Inputs required to produce the product Output.

For many more examples of ways to reduce the rate of cost you must pay for your Inputs, please see www/strategystreet/improve/costs/reduce the rate of cost.

Posted 5/7/09

Update:

The US hourly minimum wage is 4 times that of China.  By 2020 the US had lost 3.7 million jobs since 2001 due to its trade imbalance with China.  The manufacturing sector had suffered the most.  The trade deficit has continued to grow.  From 2008 to 2018 1.7 million US jobs disappeared.  These job losses affected all 50 states.  In 2019 the US still had a $321 billion trade deficit with China.

On average, full labor costs account for about 70% of total manufacturing costs.  Mexican direct labor costs average less than 25% of those in the US.  During the period from 1980 until 2022 the US suffered a $250 million average trade deficit with Mexico.  This figure reached a peak of $6.3 billion in 2020.  Most of Mexico’s exports are manufactured products.

The export of US jobs to countries with lower labor rates has decimated US manufacturing employment and has had disastrous effects on many towns reliant on those manufacturing jobs. We have reduced direct costs for consumers but have we counted the full cost to the US economy? Unemployment is low in 2022 but are the jobs that we have today of the same quality as those we had a generation ago?

8/22

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