Thread: Rethinking Outsourcing In The Recession

Rethinking Outsourcing In The Recession
Lauren Sherman, 02.20.09, 02:30 PM EST
Small U.S. clothiers are pulling production back home--and saving money.

Kirstie Kelly is doing her part to boost the U.S. economy. A Los Angeles-based wedding gown designer, Kelly whips up one-of-a-kind gowns that go for $10,000 a pop. She funds that high-end operation by teaming with Disney to churn out more moderately priced gowns, in the neighborhood of $3,800, under the Disney Fairy Tale Weddings Collection.

Two years ago, Kelly looked to shave costs by outsourcing 80% of that line's production to mainland China. (She's always produced her high-end collection by hand, in L.A.) But that labor arbitrage didn't prove so compelling in light of stiff shipping costs, day-long flights for plant visits, the language barrier and overall lack of quality control.

That's why, in the last four months, Kelly has moved 40% of her Disney (nyse: DIS - news - people ) dress production to a factory in Nashville, Tenn.; she plans to bring back another 40% by the middle of this year. With only a four-hour flight from her manufacturing facility, she says she can better monitor everything from sewing to fittings. Because Kelly grabs 85% of her revenues from U.S. customers, she estimates the savings on shipping alone will cut the overall cost of production by 29% per dress.

"And those savings don't include [other] costs, like faster turnaround," she adds. "I feel better. I've got a tighter hold and control on the brand."

Kelly has plenty of company, both small and large. On the retail side, American Apparel, Gap (nyse: GPS - news - people ), Macy's (nyse: M - news - people ) and Kohl's (nyse: KSS - news - people ) in the last decade have increasingly contracted with U.S. manufacturers to produce branded clothes, plastic goods and furniture. As for small fashion designers, they are embracing the made-in-America strategy for a host reasons.

"The original impetus for on-shoring was the spike in energy prices and a consequent steep increase in transportation costs," says Josh Shapiro, chief U.S. economist at MFR, a Manhattan-based consulting firm. "Also, labor costs in China have increased quite dramatically." Throw in expiring tariffs and a weakened dollar, and running local factories looks a lot more attractive, adds Diane Swonk, chief economist at Mesirow, a Chicago-based financial services firm.

Elise Overland makes her eponymous collection of rock-and-roll-inspired leather leggings, purple lamé blazers and jewel-toned minidresses just three blocks from her showroom in Manhattan's dwindling garment district. Overland, who launched her line just two years ago, never tried her hand in China, where many contractors require large minimum orders. For a fledgling label feeding swanky department stores and boutiques that order only a few pieces per location, the math doesn't work.

Gabriel Valley, Calif.-based sleeping bag maker Exxel, with $40 million in annual sales, ships 1.4 million bags a year to Wal-Mart (nyse: WMT - news - people ), Target (nyse: TGT - news - people ), Dick's Sporting Goods and K-Mart, among other retailers. In 2002, Exxel made 80% of its goods in China; now it makes 80% in the U.S. Thanks to smart sourcing of materials and no tariffs, the company says it now spends less to produce a bag in Haleyville, Ala., than it did in Shanghai.

Joe Blair, head of manufacturing for $300 million (annual sales) Tom James, maker of bespoke and readymade suits in Franklin, Tenn., says his company saves $35 to $40 million a year by manufacturing in Pennsylvania, New Jersey, Tennessee, North Carolina, Chicago and Maryland. What he gives up in labor costs he more than makes up by avoiding transportation expenses and currency fluctuations.

China won't fall off the manufacturing map anytime soon, says Josh Green, chief executive of Panjiva.com, which sells data on some 70,000 apparel and textile manufacturers in 180 countries. Still, for aspiring designers, sticking close to home can be the right move. Says Green: "Retailers can take advantage by being responsive and flexible when it comes to demand for product."

http://www.forbes.com/2009/02/19/fashio ... uring.html

Americans must see to it that they only hire and buy American.


I understand that businesses don't want the overhead and having to pay health insurance for workers but if they hire illegals at a cheaper rate, they and all of our society will pay for the cheaper salary 30 times over the rate of an Americans salary.


Hire and buy American!

Look this is all about greed, as an example if I have a company of 10 employees providing my family with 1 million income per year plus giving my employees a good living is it morally right or unpatriotic to eliminate my employees via outsourcing or bring in foreign labor to increase my income to 2 million per year. it's all about morals, standards, values and love of country either you understand that or not.

Simply put capitalism can and is failing due to greed since the 80's we have been in a greed mode not to build a better product or provide better service but build a cheaper inferior product with no service and teach the American consumer to accept this as free trade or global market, now the pyramid is falling and those at the bottom are trapped.

Exactly, and if I can earn a comfortable middle class income, I am satisfied with that, and I have a hard time understanding people who are not content with that. I can remember when things lasted a lot longer, and when they broke you fixed them. The universal availability of cheap goods have turned us into a wasteful culture, not necessarily of our own free will. It's hard to find well made stuff any more, much less afford it. When some corporate CEO takes an established American brand, known and trusted for quality, and moves the manufacture of it to the third world and cuts other corners as well, does he pass the savings on to us? Not usually; it may sell for a discount compared to the original product, but not as much as the profit he makes from doing so.

Moving the centers of production closer to the consumer is precisely what Henry Ford envisioned in the 1920s. In his book, My Life and Work, he has a chapter that discusses how transporting goods across half a country drives up the cost to cover shipping, makes the product more unaffordable, and as a result hurts the company's profit margins. But then again, Ford also says how company profits should rise the wages of both management and workers. Third-world sweatshops were not the goal.

As oil gets more expensive, we'll probably see this idea come back to the fore. Interesting that Henry Ford was a "buy local" sort of guy in his book. After all, if someone like Ford can argue against the globalization mentality, it makes you wonder about the validity of some of our globalist attitudes.