Why we need manufacturing and the consequences of outsourcing

The current (strategic) thinking is to move up in the production chain to the most profitable part of the business. Manufacturing has been outsourced and companies have focused on marketing and design. However, there are some unexpected consequences in this practice. The companies that were doing the outsourced work, have also moved up and have at the same time being able to innovate more than the incumbents. Innovation comes from the bottom, from the shop floor, where the actual products are created. By abstracting from the real creation of the products, companies have created opportunities for others to innovate.

Some very good articles on the topic:

This is the Carlson’s law, as described by Thomas L. Friedman and Michael Mandelbaum, in the book That used to be us.

The Carlson’s law: Innovation that happens from the top down tends to be orderly but dumb. Innovation that happens from the bottom tends to be chaotic but smart.

An excerpt from the book:

People think innovation is the idea you have in the shower,” said Ernie Moniz, the physicist who heads MIT’s Energy Initiative. “More often itcomes from seeing the problem. It comes out of working with the materials.” To be sure, there is some pure innovation—coming up with a productor service no one had thought of before. But a lot more innovation comes from working on the line, seeing a problem, and devising a solution that itself becomes a new product. That is why if we don’t retain at least part of the manufacturing process in America, particularly the high-endmanufacturing, we will lose touch with an important source of innovation: the experience of working directly with a product and figuring out how toimprove it—or how to replace it with something even better.“

A lot of innovation now happens on the shop floor,” said Hewlett-Packard’s CEO, Léo Apotheker. Indeed, if you open a factory, and are doingthings right, “it will be more productive a year later because the workers themselves on the factory floor are critical thinkers and can improveprocesses along the way,” said Byron Auguste, the McKinsey director. In any factory or call center, he noted, “there is often dramatic variation inproductivity in different parts of the system. If you have continuous learners on the shop floor or in the call center, there is a constant opportunity tolearn and spread the word, and then everyone improves. If you are doing that in every node of your production, design, and aftersales service, you will have a system that delivers three percent productivity growth every year and is not dependent on new inventions coming out of Carnegie Mellon University or Silicon Valley”

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