Tag Archives: outsourcing

05.18.2013 | The Prisoners’ Dilemma: Outsourcing Factory Safety

Why do H&M and Gap disagree?

While European retailers like H&M (biggest Bangladesh garment buyer), Benetton, Marks & Spencer and Carrefour will act to together to elevate Bangladesh factory safety standards, US firms like Gap, Wal-Mart, J.C. Penney and Target are each acting alone. Why?

Sounds like retailers are facing the prisoners’ dilemma.

Picture for a moment 2 (guilty) suspects. Questioned by the police, each one can confess or remain silent. When one confesses and the other does not, the talker gets a less severe sentence. If both are silent, then they are released; if both confess, then they get equal jail time.

And therein lies the dilemma. Do you base your decision on what you think the other individual will do? The problem is that each one’s fate depends on what the other prisoner does. And, neither knows the other’s strategy.

An example of economic game theory, the prisoners’ dilemma involves strategizing against a second party that has the power to affect the consequences of your decisions. Whether looking at disarmament negotiations, Democrats and Republicans, or H&M and Gap, the basic strategic patterns are similar. John Nash won a Nobel Prize for his research about Game Theory.

So yes, retailers have compelling ethical incentives to elevate safety standards in Bangladesh. However, because an ethical strategy coincides with profit considerations, each one’s decision is all about competition and the prisoners’ dilemma.

Sources and Resources: This Washington Post article provides good background on how retailers disagree about elevating factory safety and here is the 6 page agreement that most US firms are not signing. For more on the prisoners’ dilemma at econlife, you might enjoy posts on OPEC, Congress, Ivy League schools and World Cup soccer. Please note that this post includes some excerpts from previous posts on the prisoners’ dilemma.

Posted by: adminEcon
Tags: game theory, oligopoly, outsourcing, prisoners' dilemma, Wal-Mart, worker safety
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01.29.2013 | Supply Chain: 787 Dreamliner Problems

To understand Boeing’s supply chain problems with its grounded 787 Dreamliners, we can start with Legos.

Legos told one reporter that 18 bricks from every 1 million made are defective. If a problem piece is discovered, the company can identify its mold and correct it. They just need to look at the 3 numbers that are stamped on every brick. A costly process, manufacturing is tightly controlled by Lego.

By contrast, when Boeing conceived its 787 Dreamliner, management outsourced 60% of the manufacturing process to approximately 50 “strategic partners.” Hoping to control the expense of their state-of-the-art design, they selected cost control over supply chain control.

And that takes us to the nuts and bolts of the story…literally.

In 2007, Alcoa told Boeing that it could not meet its deadline for supplying the titanium and aluminum bolts (fasteners) for the 787 Dreamliner. They also preferred not sending over the 10 fasteners that Boeing immediately needed for a model of the plane’s shell. Consequently, Boeing had to use temporary fasteners to hold together its state-of-the-art carbon-fiber plastic fuselage. (Very different from traditional aluminum plane rivets, one titanium fastener is strong enough to support the weight of 50 Toyota Camrys.)

Shown in this WSJ.com, the Boeing Dreamliner fuselage is sort of like the UN. picture, Alcoa plane fasteners

Shown in this WSJ.com picture of the kinds of fasteners Alcoa supplies, the Boeing Dreamliner fuselage is sort of like the UN.

Why talk about fasteners when the Boeing Dreamliner had overheated batteries?

When just one supplier like Alcoa was late or a quality question surfaced, the impact rippled through the entire production schedule creating logjams, temporary fixes, planes that had to be retrofitted and reinspected. Add in conflicting business goals between Boeing and its “strategic partners” and you can see how tough it will be to diagnose the battery problems that grounded the Dreamliner fleet.

Very different from Legos, Boeing had a vulnerable supply chain.

Sources and Resources: From NPR and Businessweek these articles here and here were perfect for some Lego insight. Enjoyable always, the New Yorker’s James Surowiecki recently wrote about the Dreamliner while articles here and here from several years ago give contemporary descriptions of their troubles. My picture of the fasteners was from this WSJ article and the Dreamliner, from Boeing.

Posted by: adminEcon
Tags: 787 Dreamliner, Boeing, cost control, FAA, Legos, outsourcing, supply chain
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12.10.2012 | Manufacturing Matters in the US

Hearing about an apparel firm that “insourced,” I confess I was not as enthusiastic as the report.

The firm, American Giant, had just enjoyed a run on their hoodies. As a Made in the USA producer, they have the caché of a San Francisco factory. Proclaiming better grommets, eaglets, drawstrings and zippers and a designer previously employed by Apple, American Giant says their quality is far better than their Asian competitors.

Looking at the NPR facts and other similar articles, I wondered whether making t-shirts and sweatshirts in the US was so beneficial. Yes, they were taking advantage of US expertise, eliminating middle people and selling directly online to consumers to cut costs. However, should we applaud making apparel here?

That took me to a Brookings Report that appeared to be on target. They asked “Why Does Manufacturing Matter? Which Manufacturing Matters?” And no, it is not in the apparel industry.

The Brookings report emphasized that manufacturing provides:

high wage jobs
innovation
exports
environmental sustainability

But not all manufacturing. The industries that reap the largest gains are:

computers and electronics
chemicals (including pharmaceuticals)
transportation equipment (including autos, auto parts and aerospace)
machinery

Our bottom line? Hoping to encourage global trade, economist David Ricardo (1772-1823) said each nation should produce the goods and services for which it has a comparative advantage because then, that nation sacrifices less in order to produce more.

Sources and Resources: You might want to look at the Brookings report here. 53 pages long, it has lots more detail. Meanwhile, the American Giant stories at Slate and NPR sounded more like commercials for the firm than news reports. Finally, at econlife, whenever we talk about manufacturing, I always recommend The Travels of a T-Shirt in the Global Economy, a wonderful narrative describing the multinational origins of the typical t-shirt.

From the Brookings Report on manufacturing, the following graphs illustrate their conclusion that manufacturing should be supported by public policy.

Posted by: adminEcon
Tags: "Made in the USA" label, American Giant, chemicals manufacturing, comparative advantage, David Ricardo, exports, high wage jobs, innovation, insourcing, machinery manufacturing, NPR, outsourcing, pharmaceutical manufacturing, Slate.com, sustainability, trade deficit, transport equipment, US Manufacturing
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07.17.2012 | World Trade Spin

We might be able to divide the world between economic thinkers and everyone else.

I noted yesterday that economist Gregory Mankiw, as President Bush’s Council of Economic Advisers chair, said that outsourcing was probably a plus in the long run. Hearing his statement, reporters divided into 2 groups.

1. Economic Thinkers: Those from the FT, Wall Street Journal, and a Washington Post reporter who had an economics degree heard what they learned in Economics 101. Trade leads to specialization which means efficiencies that generate higher living standards and incomes. It was a typical economist’s statement about world trade. Nothing out of the ordinary.

2. Everyone Else: The other reporters sensed a big story. They had a viscerally negative response to anyone who said sending jobs elsewhere could be good. For them, the quote was about jobs leaving the country.

You can see the dichotomy. One group thinks more growth while the other sees unemployment. The unemployment group dominated the headlines. Political damage control immediately followed the press conference.

1. Economic Thinkers: It has also been suggested that there is a difference in our response to the word protectionist. Remembering Adam Smith and David Ricardo, people who think economically believe protectionist policies are bad. They cite the Corn Laws in 18th century England that increased the price of domestic corn by taxing imported grains. They think of the Smoot-Hawley tariffs that fueled the severity of the 1930s depression by diminishing international trade.

2. Everyone Else: For many other people, though, protection does not conjure up the negatives. After all, protecting someone can be good.

As a result, the Business Roundtable suggests a new trade lexicon:

Negative Connotation	Positive Connotation
Competition	Growth
Retool	Re-make
Protectionism	Isolationism
World trade	Working with the world
Long term growth	Sustained growth
Global trade	Trade
Cheaper	Specialized
Forced to	Take charge
Cost efficiencies	Meeting customers
Making our budget	Meeting our needs
Do less with more	Do more with more

From money (not just currency) to free lunches (there are none), economics is everywhere. Your opinion about how to help everyone think economically?

The idea and most of the information for this post came from Gregory Mankiw’s co-written paper, “The Politics and Economics of Offshore Outsourcing.” It also takes us to a wonderful Teaching Company course, “Thinking Like an Economist,” from Randall Bartlett.

Posted by: adminEcon
Tags: Adam Smith, David Ricardo, Gregory Mankiw, outsourcing, protection, tariffs, thinking like an economist, trade barriers, world trade
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05.21.2012 | (Mc)Wages Around the World

It can be tough to compare wages around the world. While lots of people could be called iPhone assemblers or auto workers or t-shirt makers, depending on the country, factory conditions, time off, the work day, all really differ.

Not for McDonald’s.

At a Hamburger University campus in Illinois, China, Russia, Tokyo, Munich, London or Brazil, you can get a similar education. And, at your local McDonald’s, no matter where, you follow the same 600 page operations manual.

McDonald’s consistency made it easy for Princeton professor Orley Ashenfelter to do an international wage comparison. The following chart (p. 36) is from his NBER Working Paper #18006 for an article that appears in the American Economic Review for April 2012. Dr. Ashenfelter used his data from 60 nations for 2007 because it preceded the Great Recession. Exchange rates for the US dollar are also for 2007.

The first column lets us compare the hourly wage for a McDonald’s crew member among different countries and regions.
The second column tells us each nation’s or region’s multiple of the US wage.
The last two columns convey purchasing power. With BMPH equaling McWage divided by the Big Mac price, you can see that an hour of work will buy almost 2 1/2 Big Macs in the US but only close to one third of a burger in India.

Countries and Economic Regions	McWage	McWage Ratio	Big Mac Price	BMPH
U.S.	7.33	1.00	3.04	2.41
Canada	6.80	0.93	3.10	2.19
Russia	2.34	0.32	1.96	1.19
South Africa	1.69	0.23	2.08	0.81
China	0.81	0.11	1.42	0.57
India	0.46	0.06	1.29	0.35
Japan	7.37	1.01	2.39	3.09
The rest of Asia	1.02	0.14	1.95	0.53
Eastern Europe	1.81	0.25	2.26	0.80
Western Europe	9.44	1.29	4.23	2.23
Middle East	0.98	0.13	2.49	0.39
Latin America	1.06	0.14	3.05	0.35

Our Bottom Line: Just for starters, we can see that indeed there are very low wage and high wage countries. We can compare China to the US and, for Western Europe, see the impact of government policy on wages and purchasing power.

I first read about Dr. Ashenfelter’s study in economist Timothy Taylor’s blog and then in the original NBER working paper. More information about Hamburger University is here, and here.

Posted by: adminEcon
Tags: Big Mac, China, Hamburger University, high wage nations, India, low wage nations, McDonald's, Orley Ashenfelter, outsourcing, US, wage rates, Western Europe
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