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Today in Outsourcing

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The Chicago factory that makes Oreos is closing and moving to Mexico. 600 people thrown out of work. The company’s CEO makes a cool $21 million a year.

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  • Derelict

    If only American workers were willing to be more competitive, we wouldn’t have problems like this. Until Americans are willing to work for 35 cents a day in appalling conditions, this country will continue to lag economically.

    Snark aside, though, I don’t see much that can be done about this kind of thing. Individual companies that try to buck the trend end up getting decimated as their competitors make the move someplace else with cheap labor. So even if you have a CEO who is committed to keeping jobs here at home, his company might not survive in the marketplace.

    • I can see making that argument about a factory that makes sprockets, but there’s only one company that makes Oreos, and people are going to buy their product no matter what. If ever there was a product with the resilience to make a stand about keeping production within the US, Oreos are it.

      • Derelict

        Nabisco makes Oreo brand cookies. Competitor brands include Sunshine Hydrox cookies and Lance chocolate sandwich cookies, among others. I’m thinking there’s some price elasticity associated with Oreo brand loyalty, but not a whole lot.

        • cpinva

          “I’m thinking there’s some price elasticity associated with Oreo brand loyalty, but not a whole lot.”

          agreed. however, moves like this are done to reduce total costs of goods sold, so I have to assume this won’t result in a price increase. otherwise, why bother. it may be iconic, but it’s replaceable, with little noticeable difference. so my family will no longer be buying Oreos.

          interesting ad I’m getting here, from the National Retail Federation, regarding the change in federal overtime laws, for salaried employees, who will, as a result, be changed to hourly. seems as though this would work to the advantage of those currently salaried, because they will now automatically be eligible for time-and-a-half pay, which they haven’t been as a salaried worker, correct? the ad makes this sound like a bad thing.

          • Lee Rudolph

            Huh. The only ads I’m seeing are one from Amazon (offering me Ted Cruz’s campaign book-like object—and good gosh, his jacket photo is dreadful) and one from Rice University promising to get me a new career in 5 months with their Paralegal Graduate Certificate Program. Maybe some unemployed JDs should look into that!

            • nixnutz

              I’m getting Sodastream and a new sneaker company that seems to have been thought up by a team of brand consultants and supply chain engineers (“redefining the footwear industry”, “born in Brooklyn” manufactured in ???). It doesn’t seem like great work from the algorithms but who knows.

              • Ann Outhouse

                Ever since I visited the Jockey site to look for women’s briefs, I’ve been getting Jockey ads mostly featuring buff young men in tight briefs.

                Not complaining, mind you.

                • Dennis Orphen

                  Jockey International (formerly known as Coopers, IIRC) is headquartered in my old hometown, Kenosha WI. There was a factory there that made underwear. One of my grade school classes toured the plant on the same day we visited the American Motors Corporation final assembly line a couple of blocks away. While I believe Jockey’s HQ and much of its distribution is still in Kenosha, all the manufacturing is long gone.

                  Oh, and Jim Palmer.

            • Brett

              Has Ted Cruz ever looked good in a photo? He always looks so goddamned smarmy in every picture I’ve seen of him.

              • cpinva

                that’s exactly what I was thinking. he always looks like the guy you just instinctively want to punch in the face, just because.

                put a picture of him and joe McCarthy side-by-side, and there would be scant difference between them. I keep expecting cruz to stand up in the senate one of these days, with a paper in his hand, claiming it’s a list of Islamic radicals in the state dept.

              • Ann Outhouse

                To me he looks (and acts) like a transporter accident involving Joe McCarthy and Phil Hellmuth Jr.

          • Procopius

            I thought salaried employees who are paid a salary above some cut-off ($28,500 a year?) were exempt from the overtime requirement. That was why companies classified them as salaried rather than hourly. They were saving a bundle. Under the new cut-off it doesn’t really matter and maybe it’s cheaper to figure payroll for hourly workers.

        • BlueLoom

          Hydrox are so much better than Oreos that I wonder why anyone buys Oreos. The filling tastes about the same, but Hydrox are a much crisper, crunchier cookie. Oreos are mushy compared to Hydrox.

          • CJColucci

            I’ve always preferred Hydrox, too, but except for about a month a couple of years back, I haven’t seen them in stores in NYC. Where can I get them?

        • guthrie

          SOmeone thinks that a cookie name which sounds like an industrial cleaner is a good idea?

          • DocAmazing

            Unless I’m mistaken, the name is a nod to the hydrogenated vegetable shortening that is the “creamy filling”. Some things are best not thought about too deeply.

          • efgoldman

            Someone thinks that a cookie name which sounds like an industrial cleaner is a good idea?

            Name goes back to when they came to market in 1908. According to Wiki, Oreos came out in 1912 as an imitation/competitor, even though most people think it was the other way around.

            • Procopius

              The Oreo ads here in Thailand are the same as they used to be in the U.S. Little girl teaches her father how to eat Oreo. Take off the top, lick the cream filling, dunk the rest in your glass of milk. Wonder where they produce the cookies they sell here. By the way, they seem to sell very well competing against a much lower-priced local brand.

        • trollhattan

          Never underestimate a kid’s brand inelasticity. Bring the wrong brand home and it will sit there and get stale.

          Advertising works.

          • muddy

            That’s great then. Kids shouldn’t be eating that crap anyway. Don’t like this brand of crap? Ok, no crap for you at all I guess. Problem solved.

            My answer to dislikes of supper heard from children was always, You know where the peanut butter is. Generally the supper was not considered so awful that a kid would want to take the trouble after all. But if they really don’t want it, PB. Problem solved either way.

    • Individual companies that try to buck the trend ^while still attempting to maintain ridiculous quarterly profit goals and executive salaries and bonuses to match. end up getting decimated as their competitors make the move someplace else with cheap labor.

      Also, this doesn’t explain why there are ANY manufacturers left in the U.S. and manufacturers (such as auto) that are coming to the U.S.

      Also, too if Loomis takes requests: Outsourcing and white collar jobs.

      • Outsourcing and white collar jobs.

        Not a week goes by that some firm in India doesn’t offer me engineering design services specifically so that I can get rid of my employees. My favorite part of their salesmanship is them trolling me LinkedIn.

        • Derelict

          And I’m sure you’ve gotten the “We can supply you with H1-B visa engineers in all disciplines!” spam as well.

          • Yes, although that’s less prevalent in structural engineering than in electrical engineering and computer science.

          • BubbaDave

            I’d like again to propose my H1B fix — unlimited H1B visas, but
            1) Sponsoring company has to pay prevailing wage for that skillset or $100k per year, adjusted upward (but not downward) by the government’s cost of living index and indexed to inflation, whichever is greater
            2) H1B visa holders have a 3 month grace period where they can legally remain in the US while they look for another sponsor if they voluntarily or involuntarily leave their previous sponsor.

            So, if Google wants to poach a brilliant software developer from Canada or the Philippines or Israel or India, great! S/he is brilliant, they’ll end up paying $164k (factoring in SFO cost of living) which is peanuts for an outstanding dev, all is great.

            A bottom-feeder consultancy wants to bring in a horde of junior devs and pay them $18k/year to replace existing professionals? NOPE!

            Think that H1B visa is a leash you can hold while you make your worker dance for your amusement? Nope. And on $100k salary your worker can save up enough cash to survive a couple months’ unemployment if neccesary.

            • DocAmazing

              Not the same thing, but related: Back in the late ’90s, there was a shortage of registered nurses, so hospitals hereabouts recruited heavily from the Philippines. The hospital administration had trouble concealing that they thought these foreign nurses would be pliable and go along with the company program. Instead, the California Nurses’ Association (their union here) signed ’em up, and the kicked off their white sneakers and laced up their ass-kicking boots. No one in Bay Area underestimates Filipina nurse these days.

        • cpinva

          do they have stables of qualified people willing to work for food only? seriously, how much confidence are you going to have, in work product coming from someone with barely enough energy to breathe, much less have complex thoughts? I would assume you’d have to have someone in house to review the product being sent from the Indian company, to make sure it at least won’t kill anyone, then send it back for corrections, review the corrected product, etc., so how much are you really going to be saving when all is said and done?

          • I suspect the services they are offering come from the Indian middle class, not the poorest people – anyone who signed up for that kind of outsourcing would cancel if the calculations and drawings they received were no good. I also suspect that a firm like mine could save money on design that way, so if that’s someone’s highest priority they’ll take the bait.

            ETA: The pool of talent is probably the same for the outsourced services and the H1B visa applicants that Derelict mentioned.

            • Turkle

              I dunno, I’m no engineer, but I worked for a company that fired all their website programmers and outsourced everything to India and the results were catastrophic. The managers that were left after firing all the low-level programmers looked like they had recently been through a war. Thousand-yard-stare and all that. Thank goodness it was just a website and not some mission-critical engineering project.

              I understand that this is simply anecdotal, but it’s at least evidence that this sort of thing can go sideways in a hurry.

              • Of course and, in case it’s not obvious, I think outsourcing engineering is a bad idea, just as I think outsourcing industry is a bad idea. But I suspect it can be made to work if that’s what someone really wants.

                Look at your anecdote: the managers who had to clean up the mess were not part of the calculation that the outsourced website would be good enough that any difference in quality was worth the difference in cost. If a company’s top management decides cost overrides all other concerns, then they’ll get improvements in cost at the expense of other concerns.

                • I deal closely with an IT vendor that, among other things, makes back-office systems for commodities traders – systems my firm depends on. At one point they laid off a bunch of their programmers and outsourced their jobs to Punai, India. The employees in India are very competent programmers, but they don’t necessarily know a lot about the industry.

                  The IT vendor has found a clever use for these programmers, however. They use them as a kind of firewall around the more experienced programmers that I really need to talk to. You go to them with a problem, and you are sent to the Indian programmers. You deal with them for a couple of weeks, trying to communicate with someone who is asleep when you’re awake, and probably can’t help you anyway, in the end.

                  After a couple of weeks of that, you get pulled from the India track and put back with the programmers who know what you’re talking about. If you kept at it they know you have a real problem. I suspect the IT vendor couldn’t get away with this if they didn’t have a near-monopoly on the product.

              • To your anecdote I’ll add that domestic outsourcing (what we generally call contracting) has resulted in some massive disasters in the area I follow.

                Sure, off-shore outsourcing is bad for the U.S. workforce, but from what I’ve seen and read here, too heavy a reliance on domestic outsourcing isn’t great for anyone either. Especially when contracting results in abuse of employees.

                • KadeKo

                  But the tales of outsourcing that CEOs get to tell each other while golfing are so much more important than the results.

                  The pissing contest is the primary goal. CNBC etc have shown us as such.

                • Derelict

                  There was a study published recently on how Wall Street looks at offshoring. (My Google-fu isn’t working great this morning, so this is from memory.) As I recall, the study found that Wall Street analysts always made buy recommendations when a company announced it was moving production out of the US–even when it was clear that doing so would cost far more than keeping production here.

                  So, as KadeKo points out, the CEOs tell each other tales about how great outsourcing is because outsourcing is ALWAYS great for the CEOs. Their stock options go up in value, their shareholders are happy for a little while (and since “shareholders” tend to be computers these days, who cares?), and only the little people suffer in any way. What’s not to love?

                  The fact that outsourcing may actually undermine the company’s long-term survivability is of no account–the CEO will be safely retired with a huge payout and whatever consequences might follow a shitty decision will not be the CEO’s responsibility any longer.

                • But the tales of outsourcing that CEOs get to tell each other while golfing are so much more important than the results.

                  This is true even when the “CEO” is the owner of a 5-person business. But I assume a desire to be like the “big boys” is part of the reason it caught on with smaller organizations.

                • There was a time, 10-15 years ago, when anyone asking for VC, and for all I know bank, funding, it was a requirement for the staffing plan to include offshoring, either India or Shenzhen, maybe Ukraine worked just as well.

                  eta: I’d guess this is a trend the finance people pick up from the business press and stuff.

                • efgoldman

                  But the tales of outsourcing that CEOs get to tell each other while golfing are so much more important than the results.

                  I’ve got it! Let’s outsource the CEOs!! Give them contractor badges and scuttle their benefits! We’ll save so much money.

                • Procopius

                  Government agencies and especially the Department of Defense went to contractors for a lot of the jobs that used to be done in-house. The argument was that this freed up their specialist employees to do the core job they were hired for. In all cases I know about the end result has been considerably more expensive than the old way. In other cases they went to contractors to get around hiring restrictions because “the deficit.” The result has been much more expensive.

            • Yes, one of the reasons India was attractive to American companies is the presences of educated, English-speaking workers.

              For example, there is (or was) a vogue for overseas outsourcing of the “read” of diagnostic imaging studies like a CT or MRI.

              That has to be done by a radiologist. A sensible provider will have some sort of audit in place to double-check a sample of results, but double-checking every result would be more expensive than keeping the operation in-house.

        • BubbaDave

          I’ve been offered iOS/Android developers for $10/hr. Freaking appalling.

          • Just curious – what’s an acceptable (almost said normal!) wage for that job?

            • Software developers are usually on salary, since there’s a huge fucking exemption for overtime in tech work. In Portland, which isn’t super cheap but also isn’t SF or NY, I would be surprised to see an iOS developer making less than 60k at anything after their first job.

              Contract rates for experienced devs start at $75/hr, in my experience.

              • And I’d assume BubbaDave would be paying $10, much of which would be going to the agency making the offer, not to developers.

    • Actually, in many cases the decision to offshore seems like it’s more of a corporate reflex – a tradition by management meant to show toughness – rather than one based in demonstrable economic gain. Consider the case of Sparta, Tennessee and its commercial lighting fixture factory.

      The piece is kinda long, but here’s the gist: prize-winning light fixture plant in Sparta, TN. Gets acquired by Dutch multinational Phillips. The owners quickly decide to close the plant, even though this will decimate the area. And even though they cannot convincingly demonstrate that this will benefit their bottom line.

      People like to talk about the economic reasons companies offshore their facilities. Offshoring is spoken of as if it were an inevitable facet of competition. But I am skeptical that it is always based in anything besides corporate culture.

      • shah8

        Along those lines…I’m having trouble seeing business sense in closing the Chicago plant unless there’s growing demand for Oreos in Mexico.

        • Dennis Orphen

          I wouldn’t be surprised, especially relative to domestic growth in Oreo demand.

      • guthrie

        CLosure of factories etc is often done for no rational reason, simply because someone at head office thinks that it’s too much hassle having that plant.

        My ex-boss used to run a small (circa 100 people) part of a large multinational, making funky lense coatings, some of which was top secret for submarines etc. Mostly employed engineers and scientists. Even made a profit every year.
        Nevertheless, someone decided they were ‘not core business’, so they were shut down.

        • Derelict

          I’ve seen that dynamic in a much more bizarre case: A publisher who went on a shopping spree back in the mid-1990s and bought dozens of magazine titles. Spent tens of millions on those new titles. Then dumped every one of the acquisitions less than a year later because the new titles were not core business.

          In addition to the rather large up-front losses (and the hundreds of people who ended up unemployed), the company saw its revenues more than halved. Genius doesn’t begin to describe it all.

          • Yahoo is infamous for doing this with web companies it acquires.

            • guthrie

              IN the case of Yahoo I thought that was jhust thinning out the potential opposition, which is entirely normal red toothed capitalism in action.

  • LeeEsq

    Maybe we can argue that certain iconic American products like Oreos should be made in the United States because of patriotism.

    • efgoldman

      Maybe we can argue that certain iconic American products like Oreos should be made in the United States because of patriotism.

      I have a vague memory of Nabisco putting out some kind of red, white, and blue cookie….

  • c u n d gulag

    Haven’t eaten an Oreo in decades.
    Now, I have even less of a reason to want to buy a package.

    In fact, I now have no reason to every buy another one.

    • I don’t know who used to make Mystic Mints, but it seems Oreo bought them and turned them into a variety of Oreo.

      • wjts

        Not really relevant, but I was trying (and failing) to remember the name of those cookies yesterday, so thanks.

  • elm

    While the flow is still mostly outward, there is some insourcing as well: A chinese textile firm has opened a factory to spin yarn that will employ 500 people in South Carolina with a Brazilian firm planning on opening an even larger spinning and dying plant in SC and an Indian firm having opened a spinning factory in Georgia recently.

    These aren’t great paying jobs and they’re a drop in the bucket compared to jobs lost in recent decades, but as wages rise in China and India, you’ll probably see more of it.

    On the other hand, a lot of it is policy driven: the TPP will provide preferential access to yarn spun in TPP members, so companies in non-TPP countries may shift some production to US; SC and GA are giving millions in subsidies to lure the companies; and China has quotas on raw cotton imports, driving up the price compared to what they would spend to buy the cotton to spin in the US.

    • joe from Lowell

      Manufacturing employment in the United States has risen for five consecutive years. The last time that happened was in the late 1960s.

      • Davis X. Machina

        Dead cat bounce. Five years ago the US was in economic cardiac arrest.

        • joe from Lowell

          Are dead-cat bounces known for being moderate and extended?

          Ship’s turning. It’s time to start figuring out why.

        • Hogan

          In 2010?

      • SamInMpls

        From Progressive-economy.org:

        The Bureau of Labor Statistics reports a net gain of 222,000 factory jobs last year – the largest jump since 1997, completing the first five years of consecutive factory job gains since 1992-1997. (Samples: 20,000 more making furniture, 54,000 more in auto and auto parts plants, 38,000 in machine manufacturing, 6,000 in pharmaceutical labs, 17,000 in wood products shops, and – with construction also turning up – 5,000 in cement and 11,000 in steel, copper, aluminum and other metals.) Should factory employment rise again in 2015 (so far, it has, but only for one month – January added another 22,000), the six-year stretch would be the longest run of continuous manufacturing job gains since the 1960s.

    • If conditions and workplace power in the United States continue to devolve toward that of the developing world, then it may make sense for some heavily automated manufacturing to return to the U.S. Not many jobs, but a few.

      • The opposite is true, too. I worked once with Chinese guys whose plan seemed to revolve around the narrative of falling U.S. test scores and competence. They basically figured apparently that they had a historical right to take over the business, though they’d notionally been hired to take on unimportant programming tasks. And it was such a hassle to work over a 12 hour time difference, and to find programmers here who’d do it, that they may have gotten their way (some time after my job was transitioned there).

        eta: Hm. Is that the opposite? Maybe not. Not exactly the same narrative, though.

      • Derelict

        And the pay for those few jobs is as low as they can possibly get away with. One of our local factories has openings that are only for those “interested in a career” at the factory. Starting pay is $24,000/year. On the midnight shift. And from that $24,000 the employee gets to deduct his/her chunk of health insurance.

        Definitely NOT the worker’s paradise.

        • Right–and those workers are going to be so scared of the jobs going away again that good luck trying to unionize them.

      • Jackov

        The estimate I saw was 40,000 jobs from reshoring or ~4.5% of manufacturing jobs added since the 2010 bottom. Over the last ten years the US’s share of manufacturing output as gone from 22% in 2005 to 19% in 2010 back up to ~19.3% now.

  • dp

    See, when the TPP comes into effect, Oreos can get out of terrible Mexico and go to Vietnam.

    • Brett

      They’d probably already be there if they could ensure that the quality of product produced was such that Nabisco-by-Mondelez won’t get sued for food contamination en masse by US customers.

  • Brett

    The parent company of Nabisco (Mondelez) seems to be trying to fluff up earnings and shares despite what they describe as “limited opportunities for strong near-term sales growth”.

    I can see why they made this move now, then. If you can’t get greater profitability from new sales and products, then you try and squeeze it out through cost reduction on the production and distribution side of things. I doubt the Chicago factory adds a ton of value that justifies the higher wages and labor costs, or could do it without a lot of expensive spending on automation.

    • Davis X. Machina

      Nabisco is SOL if it’s counting on Oreos.

      Everybody’s buying store brands.

      Maybe they make those, too. Or the smaller-than-normal packages at the dollar stores.

      • cpinva

        “Maybe they make those, too.”

        either they are, or a company you’ve never heard of is, and possibly making the name brands as well on contract.

        many years ago, I audited a pork packaging plant, a company I guarantee you’ve never, ever heard of. they had a warehouse filled with pallets of packaging, provided by the companies who contracted with them for product, everything from sausage to bacon. I was shocked to discover that so many name brands were, in fact, produced by someone else, and just put in the name brand’s package.

        this seems to be a pretty common aspect of the prepared food industry:

        1. come up with a new product, maybe one with a “secret” recipe.
        2. if you don’t own a manufacturing plant, no problem.
        3. sell/license it to a brand name company, and get a lump-sum payment, or royalties.
        4. start your own company, but contract with someone else for the actual manufacturing of the product.
        5. hire a commercial design firm, to design your product’s cool new packaging. have thousands produced and shipped directly to the product manufacturer.
        6. hire a marketing firm to develop an ad campaign for your product.
        7. put out an “Open For Business” sign and start selling your product, shipping direct from the factory.

        congratulations, you are now in business, with maybe 5 employees. when you want new products, hire a company to do R&D for you, and start the cycle all over again.

    • Derelict

      Well, this is also part of the rather fucked up Wall Street mentality: The expectation that every business MUST demonstrate double-digit profit growth every quarter for eternity. You company is stable, profitable, and showing steady modest growth decade after decade? Obviously, your business is at death’s door.

      Your business uses offshoring and accounting tricks to produce on-paper 22% growth for a single quarter? Let’s put everything we’ve got into this obvious winner!

      • cpinva

        the finance industry doesn’t make money on stable companies, with steady but not spectacular growth every year. they make money by constantly churning the same assets over and over again. they make their money on the commissions earned on both sides of the deals, from the buyers and sellers. a single company can be bought and sold multiple times during the year, earning commissions & fees for the brokers/CPA’s/attorneys each time.

        and yes, it’s a racket, and a very, very profitable one, for the wall street gang. for everyone else, not so much.

        • Dennis Orphen

          Bullseye.

  • Bitter Scribe

    The factory isn’t closing. Mondelez is just opting to modernize the Mexico facility instead of the Chicago one. Still sucks for the laid off workers, though.

  • creature

    A friend of mine worked for GM, at one of their parts supply factories in Ohio, back when GM still made its own parts. GM sent him down to Mexico, to aid in setting up and operating one of the first ‘maquilladores’. Needless to say, he was not impressed with the quality of product, or that the workers were making a wage just high enough to guarantee their loyalty- but low enough to keep ’em hungry. They offered him the plant manager job- he declined, citing his family, etc., went back to OH, work for many years and retired when he wanted to, and died a few months later. He told me he couldn’t live with himself, if he had stayed in Mexico and participated in the exploitation. He was one of the few management guys I ever met that had a real sense of what part the employees played in production. Outsourcing has brought a lot more problems, socially, than any resolutions it has brought.

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