October 21, 2013 1 Comment
Team USA recently won one. It’s just one win, but for a change, it’s a win. Momentum has to start somewhere for the long road that still lies ahead. This is about one that we won.
Chinese Take Out
Armstrong World Industries has announced plans to invest $41 million in its domestic manufacturing capacity. Specifically the global building materials leader is going to produce luxury vinyl commercial tile in Lancaster, Pennsylvania. Manufacturing employment at the company’s Lancaster site is expected to increase from 160 to 217 jobs – a 26% increase. In today’s world, stories like this have impact that exceeds the numbers. Although just one win, it becomes symbolic of the hopes and dreams of many Americans still craning their necks to see a better tomorrow.
What’s most significant about this development is that the protagonist luxury tile product is currently made in China by a third party manufacturer. That’s right – this is actually the reverse of the outsourcing that we’ve become so accustomed to seeing. Some people refer to this contemporarily far-fetched notion as insourcing or reshoring. If you don’t believe this is really happening, here’s the link to the article. See for yourself – it’s true.
Maybe scale this self-serving assessment back just a little to “yes, the prior post possibly had some predictive value”. Here’s the link to a previous BizSinc blog post, called “No Bargains” which takes an apples to apples approach to the economics of outsourcing. A more financially-oriented version of the TCO (“tee-co”) – Total Cost of Ownership – appeared in an Association of Financial Professionals (AFP) publication (posted here). As it should be, this is a pretty hot topic and appears to be warming up a bit more in a positive direction thanks to news like Armstrong moving production from China to the US.
The symbolism of the Armstrong story centers in large part around the American workforce. The $41 million investment is to occur in the same town in which the company remains headquartered and still maintains a small portion of what was once a ginormous plant site. At peak production during WWII years, the vinyl mine employed close to 8,000 people. From generation to generation, the local lineages gained solid employment with union-bolstered wages and benefits. The company was the undisputed pillar of its community. The vinyl mine was so big that forty years later and at less than one fourth of its war-time employment levels, the monthly electric bills were more than many local businesses grossed in annual sales. This is an own-eyes fact.
As we’ve seen all too often, what was once seen as a good thing takes on competitive fire which in turn causes change. The vinyl mine was substantially and systematically dismantled over a relatively short period. Many believed that management-labor relations played a big part in the vinyl mine’s fall from glory. Production was moved to other company plants that were deemed as lower cost and possessing more cooperative labor forces. Consequently, huge numbers of workers were displaced. The company turned the once behemoth vinyl mine into a relatively small plant in a few short years. It moved the hundreds of thousands of bricks no one ever thought would or could be moved.
Full Circle at the Vinyl Mine
In its public release, the company mentioned several factors for its decision. “By bringing this manufacturing to the US, we leverage our manufacturing expertise and create a strong cost, quality, and service position”, says the company. That’s a mouthful of important stuff right there. As we’ve seen with the TCO equation, a lower price is not necessarily cheaper if hard to quantify supply chain disruption and inflexibility accompany production in a perceived low cost country (PLCC).
Having essential infrastructure, proximity to its flooring distribution center and technical centers, as well as support of the plant’s workforce were also mentioned by Armstrong as factors in its decision to repatriate luxury tile production. Wait a second, did they really just say support of the plant’s workforce? Sometimes things really do come full circle.
Rational Decision Making & Actions
So, with the Armstrong news, we have one win. Just one, but it’s a big one. Armstrong’s decision to “bring it back home” was most likely based on the same type of business logic that led it and others to outsource in the first place. Countries, corporations, and workforces alike must adapt and continuously demonstrate competitiveness. Armstrong is not moving this production from China to Lancaster, Pa. as a charitable contribution or out of some sudden grasp at sentimentalism. It’s about making what it thinks is the best decision for its business and shareholders.
It’s also nice to see that the Commonwealth chipped in with some grant funding. Targeted government incentives that help create good jobs can be timely difference makers. This story also shows how a company that is forced into bankruptcy and is legally compelled to concede majority control to a third-party trust appears to be calling its own shots again very soon after regaining majority control.