Bright light reflects off the shiny exterior of row upon row of water heaters that stand like sentinels in Building 2 of General Electric Co.’s Appliance Park. The products soon will be shipped to retail stores such as Lowe’s, where they sell for about $1,000.
The ordinary household product is part of an extraordinary turnaround story at one of Louisville’s largest employers and reflects the growing trend of reshoring: After decades of moving jobs to low-wage countries, American manufacturers are moving some jobs back to the U.S.
When Mike Mayes, a leader with the IUE-CWA, was tasked by General Electric leaders in 2006 with starting a lean manufacturing program at Louisville’s Appliance Park, he reacted with skepticism.
He remembers thinking, “If we get any leaner, there won’t be anybody left to turn the lights on.”
For years, the park’s employees had seen thousands of co-workers sent home with a final paycheck as the company moved appliance production out of the country. Employment at Appliance Park, once at about 9,000, had fallen below 2,000. The company talked about selling the park altogether.
The remaining employees’ mood mirrored the state of some of the park’s buildings: derelict, dark and depressing.
GE was not alone: Between 2001 and 2011, the U.S. lost 2.7 million jobs, in part because U.S. manufacturers moved production to low-cost countries, according to the Reshoring Institute, which, with the help of the University of San Diego Supply Chain Management Institute, helps U.S. companies bring back jobs to America.
But Mayes, the union leader, overcame his initial skepticism about GE’s proposal and put together an experimental team to redesign a 57-employee dishwasher line to improve efficiency and quality and to cut costs.
The redesigned line required 40 employees, but instead of cutting 17 jobs, GE moved those employees to a new line to produce a part that previously had been delivered by a supplier with a poor track record.
Mayes said the experiment showed the company that lean manufacturing could significantly cut production costs while improving quality. And it showed employees that a lean approach could allow the company to maintain employment.
Rich Calvaruso, the company’s executive for operational excellence, said when the small unit showed the results to company leaders, they were told to repeat the process for other products, including those that were being produced outside of the U.S.
In hot water
GE assembled a team from design, purchasing, production and other departments to figure out how to move production of a water heater from China to Louisville. But the employees realized quickly that reshoring the product would prove difficult.
For example, Calvaruso said, a filter on the original heater could be attached and removed only from the top. That design could not work in the U.S., because the heaters often are placed in closets and garages without any space above them. That meant the filter could not be changed without removing the entire water heater.
From aesthetics to installation and servicing, the team ran into a lot of challenges that made the original design unfeasible for production in the U.S.
“We basically redesigned the whole water heater,” Calvaruso said.
But the challenges also imparted other lessons: Cooperation among the company’s various departments – and between the company and its suppliers — were vital to greater efficiency, higher quality and ultimately to making reshoring work.
You can’t just move the production back to the U.S., Calvaruso said. You have to think about how you build and design it more efficiently, because otherwise you run into the same problems you had when you offshored.
Rosemary Coates, executive director of the Reshoring Institute, said American companies that want to bring manufacturing jobs back to the U.S. often struggle to find the right suppliers and employees, including engineers, welders, and tool and die makers.
As companies moved production offshore, domestic suppliers went out of business, and employee expertise was lost when those workers changed jobs or retired. Now that more companies are moving jobs back, Coates said, that supplier and employee base still has to be rebuilt.
From its early forays into reshoring, GE learned it had to invest in and engage employees. The idea was pretty simple: People who spend their whole day building a product probably have some good insights into how to improve the product and the way it is made. Having those employees on the same campus as designers and engineers fostered communication and cooperation, which increased efficiency and improved quality.
Since the early experiments, GE has brought back to Appliance Park refrigerator production and this summer announced it would invest $100 million to produce a new topload washer, its largest laundry investment in 20 years. And last month GE said it would create 100 local jobs by reshoring production of air conditioners for the hospitality industry.
By the end of next year, the company will have invested about $1 billion in the local campus. The number of jobs has climbed to 6,000.
To make the investments work, though, employees also have had to make concessions: While longtime employees still earn close to $30 per hour, new employees make about half that.
Companies have become more sophisticated about off- and onshoring decisions, said Beth Davis-Sramek, associate professor and Dean’s Research Scholar at the University of Louisville’s College of Business.
U.S. companies are no longer just chasing low labor costs, she said. “They are being very thoughtful and analytical and strategic about their location decisions. To me, that’s very encouraging.”
Companies previously did not have a good grasp on hidden costs of offshoring, she said. They often would move production to a low labor cost area only to find those savings offset by higher costs related to transportation, more red tape, and lax intellectual property protections.
In addition, some offshoring advantages are disappearing. For example, China is significantly tightening formerly slack environmental laws.
Weather disasters in Asia, such as a flood in Thailand in 2011, can significantly disrupt parts deliveries. And suspect decisions from suppliers can cause quality problems that can be difficult to address when one’s products are in the middle of the ocean, weeks from the nearest production facility that could solve the issue.
GE rival Whirlpool learned this first-hand, according to the Global Supply Chain Institute at the University of Tennessee. Whirlpool had outsourced production of a dishwasher water seal to a Chinese supplier, with projected annual savings of $2 million. However, the Chinese supplier soon sourced the rubber for the seals elsewhere, causing a failure rate of about 10 percent.
“By the time Whirlpool discovered the problem, over 2 million dishwashers had been produced with the defective seal, and two months worth of supply was in transit on the ocean,” the GSCI wrote in a report. “This cost the company millions of dollars and destroyed all savings from the project for over three years.”
The Reshoring Institute’s Rosemary Coates said companies are getting better at evaluating where they should manufacture for which market.
“It’s a shift in strategic thinking,” she said.
Trickle or torrent?
More than 50 percent of companies with more than $1 billion in revenues are considering onshoring or are doing it already, according to Coates.
And as of this year, companies are creating about 40,000 manufacturing jobs annually in the U.S. – about the same number they’re offshoring.
While concrete figures about onshoring are difficult to track down, Coates said, “There’s a lot of momentum building.”
Davis-Sramek suggested that detailed analyses for some durable goods, such as dishwashers, can indicate that producing in the U.S. makes sense.
And, she said, companies are learning from their early experiences.
GE has applied lessons it learned from reshoring the water heater to subseuquent projects, which have progressed with fewer problems.
Other companies are still learning: Apple recently wanted to open a plant in Arizona and planned to hire 2,300 people; however, only about 300 have been hired.
“There are some success stories,” Davis-Sramek said. “And there are some colossal failures.”
Then there’s the fact that production of some labor-intensive, low-margin goods, such as clothes, is not going to return to America.
Reshoring likely will fall short of the resurgence people are hoping for, Davis-Sramek predicted, and she fears offshoring of high-paying jobs in information technology and medicine will continue to grow.
And whether GE’s appliance unit will continue to reshore will depend in large part on the new owner, she said.
GE is trying to sell the division. A proposed sale to Sweden-based AB Electrolux fell through after it ran afoul of antitrust legislators. Potential buyers include LG, Samsung and Haier, all based in Asia.
Davis-Sramek said that while she is no isolationist by any stretch, the thought of an iconic American brand being sold to a foreign competitor makes her shiver.
“Like InBev owning Budweiser,” she said. “It doesn’t feel good.”