This blog entry is a direct continuation of Marty’s post on Textiles in America and part of our ongoing posts on reshoring of work. The New York Times Replica Edition is an exact electronic version of the in-print newspaper where I first saw these two nice pieces of data. (I LOVE data. Recall: “In God we trust, all others bring data”–according to quality guru Edward Demming.)
This chart provides hard data of the stories often told about job losses. The huge transformation of textiles and apparel is striking–mind you, the data spans the relative recent 18 years! I can only imagine the devastating impact to families working in that sector… From an economic perspective, two key explanatory changes are: 1) offshoring to low cost countries after deregulation and 2) innovation leading to increased automation, and the substitution of capital for labor. (I purposely use the “big” innovation word; later I shall also write about recent data linking innovation to offshoring.)
There are benefits and cost to offshoring and my colleagues Gad Allon, Robert Boute and myself have a keen interest in this (here are two research papers on global dual sourcing). A key tool to make global network location and sourcing decisions is Total Landed Cost, which estimates the total cost from origin to destination. This includes the typical material + labor + overhead (also known as COGS) PLUS supply chain costs. Some nice data for apparel again from the New York Times:
In our papers and in class we emphasize that there are (at least) two other important hidden components that are (typically) forgotten, or at least not quantified, in the TLC:
- opportunity cost of required working capital, which is current assets minus current liabilities. A key current asset is inventory, in-transit (aside from the transportation cash cost shown in the figure) and at the seller’s plants, distribution centers, and retail stores. In addition to cycle stock, the latter includes safety stock to hedge against long leadtime uncertainty, demand uncertainty (including taste uncertainty), supply quality and quantity risk. Like any risk, safety stock is harder to estimate but that shouldn’t be a reason not to include it…
- supplier relationship management costs. The indirect costs of dealing and managing an offshore location or supplier.
What we can conclude from the revealed actions of American Giant, assuming they are rational and maximize profit, is that the cost of these two hidden components exceeds “the gross offshoring advantage” of $38.10 – $31.40 = $6.70 minus the price premium commanded by the domestic product. (If the TLC comparison is apples-to-apples then the price premium would represent only the increased customer willingness to pay for “made in USA.” If the latter were very small, this would imply that the two hidden costs represents at least about 20% of total landed cost. I love data…)