Offshoring again

Even with a good fourth quarter and my natural optimism, reports from contacts at some of our larger customers concern me, reports the Manager's Desk columnist in the October issue of Cutting Tool Engineering magazine.

October 15, 2015By Keith Jennings

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Several good customers indicated they’ll be issuing jobs in the last quarter of 2015 and, with other accounts cutting back, we can use the work.

Even with a good fourth quarter and my natural optimism, reports from contacts at some of our larger customers concern me. It mostly relates to a return of offshoring, not only the machining of important products, but the divesting and transferring of their jobs to other countries, particularly the Far East and India.

In one example, a large U.S. conglomerate acquired many smaller companies that were longtime customers and strategically revamped their approach to sourcing—to our detriment. Their strategies and new contract terms evolved into a typical big-corporation approach, requiring us to reevaluate the profitability of their work.

As is common in this scenario, the corporation became more price-conscious and demanding, wanting to extend payment terms to unsatisfactory timeframes, perhaps Net-90 or longer. We attempt to work through these situations, and even offer discounts for prompt payments. Occasionally, they agree, but more often than not, they aren’t flexible.

Over time, the terms and conditions became more difficult and most of the work dwindled or went away—usually overseas. To make matters worse, a longtime contact at that same corporation said he was being laid off, along with other skilled employees, with many of the positions transferred as well. This was not because of reduced demand for the company’s products, but because the company views the employees’ capabilities and skills as commodities and no longer values them in the same way.

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In a similar case, CNBC.com reported that Disney’s Florida headquarters replaced many highly skilled employees, such as engineers and IT professionals, with lower-cost foreign workers. The company even required the longtime employees to train their replacements, threatening that their severance packages would go bye-bye if they refused.

Being a machine shop owner, thankfully, no one can replace us in this manner. But thinking about being required to train your foreign replacement, who’ll earn half your salary, has to be difficult, if not maddening.

With our local market slowing, it got me thinking about all the good machine shops and related companies in North America and the potential ramifications of this offshoring trend. If this caliber of highly skilled jobs is less-valued and easily duplicated elsewhere to reduce costs, could our shop’s capabilities and skill set suffer the same fate? With the rapid evolution of shop automation, software, 3D printing and other technologies, how much longer can we be viable?

The reality is, some large corporations have also acquired their longtime customers. It’s happened to such a degree that four large companies now literally dictate the primary energy market we serve.

Will the other conglomerates follow the lead of the previously discussed corporation and their offshoring strategies as well? Time will tell, but it certainly makes me think about whether my kids and yours will have the same opportunities in this industry that has served us so well. One thing is for sure: We’ll aggressively press on and make it hard for others to duplicate what we offer. We’re not done yet!