Making the Case for Insourcing
Outsourcing has become a mantra for managers. If the union is strong enough and the economic conditions sufficiently favorable, the union can prevent outsourcing simply by making clear that it will not tolerate loss of jobs and that it is up to management to figure out ways to do the jobs efficiently.
In fact, this method worked for years, and management often responded by buying capital equipment and automation to improve the productivity of its higher-paid labor force (moves which ultimately might cut jobs a different way).
But these days, most unions are in a weaker position. Fighting outsourcing may require “proving” that keeping the work in-house is cheaper than sending it out.
Be sure to keep in mind that this sort of work is dangerous terrain for unions. Avoid any situation where “putting in a low bid” leads to undermining work rules or setting bad precedents on staffing levels.
It is easy to get carried away in trying to find ways to undercut the competition. Your first job is to maintain and improve good union conditions. Says UAW Local 909 President Al Benchich, “You can’t beat ’em with a calculator. You have to beat ’em with a stick.”
In some cases, such as at the Big Three auto companies, unions have specific contract language to use. The company must notify the union of its intention to outsource work and the union has 90 days to make a proposal showing the savings from in-house work. It’s not much—management still has the final decision.
In most contracts the union has no rights at all in this area. But the union can try demonstrating cost-savings as a way of applying pressure on one section of management to make the right decision.
Accurately calculating the full costs of a job takes considerable skill, time, and knowledge. Despite management’s obvious advantages, unions may have some of their own.
Management rarely puts in the effort to do a serious job. The staffers assigned are usually overworked and/or lazy, and they often present very crude guesstimates and mistakes (while using very precise figures).
The union has access to the people who know the realities of the job. Often workers in the bargaining unit have expertise about other processes, methods, and pricing from previous jobs and/or family members. Unions do well to draw on this talent, on their union’s research departments, and on local college labor studies departments.
Here we will discuss insourcing of parts in a factory, but similar considerations apply to insourcing services. To compare the costs of in-house versus outsourced work, the union will need to figure out costs for materials, labor, transportation, engineering, tooling, training, and in-house floor space or work areas.
WHAT TO LOOK FOR
These costs are not always straightforward. Here are some factors that experienced bargainers have used to make the case for doing the work in-house:
Cost of packaging and transportation. Finished parts usually require more space, more packaging, and more care in handling than the raw materials and components.
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Pipeline costs. Outsourced work usually requires a longer pipeline. Money is tied up in the extra inventory required for the pipeline, in keeping track of where things are, and in preventing damage as parts are moved.
Quality. 1) A well-paid stable workforce usually does better quality work. 2) A workforce that is in closer contact with the end result has a better understanding of and more commitment to a quality product. 3) The longer the pipeline, the harder it is to discover the source of errors and the longer it takes for a correction to have an impact. In some cases everything in the pipeline has to be scrapped.
Sequencing savings. In these days of just-in-time production, changes in customer demands drive week-by-week adjustments to quantities and to the product mix. The right parts need to arrive at the right time (sequencing). The red dashboard has to be there when the red car gets to the assembly station. In-house production and sequencing mean that parts can be more quickly ordered and matched with changes in demand.
Synergy savings. A large plant is more likely to have spare parts and knowledgeable staff available for faster repairs. Small shops with a single specialized machine are more dependent on vendors to take care of them.
Make an official information request to management on true costs when they propose to outsource. But don’t expect managers to have accurate figures.
Bill Parker, president of UAW Local 1700 at a Detroit-area DaimlerChrysler plant, has succeeded at bringing work back in. Parker advises unions to keep careful track whenever work is lost.
Keep track of the amount of production time lost because the outsourced parts were not there in a timely fashion. Keep track of quality problems, how long it takes to get them fixed, and how much the repairs cost. These often turn out to be far more expensive than any small savings in the listed product cost.
Don’t let managers mix apples and oranges. Be very suspicious when they use “average” costs. For example, the stated “average” cost for labor may include a substantial amount that is covering existing pension obligations. If they move the work out and abolish the jobs, they still have this cost. Don’t let them include it in the cost for in-house labor for the specific work in question.
A similar case can be made about space. If the space is available and unused, don’t let them count the cost of maintaining the building as part of the cost.
In economic terms, make sure that the costs you use are the “marginal costs” (costs for the extra production), not the average costs.
Above all, remember that costing is more of an art than an exact science. There are many variables, each with a different weight. As one negotiator says, winning on these questions “requires doing a lot of homework. But it also depends on big parts of intuition, power, good notes, and b.s.”
Of course, even if you have all the facts on your side, it may not matter. Management may have a different agenda—like breaking or de-skilling the union.
In a number of industries the benchmark is “Harbour numbers,” a measure of labor hours per unit of production. In this case there is no mutual ground for discussions with management. Outsourcing, even if it costs more, produces better Harbour numbers and better bonuses for managers.