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First Thoughts
  By Dan Gilmore - Editor-in-Chief  
     
   
  Sept. 2, 2011  
     
 

The Labor (Day) Supply Chain

 
 

It's the Labor Day holiday this Monday in the US. Just FYI, this now national holiday started as a local event in New York City in 1882 under the direction the Central Labor Union.

It expanded from there rather quickly to other cities and states as formal legislation in an effort to celebrate a "workingman's holiday." National Labor Day legislation was passed by Congress in 1894.

Canada also has a Labour Day on the same Monday as the US. Not sure about other parts of the world.


It's a slow week here and many will be off Friday when this newsletter is delivered, so I decided to take a bit of a look at a number of issues and trends related to "labor," which for these purposes will generally mean "blue collar" labor in the supply chain in manufacturing, distribution, logistics, etc. Right now, there are a bushel basket full of those issues. And supply chain, like it or not, is in the middle of the mix, both at any individual company and as a nation as a whole (and that applies to virtually every economy out there, especially the G-20 nations).

Gilmore Says:

Earlier this year, giant Asian contract manufacturer Foxconn said that even in its low wage factories in China, it was planning to replace men with machines.


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Reader Feedback


"Labor" is generally having a tough time right now, and many (including myself) have had issues with the union approach in many areas over the years, dating back to my first real job after college at a manufacturing company where the union blocked a move to have factory workers inspect their own work. That company was large enough to survive that brain dead position, but I try to put myself in the shoes of a smaller company where that kind of resistance to continuous improvement could cause real pain.

That said, none of us of course like seeing the devastating loss of manufacturing jobs or high levels of unemployment among blue collar workers. The state of Ohio in which I live has been especially hurt by these kinds of developments, as have many others or even most states.

The reality is the percent of workers in unions in the private sector continues to decline, and rather dramatically. In 2010, 11.9% of all workers, or about 14.7 million employees, were in a union. In 1983, the first year this data was collected, the comparable numbers were 20.1% and 17.7 million workers over a smaller population/worker base. As most know, the percent of union workers in the private sectors is now amazingly low, down to just 6.9%.

Even in manufacturing, the unionization rate is only 10.7%. In "transportation and warehousing," the figure jumps to 20.5%, which would include things like airline pilots as well as truck drivers. Not sure what percent of warehouse workers are unionized, but I am sure it is much lower than 20%. In manufacturing, only about 1.4 million workers are now union members, out of some 13.2 million in total. This is quite an astonishing turn over a few decades.

There are so many dynamics here it is hard to know where to start. One place might be that heavily unionized states (Michigan, Ohio, New York, etc.) have been losing manufacturing jobs and at least relative if not absolute population to "right to work" states in the south and southwest that are less sympathetic to labor, impacting not only manufacturing strategy and jobs but the demographics of the country itself (see Texas).

Unions in manufacturing have been under much pressure for a decade or more, especially as foreign auto companies (Mercedes, BMW, Hyundai, Subaru, Nissan) took the southern route. Even those auto OEMS that had mixed geographic strategies like Honda (Ohio) and Toyota (Kentucky, Indiana, Texas) did so in non-union plants (though paying close to equivalent wages, but without the work rule nonsense).

As I wrote at the time, a seminal change occurred in 2007-09, when bankrupt auto parts maker Delphi (spun out of GM) played hardball with the UAW and was able to extract significant concessions from the union as part of its Chapter 11 exit plan. A big part of that was adopting a aggressive tiered wage system, where newer and less tenured workers made far less than experienced employees.

Tough guy Delphi CEO Steve Miller rather boldly said at the time said the UAW simply had to get real about what it cost to make product worldwide. He wound up compromising a bit, but I believe it was watershed moment that really took the wind out of the labor movement and led to similar changes at GM, Ford and other automakers, which in the end affect other union contracts. The union trajectory had been changed.

Of course, you can still hit the union jackpot. Senior UAW workers still make a very nice living compared to most of their union brethren. Get lucky enough to get a port job on the West coast and join the Longshoremen's union, and you could be pulling down well over $100,000 a year for moving cranes and containers.

Neither of the above is a value statement. Just that this discrepancy between blue collar union wages is not exactly logical. You can pull down $125,000 a year if you are working in the Port of Tacoma, and perhaps $30,000 a year at a factory in Tennessee. White collar salaries for similar work actually have a much tighter range for similar job levels.

Today, all of this is tied at the hip to globalization, and it is somewhat amazing to me that the impact of globalization on US wage compression is not more discussed. Manufacturing wages has been flat at best in real terms for many years. This is clearly largely a function of pressure from low cost overseas goods, and has resulted in both the obvious run to offshore manufacturing and wage stagnation in the US.

Historically, manufacturing wages were connected to productivity growth, and the rates of such productivity expansion in the US have been the world's envy for a century. But globalization has cut that connection. There is clearly a direct correlation between productivity growth in manufacturing and the amount of manufacturing labor needed, but, unlike most of our history, that has not led to comparative wage increases for those still employed in manufacturing.

The graphic below is very interesting. US manufacturing output, even with offshoring, continues to rise steadily, but almost in the exact oppositetrend for manufacturing jobs.

 

 

There is so much more we could discuss. The aging demographic of blue collar workers in trucking, manufacturing and distribution is one area we'll save for later. Not unrelated to that trend is the continued and increasingly aggressive investment in robotics and other forms of automation.

And that is not only in developed countries. Earlier this year, giant Asian contract manufacturer Foxconn said that even in its low wage factories in China, it was planning to replace men with machines. "Foxconn will replace some of its workers with 1 million robots in three years to cut rising labor expenses and improve efficiency," its CEO recently said.

As we have noted many times before, a not well understood megatrend is the rapid rise of robotics in distribution center environments, which will change the face (and labor supply chain) in distribution over the next decade. Until now, automation really had a limited impact on DC labor. That is changing.

What it couldn't get through legislation (card check rule), the Obama administration and the National Labor Relations Board are trying to achieve by other means. First is the outrageous move by the NLRB to block Boeing's move to begin operations at a nearly complete airplane factory in South Carolina, on the grounds that company is illegally retaliating against the unions in Seattle for previous strikes. This issue is now being litigated. Big impact if it goes the NLRB's way.

The NRLB is also proposing a number of rules that appear to give advantages to labor in unionization drives, and challenging states that have implemented laws designed to bar card check provisions were they ever to be passed in Congress or somehow required through NLRB rules. Outcomes of all this totally unknown at present. 2012 election will loom large.

Right now, we are at the shoot out at the OK Corral. It would be so nice if we could bring back the 1950s where companies could succeed and blue collar workers make a nice wage, but we are in a very different place here in 2011.

What is your take on the current "labor supply chain?" Any reaction to Gilmore's perspective? What are other key issues? Let us know your thoughts at the Feedback button below.

 
 
     
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Feedback
2011-09-11

Interesting to see the chart on output compared to employment in manufacturing. It confirms my view that US manufacturing is not and has not really been in trouble or decline. It is the workforce that has reduced in numbers not the output of the sector as a whole. Individual businesses and some whole sectors have had their troubles, as others will in the future, but generally manufacturers have stepped up the plate and done what is expected of them.
 
I would expect that most of the jobs that have gone away were the unskilled low wage ones that are more easily outsourced. I am not convinced either that we should have kept these jobs. If we try to compete with China, Vietnam and other countries by lowering our wage rates we are doomed to fail. Which also makes me far from convinced that we need a "Texas Miracle" of minimum wage jobs and low educational standards. Remember if Texas is stealing people and jobs from other States in the USA then it is a zero sum game for the USA as a whole - applying Texan conditions to the economy as whole will not necessarily increase net employment it will just stop jobs moving within the USA. For more jobs to be generated in the USA we need more domestic demand. Lowering wage rates has the opposite effect - though this may have been offset in Texas by the rise in population. While increasing wages are of course not in the interests of individual businesses paradoxically one of the best things that could happen for US business as a whole is to increase the living standards of the huge majority of people who earn less than the median wage and thereby increase demand in the market.
 
I also noticed where the dips, flatter growth and rapid growth in the manufacturing output figures chart appeared. Who would have guessed that Reagan 81-89 would be quite flat and Clinton 1993 to 2001 would show the apparently highest growth rate.
 
Nick Turner

2011-09-05


The strong parallel to this manufacturing trend is America’s evolution from an agricultural economy to an industrial economy during the 19th Century. Are we worse off today because productivity improved in agriculture, and all those farm workers were no longer needed? Of course not! The resulting displacement of farm workers freed up labor for our burgeoning industrial economy. Similarly, today’s ongoing displacement of manufacturing workers (due to productivity improvement) frees up labor for the information industry, the healthcare industry, and so on. “Different” doesn’t always mean “worse,” and sometimes it means “better.” But to achieve “better,” the workers have to want to develop skills in these growing industries, rather than clinging to the industries that don’t need as many workers.

Steve Hopper
The Progress Group


2011-09-02

Note From Editor:

Thanks for writing.
 
I think if you re-read what I wrote you will not find I at all said there was a “definitive case that they [unions] are necessarily bad.”
 
I think a lot of the work rule stuff is stupid. I am very much in favor of workers making a decent wage. How to do this and keep US companies competitive and/or not having the jobs automated away is the question, and I do not have an answer to that.
 
You will note I noted the unfortunate scenario that productivity gains of late have not led to blue collar wage growth, as they have through most of our history.
 
Specifically on CEO pay, I think this has gotten much out of hand, but it is the shareholder’s money. I think Boards/shareholders have to be the ones to rein it in. But even if you do, it won’t help the workers much, just be more symbolic.
 
 
Dan Gilmore
 

What is wrong with workers trying to get a bit of leverage in their work environment so they are not taken advantage of by powerful employers?  Sure, there are a lot of ridiculous things associated with union rules and union contract rights but I am sure there are a lot of good things (worker safety, worker training, etc.) that have come out of unions as well. I am afraid the mention of your one personal experience in regards to unions does not make the definitive case that they are necessarily bad. You infer with your dialog and the statistic you presented that union workers making more than non-union workers (9% greater) is a bad thing and makes us anti-competitive. This may be true to some extent but judging by the worker uprisings and the increasing wages in China (see attached article) this may be a moot point in the future. Also, why is not more scrutiny given to the CEO and upper managerial class of workers whose salaries and bonuses far exceed reasonable compensation?

Here are some statistics taken from Wikipedia:

“The U.S. stood first in the world in 2005 with a ratio of 39:1 CEO`s compensation to pay of manufacturing production workers”.

“In 2007, CEOs in the S&P 500, averaged $10.5 million annually, 344 times the pay of typical American workers.”

Does not this form of compensation also make us less competitive? You mention that port workers being paid $125,000 compared to the $ 30,000 paid to a manufacturing worker in Tennessee but this is only a little over a 4:1 ratio. Far less than the 39:1 ratio wouldn’t you agree? You would have to fire 84 port workers being paid at $ 125,000 per year to in order to negate the $10.5 million made by only one average CEO. Sure I can agree that port workers may be overpaid, but I save my rage for the inequities in executive pay compared to the average hard-working employee. It would please me to see you devote a column to this subject.

What is your take on this? Do not workers have the right to protect themselves from the oppressive and selfish actions of employers? Like CEO’s and executives, do not workers have the right to seek as much compensation as they can for their work? Does not executive pay and bonuses also make the U.S. less competitive in the world?

Your thoughts would be appreciated.

Steven A. Krachey
Controller
Sankyu U.S.A., Incorporated


2011-09-02


Your article (The Labor Supply Chain) and the statistics on  unionized labor in the U.S. were very informative – thank You.

By way of feedback, the strength of unions in the retail distribution sector still remains quite powerful, particularly in the Grocery sector in the NorthEast, Chicago, California and other parts.  This has created a tremendous competitive disadvantage for established regional grocery retailers who have to compete against Wal-Mart’s non-union labor force. Wal-Mart is now the largest grocery retailer in the U.S. by a long shot.   In 1980 Wal-Mart wasn’t even in the Grocery business and today the company is not only the number 1 Grocery retailer in the U.S., they are twice the size of the number 2 company.

I consult for many companies who pay upwards of $60 – 100,000/year (wages + benefits) for unionized forklift labor.  In most cases , the unions have forced many of these companies into accepting so many restrictions that any attempts to improve efficiency requires a monumental effort in politics.  This is taking place in an industry that is the most labor-intensive in the world and which has to exist on razor thin net margins in the 1 - 2% range.  It’s been like this for decades and the result has been the demise of over 20 regional grocery firms during this time.

One needs to take a look at what some companies are doing to defend themselves against unions which in effect is reducing the union’s power base:

  1. Full blown automation of large grocery distribution centers has reduced up to 70% of the direct labor force in a number of large facilities now operated by Kroger, SuperValu, Sobeys and believe me, more are on the way.  Despite the significant capital investment required to deploy a fully automated distribution center, we can expect to see companies move in this direction, particularly where unions are militant and labor rates are excessive.
  2. Outsourcing to wholesalers/3PLs.  Witness the explosive growth over the past 20 years of C & S Wholesale and its ES3 subsidiary; and SuperValu its Advantage Logistics subsidiary.  Many grocery retailers have decided to get rid of their distribution centers and all of the union headaches that go with it.  I’m thinking about:
  • Giant Foods Landover which was recently announced for closure so that the operation can be outsourced to C & S
  • Kroger which has outsourced in my estimation about 6.7 Million sq. ft. or about 1/3 of its distribution network to 3PL companies
  • Loblaws in Canada that has outsourced numerous facilities to 3PLs to eliminate hundreds of UFCW jobs
  • Shaws Supermarkets, Safeway, A&P, BI-LO, Bruno’s, and the list goes on, there’s a dozen more companies I could mention here. 

A significant Wal-Mart competitive advantage has always been is its non-union distribution center labor force and this helps the company squeeze costs out of their supply chain to better compete on retail price.  This competitive advantage has literally forced competitors to seek ways to cut costs to survive.  Given that warehouse labor expense represents a massive portion of a grocery company’s controllable expense structure, this is the most obvious place to look for savings. 

The bottom line is that it’s time for the unions to wake up and smell the coffee – this isn’t about union bashing.  It’s about macro-economic changes that are forcing long-established firms into survival mode.

Marc Wulfraat
President
MWPVL International Inc.


2011-09-02


There`s something else I wish you would factor into your discussion of labor issues: the correlation between the decline of unions in the private sector, the "financialization" of the U.S. economy, and the pay disparity numbers -- (e.g., the big time CEOs averaging over $11 million/year in 2010).

I`d like to understand these dimensions of the trends better -- and without either Neoliberal or union ideological cant.

Always learning.

Karen Owsowitz


2011-09-02


"Earlier this year, giant Asian contract manufacturer Foxconn said that even in its low wage factories in China, it was planning to replace men with machines."

That`s not a a bad idea. Everybody should replace their workers by machines until there is nobody left to afford to buy their products. This way, perhaps, they can sell their products to machines that replace their customers. Let`s go back to the era of hunters and gatherers.

Suleyman Demirel
PhD Candidate in Operations Management
Stephen M. Ross School of Business
University of Michigan, Ann Arbor


2011-09-02


The 1950’s were great for the US, because the industrial capacity of the rest of the world was in ruins following World War II.  I believe that an event of similar magnitude (not necessarily as destructive or horrible as a world war) is required to put the US in a similar position that both businesses and labor can enjoy shared success.

The FairTax legislation that is currently working its way through Congressional committee is something I feel would have that level of effect on the US and global economies.  I would love for you to share your thoughts on its potential impact on the Supply Chain.  If you are unfamiliar with it, check out www.fairtax.org

Thanks for the great perspective.

McLain Oppy
Supply Chain Consultant
The Open Sky Group, LLC


2011-09-02


I also vividly remember union labor, in my case Teamsters in the trucking business.  Comparing the old Overnite costs to Teamster carriers was a real eye opener-wage rates were almost identical, but everything else labor was out of sight in favor of Overnite. 

I also agree with your remarks about globalization, but that begs the other question-how well will the U. S. standard of living hold up, without some guarantee of middle class wages staying close to perceived middle class needs?  I wish I had an answer, for my grandchildren`s sake.

Somehow, we need to come an agreement about equity across the globe.  Let`s hope getting to that agreement is not too painful.

Arnold Maltz
Arizona State University




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