Thursday, March 6, 2008

The Downward Spiral of Manufacturing

This article says that a small shoe manufacturer failed because the exit of shoe manufacturers left the industry with too few suppliers for the plant to survive.

Supposedly, the most efficient businesses are supposed to survive, but that works only if there is adequate infrastructure.

Aeppel, Timothy. 2008. "U.S. Shoe Factory Finds Supplies Are Achilles' Heel." Wall Street Journal (2 March).

Howard Shaffer's factory for making high-end custom shoes, relied on computer imaging to fit customers from around the U.S. and Canada remotely, turning out shoes for $450 or more a pop.

"Having spent the previous decade setting up plants in China to manufacture shoes for big U.S. brands, he thought he knew how to revive the moribund U.S. footwear industry: use heavy automation run by a handful of skilled workers instead of relying on large numbers of low-paid Chinese laborers."

A trade magazine catering to the factory-automation industry pronounced him "Progressive Manufacturer of the Year" in 2005, picking tiny Otabo for an award that usually goes to a large multinational.

"But now, he is throwing in the towel on that venture, too. He closed his factory over the weekend, and is shifting the bulk of his operations to China."

"What killed his U.S. factory isn't just competition from Asia's cheap labor, he says. It is the lack of infrastructure needed to make a factory tick, a problem that has bedeviled the few remaining independent shoemakers in the U.S. Finding technicians to fly in on short notice to fix shoe machines was a constant and growing challenge, Mr. Shaffer says, because the number of U.S. companies that make and service machines has dwindled. The suppliers of shoelaces, leather, and other basic materials insisted that he buy in batches far larger than made sense for a small-scale producer."

"Consider what happened with his supplier of outsoles, which form the bottom part of the shoe. Mr. Shaffer initially found a domestic supplier to provide what he needed at a reasonable price. But a glitch developed about a year ago. One Otabo style required an outsole with two types of polyurethane sandwiched together -- a tough bottom layer that resists wear and a spongy inner layer that makes the shoes more comfortable. It is a more complex process, Mr. Shaffer says, "and so after three years of supplying us, they said they just can't do it that way anymore"."

"David Murphy, chief executive of closely held Red Wing Shoe Co. in Red Wing, Minn., an iconic American boot maker that has kept a large manufacturing operation in the U.S., says even a larger-scale company like his, with annual sales of more than $400 million, has to worry about the shoe industry's withering infrastructure."

"Almost 99% of the 2.4 billion shoes purchased in the U.S. every year are imported, 86% of them from China. The problem of obtaining components is especially acute when it comes to materials uniquely designed for shoes, as opposed to generic items such as cardboard boxes that are used by a wide array of manufacturers. This is one reason why Red Wing prepares its own shoe leather, says Mr. Murphy. Mr. Murphy notes he just got a call from a small custom shoe producer in northern Minnesota who often turns to Red Wing for supplies. "They were having trouble getting shoe laces," he says."


Anonymous said...

It is not only the problem of shoemakers. One of possible ways to look at the processes in various industries and sectors is to plot the evolution of firm density over time. The firm density is the ratio of the number of firms of given size divided by the width of size bin as expressed by the number of employees working at these firms. For example, the number of firms with 1 to 4 employees divided by 4 (width of the bin). This is a standard bin for many industries as presented by the US Cesnsus Bureau from Economic Censuses.
The evolution (from 1992 to 2002)of firm density in manufacturing shows a decrease in the range from 2 to 10 employees in the US and no density change for larger firms.
Therefore, the infrastructure related to smaller firms slowly disappears.
In construction and mining, situation is different:

Anonymous said...

The reason for decreasing form density is likely related to the trough in the sales/payrall dependence on firm size. People in the firm size range between 2 and 20 employees get the smallest portion of total sales.

reason said...

This also affects startups, which are even more important. Loss of firm diversity is deadly for a region. Manufacturing supplies are also potentially service industry suppliers (or training gounds for staff). It goes on and on.

Shag from Brookline said...

Back in 1968 Presidential candidate Gene McCarthy (the good McCarthy!) in response to a question on what would be his plan with respect to a policy he was critical of, said:

"You don't have to be a shoemaker to know the shoe hurts."

There are a lot of corns and bunions in our economy. We need economists trained in podiatry. Our feet are in your hands.

PGL said...

There is another angle to the story of US shoe design companies sourcing goods from 3rd party shoe manufacturers. They often set up some offshore procurement entity paying that entity a commission that is several times the cost of rhe of providing these services. In other words, another way to reduce US taxation by violating section 482. Well - their accounting firms will write them some absurd argument that this is all arm's length in the hope that the IRS is once again too stupid to challenge this tax evasion dressed up in fancy econ sounding terms that are all just silly.

Eleanor said...

Interesting. I try to buy US made shoes, which is not easy; but some of New Balance is still made here, and Red Wing has a union plant in Minnesota.