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I go both ways ...      Outsourcing

The latest
scheme to
eliminate jobs.

It's happening in manufacturing — and it's happening
in the public sector ... workers are fighting to protect
their jobs not only from an old threat (outsourcing) but
from a new one: insourcing. Here's the story ... and
some things that can be done ...


Outsourcing is "in" among manufacturing employers — and public and service sector employers as well. UE members in a variety of workplaces find themselves required to be continually vigilant to protect their jobs from the threat of subcontracting.

In fact, says UE Genl. Pres. John Hovis, outsourcing has been revolutionized and become so prevalent that it should be acknowledged as a new manufacturing technique that unions need to struggle with but can’t wish away.

But if workers already have cause to fear job farm-out, their nightmares could take a hellish turn as employers increasingly look to farm in work. The latest trend in outsourcing is insourcing — having subcontractors set up shop in the shop.

Volkswagen opened a world truck and bus plant in Resende, Brazil in November 1996 that some bosses believe may be the factory for the new millennium. Volkswagen’s suppliers not only supply components but actually assemble units into vehicles on the VW assembly line.


Welcome to the world of modular production — and the world’s first plant run by subcontractors. The production flow integrates seven "modules" sequentially. Six are designed for VW’s strategic business partners — its suppliers.

Each partner occupies a section of the plant and has responsibility for the mounting of complete assemblies. Each partner is responsible for quality control and is paid only when the totally assembled vehicle is approved by VW.

Among the supplier-partners is Rockwell International, which is responsible for axles and suspension systems.

VW has essentially "farmed in" its assembly operation, being exclusively responsible only for the seventh and final production module, final product testing. "What are conspicuously scarce are Volkswagen workers," reported the New York Times.

Assembly-line workers in the new plant are paid approximately two-thirds less than auto workers in Volkswagen’s Sβo Paulo plant. Any down time on the assembly line is charged to workers, who must make it up without overtime.


Why the new process? A Brazilian VW executive explains that the old manufacturing system pioneered by Henry Ford "can’t respond fast enough to the challenges of the global economy."

The Ford Motor Co., meanwhile, began building a new plant in Brazil last July which will employ the "modular consortium" system. Ford suppliers are reportedly investing a total of $300 million towards the company’s "Amazon Project;" the supplier-partners will share factory space with Ford workers, delivering completed units of new vehicles instead of several parts that would later be assembled on the line.

General Motors’ cutting-edge "Blue Macaw" plant, also in Brazil, is likewise based on a new relationship with suppliers; it’s scheduled to open this spring. Chrysler is also getting into the act, also in Brazil, opening a $315 million modular truck plant there last summer.

But corporate plans for re-engineering manufacturing are not limited to Brazil.


General Motors, which has already had bruising battles with the United Auto Workers over outsourcing, has a North American version of its Brazilian Blue Macaw." GM envisions a smaller labor force (reduced by as much as half) and "new manufacturing techniques" for what the company calls "Project Yellowstone." Suppliers will build entire sections of a car; GM workers will do final assembly. GM’s Oklahoma City assembly plant has been chosen for the launch of Yellowstone.

GM’s decision announced Aug. 3, 1998 to spin off its $31 billion Delphi Automotive Systems components division is believed by some industry analysts to be part of the company’s shift to modular production.

Modular production "looks great on paper," says Business Week. With suppliers shouldering more of the risk and investment, auto makers can cut the size of assembly plant by two-thirds and slash the workforce by half.

Ford’s Batavia, Ohio parts plant will produce "gearless" transmissions in a joint venture with the German firm, ZF Friedrichshafen AG, holder of a patent for continuously variable automatic transmission. (Ford will own 49 percent of the new entity, ZF 51 percent.) Parts companies will install pre-assembled modules in model-year 2001 cars.

According to Business Week, some experts believe the Big Three auto companies will eventually sell off their engine and auto assembly plants.


Deere manufactures big mowers at its plant in Fuquay-Varina, N.C.; MetoKote Corp. is a painting subcontractor with an adjacent facility. Pieces of Deere machines to be painted are whisked at 45 feet a minute to and from MetoKote via conveyer. The arrangement between the two companies means that MetoKote pays for Deere’s painting operations, deals with the Environmental Protection Agency and handles changes in paint technology. It also wipes out the shipping costs Deere incurred by farming out painting jobs.

Graham Packaging employees — represented by UE Local 1421 at its Santa Ana plant — will install and operate a bottle facility inside the Quaker Oats beverage plant in Atlanta, blow molding plastic bottles for Gatorade. This will be Quaker Oats’ first-ever in-plant operation. Graham, on the other hand, has nearly 20 on-site plants worldwide. "We’ve done this a long time," says Roger Prevot, Graham senior vice president. "More of our new facilities are on-site than off-site."


There is a convergence of two trends here: subcontracting and what’s been described as "lean, mean supply-chain management."

An early example of subcontractors working inside the plant because of the corporate outsourcing craze has been General Electric’s use of outside maintenance personnel — a practice contested by UE from the shop floor to national negotiations.

It’s becoming a common practice for companies to rent each other’s employees.

And as example of supply-chain management, look at how GE Transportation Systems in Erie, Pa. (the employer of Locals 506 and 618 members) has built a close relationship with suppliers like Dominion Castings, a Canadian division of Chicago-based NACO. Beginning with a long-term contract for truck castings in 1993, GE’s relationship with its supplier deepened when NACO became involved in the design and production of its steerable locomotive truck. "The NACO tie-up fits into a larger GE strategy that targets just-in-time delivery from suppliers and significant inventory reductions.

In another variation, IBM, Hewlett-Packard and Compaq have begun sending bare-bones machines to distributors; the distributors finish assembling the computers when the orders come in. One Hewlett-Packard executive was quoted saying, "Putting parts together? Others can do that." Another HP executive recalled for Fortune magazine how 20 years ago, H-P workers made screws and steel, and wound motors. Now production is quickly farmed out.

Nike and Dell are extreme examples of "hollow corporations" — all of their goods are produced by subcontractors.


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Visionaries say that if manufacturing has a future, this is it. Inventories all but disappear as product designers, manufacturers and distributors are linked electronically. Goods will be produced based on retailers’ daily needs; even cars will be assembled according to customer specifications.

Promoters of insourcing say the new partnerships allow companies to cut costs, use their resources more efficiently, focus on specific goals, gain access to other’s production expertise, gain economies of scale and get product to market quicker.

For example, management at VW’s Resende plant claims it can concentrate better on logistics, product engineering, process and quality assurance and customer service.

"Observers in Brazil believe that this type of closer manufacturer-supplier relationship represents a trend that is here to stay—and not just in the automotive industry," reports Industry Week. "It may be more easily implemented in a greenfield plant, they acknowledge, but if the right strategy is followed regarding unions, it might be possible to introduce it in existing plants as well."


The "right" labor strategy would presumably require neutralizing, if not eliminating, and certainly avoiding union organization.

If organized, workers would have a way of objecting to the seamy side of this flexibility — layoffs, deskilling and smaller paychecks.

This institutionalization of a two-tier employment strategy gives the bosses a powerful weapon against unions. Not surprisingly, last November union members at GM and VW plants in Sβo Paulo, Brazil accepted management’s first offer on a new contract.

In Resende, Brazil, local union leaders hope to organize the VW plant eventually but admit the web of employers poses a challenge.


The insourcing phenomenon is bad news to those American workers who are already under threat from outsourcing — and should be of concern to those who work for suppliers. In the new "flexible" and "lean" global economy, subcontractor jobs can be outsourced.

In 1994, U.S. companies subcontracted about $16 billion worth of work — a figure expected to grow to $37 billion in 1998. A 1997 study by the OI saw companies planning projects that would double their outsourcing of all types, including services as well as production of parts. Last year, companies covered by a Dun & Bradstreet survey said they would increase manufacturing outsourcing alone by 25 percent. Manufacturers account for nearly two-thirds of all outsourcing

The electronics industry’s subcontracting manufacturing sector is growing faster than overall electronics sales. Nestlι Corp. may own 495 plants world-wide, but subcontractors produce more than half its production and almost half its packaging. Big pharmaceutical firms are relying on small specialized biotech production companies.

GM outsources about 55 percent of its work, Ford 62 percent and Chrysler 67 percent, compared to 75 percent for Japanese automakers. Four out of five auto-parts plants are non-union.

"The restructuring that has swept the automobile industry for the last several years seems pointed toward a two-tier industry: one union, one non-union; one more or less well-paid; one, not; both with super-stressed workplaces," writes Kim Moody in Labor Notes.


Of course, not only manufacturing workers are affected. Information services is a growth industry for subcontractors. For example, a subcontractor in India handles the medical records for a hospital in suburban Washington, D.C. Companies from the Philippines to Ireland are vying for U.S. office jobs.

Postal workers unions have been protesting plans by the nation’s ninth-largest firm — the U.S. Postal Service — to subcontract work. Public sector employees — federal, state, county and municipal — face severe threats from subcontracting. School districts contract for services like cleaning.

Then again, UE Local 792 members at Wright State University are employed by the university’s food-service subcontractor.

While many UE members are fearful of — and have been fighting against — the threat of outsourcing, a growing number of UE members work in manufacturing plants that supply parts to factories owned by major auto and electrical manufacturing companies. They have benefited from the 1990s growth in outsourcing, but their jobs, too, may be in danger.


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"One change in outsourcing is that the suppliers of outsourcing services themselves are beginning to outsource non-core functions and form alliances with other providers to offer end-to-end services," says The Outsourcing Institute. Sub-suppliers are providing hundreds of individual parts to main suppliers.

Already in the auto industry, companies are supplied by subcontractors who in turn outsource work.

The ultimate so far, reports Fortune magazine: "A ‘rolling chassis’ being delivered by Dana Corp. to Chrysler’s new $315 million Dodge Dakota pickup-truck plant in Campo Largo, Brazil. The chassis arrives on inflated tires complete with brakes, steering components, gas tank, and other parts supplied by 70 companies, including ITT, TRW, Eaton, and Bosch."


U.S. industry’s love affair with outsourcing and new fling with insourcing is ominously reminiscent of Japan’s reliance on subcontracted labor. Each big company employs 100 subcontractors, which in turn contracts out to hundreds more companies, some with only a few employees. The wages and conditions of workers employed by subcontractors are inferior to those employed by the major corporations.

The big Japanese corporations like this system because the work of the tiny subcontractors can be of very high quality; if minor changes are needed they are easy to make, allowing the corporations to remain highly competitive.

The bottom layers of the Japanese workforce are made up of subcontract employees, "temporary" employees, "extra-workers," day laborers and casual workers, employed by the subcontractors and myriad of small employers dependent on big capital.


Despite the hype, insourcing has already exhibited real-life problems for big corporations — like finding reliable suppliers and maintaining good relations with subcontractors. When Daimler entered into a joint venture with a Swiss firm to produce a micro-car plant in France last year, quality problems delayed the car’s introduction by six months. Daimler says modular assembly works but will not entrust suppliers with production of its high-price Mercedes luxury sedans.

As the boundaries of U.S. manufacturing become blurred, all the way from parts to distribution, accountability becomes more difficult — a problem potentially for business and labor. A subcontractor intricately involved in production is not so easily fired. And who do unions bargain with — or strike against?

As vertical integration gives way to "virtual integration," the danger for business is that the insourcing model will simply shift labor costs without cutting costs.

For workers, the danger is that business will succeed — at the expense of their wages, benefits and jobs.

The union must get on top of insourcing — or any subcontracting — before it becomes a reality in their workplace, counsels UE Genl. Pres. Hovis.

"We must be more vigilant about bargaining over subcontracting while we still have bargaining power, before work is moved out or in," says Hovis.

I go both ways ...    Outsourcing

What can be
done about

There are no easy answers.

Unless the contract specifically prohibits subcontracting, arbitrators have increasingly found for the employer. Labor law at best provides that the company must give notice and if requested, provide information and bargain. Thus our main muscle is the ability to put up a tough shop floor struggle to deter employers from initiating and carrying out subcontracting decisions.

The following guidelines, taken from a recent issue of the UE Steward, offer UE locals a starting point for developing a response.

  • Be pro-active (not reactive). Don’t wait until the boss tells you a department is being farmed out before taking action. When rumors start surfacing about subcontracting check them out, but don’t let the boss create an atmosphere of panic. Often employers use rumors to "soften up" the union for the kill. Make a plan before subcontracting starts and put that plan into action.

  • Demand information. If the employer says that work is going out the door, the union has a right to demand information on why the work is going, how much the work will cost at the subcontractor, where the work is going, etc. The employer may resist giving all the information we request.

  • Does the employer have to bargain over moving work? This is a matter of contract interpretation and labor law. If your contract clearly gives the employer the right to subcontract, then the union may only get to bargain over the effects of the subcontracting (layoffs, transfers, etc.), not over the decision to subcontract. However, do not assume that the employer has the right to subcontract without bargaining just because they say so.

  • If the contract is silent the presumption is that the employer must give notice about any decision to move work out of the bargaining unit and bargain on request, especially if the employer claims a financial reason for subcontracting.

  • Educate the members. Make sure the members understand the problem, even if it is not their area that is being affected. Make sure they understand that this is a hard battle to win, but it is the union’s obligation to try.

  • Think about changes to the contract. Figure out what language should be added or taken out of the contract to give us more power on this issue. Every little roadblock created against subcontracting is a victory.

  • Improve production and services. Many UE locals have stopped or slowed down subcontracting and privatization by developing union plans to increase production, or deliver better services. The key to engaging in this strategy is to never get into the concession trap and to get written guarantees from the employer. If the union has a better way to organize production and lower scrap, bargain with the employer before giving the new idea. Don’t accept vague promises, get a written agreement. Remember, it doesn’t hurt to occasionally remind the employer of the bloated salaries and benefits that they get. Eliminate these and the need for subcontracting is over.

  • Organize the unorganized. Subcontracting and privatization are successful because there are too many unorganized workplaces. If your employer subcontracts work, find out where, and under what conditions. If there are unorganized workplaces in your area, even if they don’t do subcontracting for your employer, try to organize them. Only by raising wages and benefits of all workers can we protect our standard of living.

UE News - 02/99

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