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Wednesday, September 10, 2014

Strategic CSR - Outsourcing

Outsourcing is an important issue in the CSR debate. While there are some industries that favor outsourcing more than others (and other industries that are starting to see some manufacturing and other operations returning onshore); in general, the debate over whether a company should or should not outsource is an economic one. As noted in the article in the url below, however, these same economic principles appear not to apply to the U.S. government—in particular, in relation to its military spending:
"As a case study, military footwear is pretty startling. Boot factories in rich countries are a rarity. Indeed Wolverine Worldwide—the Michigan-based company that owns Bates [a maker of military boots and shoes], along with such civilian brands as Merrell and Hush Puppies—makes almost all its other shoes [i.e., its nonmilitary boots] abroad, where labour costs are 30-40% lower."
In spite of the Bates factory in Michigan making most of its shoes overseas, the part of the company that makes military footwear is a 100% U.S. operation:
"… every component used there is American, from leather (a Minnesota tannery provides most hides) to shoelaces, eyelets and the yarn used for linings."
The push to manufacture using all-American raw materials, however, is driven neither by consumer-driven patriotism nor economic efficiency, but by political interference in an industry that manages to supply non-military shoes extremely efficiently:
"Military footwear is governed by the Berry amendment, passed by Congress on the eve of war in 1941 to ensure that troops would be given home-grown wool and food. Today the amendment applies to most uniforms, tents, flags and processed food bought with Pentagon funds. These must be entirely American-made or -grown, unless domestic firms simply do not make the product."
The U.S. defense budget is an important component of overall government spending because, in spite of recent announced cuts, it is still so large:
"America accounts for about four of every ten dollars spent on defence worldwide."
As such, finding easy ways to cut the total would be advantageous, although not, it seems, at the expense of making everything domestically, whatever the consequences in terms of costs. And, needless to say, military boots are not the only military need that must be supplied domestically:
"The rules are far stricter than those that apply to the federal government through the Buy American Act, which smiles on goods once they are more than half American. They are also amazingly complicated. One clause specifies that fish nuggets served to troops must contain only fish caught in American waters or by an American-flagged ship, but may use foreign breadcrumbs."
I am sure foreign breadcrumb makers are heaving a sigh of relief at that major concession!
Take care
David Chandler & Bill Werther
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Boots on the ground
March 1, 2014
The Economist
Late Edition – Final