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OM in the News: Why Manufacturing Still Counts in the U.S.

January 19, 2015

manufacturingThe U.S. economy,” writes The Wall Street Journal (Jan.14, 2015), “is dominated by service work but manufacturing matters because it includes many middle-class jobs.” The Bureau of Labor Statistics estimates that employers in manufacturing, mining and construction pay an average of $36.37 an hour in wages and benefits, compared with $31.46 paid by stores, restaurants and other service companies. The U.S. lost more than 6 million manufacturing jobs between 1998 and 2010, largely to low-cost countries. Since then, the number of U.S. factory jobs has recovered nearly 7% to 12.2 million, compared with about 17.5 million in 1998.

Manufacturing creates demand for supplies and raw materials, as well as such services as delivery and machinery repair. Every $1 of sales by U.S. manufacturers yields $1.37 of output in other parts of the economy. A dollar of retail sales adds 64 cents. Expanding U.S. manufacturing allows the country to export more and rely less on imports. (The U.S. has run trade deficits every year since 1976). Manufacturing also is a source of innovation. It accounted for 83% of R&D conducted by businesses in 2013.

More U.S. companies would shift production from abroad if they analyzed the costs of overseas production to include such things as the shuttling of executives abroad and holding large inventories as a hedge against supply disruptions, says the Reshoring Initiative. But Harvard Prof. Willy Shih is less optimistic. “China has really captured the whole electronic supply chain,” he said, “and that is unlikely to return to the U.S. Instead of trying to make established products in the U.S., we’re going to have to focus on next-generation technologies” in, for example, advanced pharmaceuticals.

Some of the hurdles are practical. The U.S. needs to rebuild its supplier base, as well as invest in more efficient manufacturing equipment. The average age of industrial equipment in the U.S. has passed 10 years old, the highest since 1938. This article is a good way to start off the new semester as it brings current OM issues to the fore.

Classroom discussion questions:

1. What factors work against the U.S. regaining the millions of manufacturing jobs that were lost?

2. Why is manufacturing so important?

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