Ken Jarboe at the Athena Alliance has had two great posts recently about manufacturing. In Reversing the Offshoring Trend,he makes the point that high energy costs and the knowledge intensity of manufacturing are important factors that can outweigh the low labor costs that have moved so much production out of the U.S. In Workforce as an Intangible Asset he describes how the experienced workforce of Danville, Virginia was a key factor that, along with energy prices, recently has lead to the decision by two companies to open two new furniture plants in Danville.

Jarboe’s arguments made me think of the wonderful cases laid out in Lean Solutions a few years ago by James P. Womack and Daniel T. Jones. The book looks at value from the customer’s point of view — one that is getting increasing attention in today’s Web 2.0 world. Although the analysis of the management of doctors’ offices is also memorable, I call your attention to the case of shoe manufacturing. This type of manufacturing was moved off shore long ago and certainly yields a lower cost per shoe.

But the authors point out potential limits to the total cost and earnings related to offshoring. The distances and complexities of offshoring usually imply long lead times so product mix and quantities have to be decided as much as a year in advance. Long lead times mean that new product cannot be produced if a shoe turns out to be a bestseller or if one size sells out before others. Shoes that don’t turn out well end up being sold off through discounting channels. This leads to an overall profit that is lower than that which might be obtained with more flexible, shorter-run production were available. I don’t remember energy costs being part of this argument but they would certainly tip the balance in favor of looking at more creative production that is closer to home.

This is yet another illustration of the power of intangibles to turn business models on their head. Cost of production was paramount in the industrial economy. Although factors like flexibility, quality and customer service are intangible, they can have real bottom line impact. The faster we learn to evaluate intangibles, the better off our economy will be.