Two years ago, Sparton Electronics Inc., a division of Jackson, Mich.-based Sparton Corp., faced a dilemma common among many midtier technology companies.
A customer of the electronic manufacturing services (EMS) provider was keenly exploring the transfer of some production to Mexico in a bid to cut costs. With no facilities outside the United States and unwilling to set up plants across the border, Sparton executives scrambled for a solution. They found one literally behind bars.
For U.S.-based electronic equipment makers that are willing to brave the ire of competitors and critics, prison labor is proving a viable though highly controversial solution to the challenges of competing against low-cost sites in Asia, Eastern Europe and Mexico.
High-tech companies with no manufacturing presence outside the United States must devise creative ways to reduce production expenses while maintaining quality standards. And what many of them are finding is a captive, fairly well-educated pool of workers at state and federal prisons. The prisoners can be easily trained to do often labor-intensive cable assembly, wire harness, printed-circuit-board, recycling and refurbishing work.
Sparton, for instance, moved portions of its cable assembly, wire harness and wire-prepping work for tour bus lighting mechanisms from its Deming, N.M., facility to a state jail in nearby Las Cruces.
"It's a way for us to stay competitive," said
Stephanie Martin, vice president of corporate materials acquisition and logistics at Sparton's Brooksville, Fla., operation.
But despite being in existence for decades, prison job programs are controversial. Some political activists regard them as an unsavory exploitation of people with limited rights, while many industry executives claim they offer companies a legal loophole for anti-competitive practices.
"We don't believe prison labor is a good thing at all," said Bobbie Gentile, president of the National Association of Manufacturers and Representatives (NAMR), based in Centerville, Ohio.
Opponents argue that prison programs, particularly at the federal level, have unfair advantages when it comes to paying workers and winning bids. They contend that the prisoners are paid less than minimum wage while companies that employ them have an unfair edge when bidding for government contracts due to mandatory sourcing requirements.
Despite the raging dispute, many more companies in recent years have embraced the use of prison labor, especially those in sectors where competition for government contracts is fierce, including electronics, textiles and industrial machinery.
"The vast majority of companies we talk to that use inmate-labor programs are satisfied with the results," said Knut A. Rostad, president of the Enterprise Prison Institute (EPI), a consulting and research firm based in Bethesda, Md. "Companies look into these programs not only to cut costs but also because there were labor shortages in their local markets."
A 2002 EPI survey of 30 of the 200 companies that use state-prison programs found that 39 percent got involved primarily because of labor shortages in their respective regions, while about 19 percent cited social responsibility as a driving factor. Only 15 percent said they chose to use prison labor to lower their manufacturing costs.
The reasons given for staying with the program, however, are dramatically different than for the initial adoption, the survey found. More than 50 percent of the respondents pointed to the quality of the work force and the quality of the product as the main criteria for renewing contracts, while 12 percent listed available work force and 11 percent cited scheduling flexibility as priorities for returning.
"Companies that use these programs find that this is a productive work force," Rostad said. "Prisoners must compete vigorously to get jobs in these programs, and they work hard to keep them."
Making the case
Sparton's decision to tap the prison work force was a laborious one, according to subcontract process manager Bill Roden. One of the first challenges was finding the right facility, a task made easier by already existing support structures at the federal and state levels.
At the national level, Federal Prison Industries Inc. (FPI), a corporation formed in 1934 within the U.S. Department of Justice to provide inmate training, operates 11 prison-based factories. The plants offer a variety of electronics-related products, such as plastic injections, cable and telecommunications assemblies, fiber optics, printed-circuit-board assemblies and connectors.
Revenue from electronics services accounted for slightly less than a quarter, or $152.4 million, of FPI's $667 million sales in the fiscal year ended Sept. 30, 2003, with the Department of Defense being its primary customer.
Sparton narrowed down its list to two facilities. It settled on the state prison in New Mexico because the company already had a wire harness and cable assembly plant in the area; logistically, it made sense to have everything in close proximity, according to Sparton executives. The prison authorities buy materials on consignment, pick up the items they need from the Sparton plant and do the work at the Las Cruces site, according to Roden. To date, the prisoners have completed about 5,000 units, he said.
"The prisoners are treated purely like any other subcontractor," Roden said. "When the products come back, they go into the factory and are inspected like every other part to make sure they are OK."
The biggest benefit is the labor savings. Sparton pays $5.77 per hour per employee but doesn't have to cover extra expenses like medical benefits because the government already provides that, Martin said. That's a 75 percent reduction in the local New Mexico labor rate.
"It's still higher than the Asian labor rate, but it's competitive with Mexican rates," Martin said.
Locking out others?
It's that kind of wage advantage that has drawn the anger of other midtier high-tech companies and the politicians who represent small-business interests on Capitol Hill. Although the hourly rate may be close to minimum wage, money is taken out for mandatory restitution owed by the prisoners and other room-and-board-type payments. Therefore, real wages drop significantly below what would be considered a living wage in the open market, opponents argue.
"What they end up paying the inmates is often well below minimum wage. Businesses in the manufacturing sector cannot afford to do that," said Patrick Lyden, manager of legislative affairs at the Washington-based National Federation of Independent Business, which represents 600,000 small businesses nationwide.
Speaking specifically about the federal program, Lyden said executives from FPI (which is also referred to as Unicor), small-business owners and legislators have held discussions on how to level the playing field. "This battle against FPI has been going on for quite a while because of the unfair competitive advantage this quasi-government agency has," Lyden said. "FPI receives money from the federal government, and they don't have to follow the same labor requirements private businesses have to follow."
Besides the wage issue, the government's mandatory-sourcing requirements have caused sparks to fly. Under past legislation, if FPI made certain products, government agencies--including military organizations that annually buy millions of dollars' worth of electronic components--were required to purchase them from the prison program without calling for bids from the private sector.
"Since the 1970s, companies could not compete with FPI, because of the mandatory-sourcing requirements," said the NAMR's Gentile, who is also president and owner of Q-Mark Inc., a Dayton, Ohio, consulting firm that represents 15 manufacturers, 12 of them connector makers.
Passage of the National Defense Authorization bill in fiscal 2000, however, has eased the mandatory-sourcing constraint and opened the door for greater private-sector competition. A provision in the bill requires Department of Defense purchasing and contracting agents to determine if FPI's mandatory products are comparable in price, quantity and time-to-delivery to commercial products. If they aren't, the DOD is permitted to bring in competition.
An FPI spokesman acknowledged that revisions in the law have changed the way government organizations can buy products, but he said customers will ultimately decide whether private industry or prison programs are better suited for their needs.
"Language in the fiscal-year 2002 and fiscal-year 2003 DOD Authorization Bills altered FPI's status as a mandatory source of supply for the DOD," the spokesman said. "How FPI compares with other vendors is for FPI's customers to decide."
In the short term, the jury is out on how the playing field will be leveled and what the outcome will be for small and midtier tech companies that use or compete against prison programs.
Politicians continue to debate exactly those issues. Last year, the House of Representatives approved a bill calling for the phaseout of mandatory sourcing of FPI products in five years and the further opening up of the bidding process. The bill is now in the Senate for consideration.
Others, though, say more needs to be done. "The 2000 DOD reauthorization bill did give the Defense Department more flexibility, but there are still numerous ways that FPI's practices present unfair competition to, and an uneven playing field for, our nation's small businesses," said Rep. Nydia M. Velazquez, D-N.Y., ranking member of the House Small Business Committee.
"None of the legislation either passed or pending addresses the fact that FPI pays inmates next to nothing, while small companies pay their employees a living wage," she said.
Still an option
Despite the political ping-pong this alternative labor source has generated, many companies are likely to stay engaged with inmates, according to observers.
"The [prisoners] do darn good work," said Stan Ricker, electronic equipment specialist at the Test Article Preparation Department of the Naval Air Warfare Center, Weapons Division, in China Lake, Calif.
Ricker said his group buys wire harnesses for telemetry bodies used in missile testing from an FPI-affiliated facility in Wisconsin. Ricker's organization provides prisoners with the plugs and sockets, and then the inmates handle the wire and soldering processes.
"Wire harnesses are such a labor-intensive product," Ricker said. We have a captive audience available to us. We might as well use them."
Even PC bellwether Dell Inc., Round Rock, Texas, at one point contracted prison labor for its recycling needs. "We did use Unicor for our consumer recycling operations for about nine months," said a Dell spokesman. "It was a good relationship, and they did good work."
But, under pressure from stakeholders who were uncomfortable with the use of prison labor, Dell ended its relationship with Unicor in July 2003 and shifted the work to private-sector recyclers, the spokesman said.
Industry experts expect that the stigma of working with inmates may lessen as companies become aware of such programs and realize where these labor resources can fit within their operations.
For my company?
While engaging with prison workers is obviously an option for high-tech companies struggling to match low-cost manufacturing rivals, it could be a touchy subject among executives, employees and even customers. Use of prison labor comes with a mixed bag of advantages and disadvantages that will likely raise some eyebrows.
First, like other business decisions, going this route takes considerable due diligence, with the primary factor hinging on the company's culture and its openness to venture off the beaten path, observers noted.