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Survey Shows Resilient Manufacturing Sector Is Adapting to New Environment
by Erik Skie
Over the last several decades, U.S. manufacturers have faced an onslaught of challenges that had led many to predict the eventual demise of U.S. manufacturing. As recently as five years ago, the conventional wisdom was that the United States could not compete with the low labor costs in countries like China, Vietnam, and India. In addition, purchasing tactics like those implemented by the “big three” auto companies underscored the perspective that life as a manufacturer would be precarious at best.
The dynamic shifts in this industry are almost unparalleled in any other sector of our economy. Interestingly, though, in a recent survey of almost 400 small to mid-sized manufacturers across the country, most have returned to financial stability after the Great Recession and are focused on future opportunities.
Stiff competition has produced a U.S. manufacturing base that is innovative, adaptable, and resilient in the face of adversity. Since August 2009, the Institute of Supply Chain Management’s (ISM) Manufacturing Production Index (PMI), a measure of manufacturing activity in the United States, has shown expansion for 33 of the past 35 months.
Here are some survey respondents’ observations on opportunities and challenges in today’s manufacturing industry.
Expanding domestic sales
Over the past decade the trend has been to send work to low cost-producers overseas. However, the anticipated profit improvements of off-shoring, which are primarily driven by lower wages, have sometimes been elusive due to collateral issues like longer lead times, less flexibility, and the need to carry more inventory. While there is still a clear role for overseas production, more companies have turned to re-shoring in the past 24 months for their more complex, design intensive, lower volume, and higher mix products. The need for supply chain intimacy is creating renewed demand for flexible, responsive U.S. domestic production.
The U.S. manufacturing base has been the home for tremendous product innovations for many years. As globalization has increased, the middle class in places like China is growing rapidly and turning a once producer-only economy into a nation of consumers. China’s increased consumption of U.S. brands and technology has been a blessing for U.S. manufacturers like General Motors. The aerospace industry is benefiting as well, with Boeing seeing significant backlog for their products in China.
The globalization of manufacturing creates both competitive challenges and opportunities, but innovative and flexible producers in global supply chains stand to benefit from this increased customer base and global growth.
Increasing flexibility and profitability
Flexibility was clearly a focus among respondents.
In periods of uncertainty, which seems to be our default situation these days, it’s best to maintain the flexibility to respond to changing market expectations. Flexibility is the key to profitability in manufacturing, and profitability provides the continued capital necessary to grow.
In addition to flexible operations, respondents wanted to protect their financial health to maintain their relationship as a key supplier. In many supply chains, interruption in supply from an unstable supplier is a bigger concern than having the lowest price. Respondents did not want their customers questioning their sustainability or ability to scale their operations.
Overall policy uncertainty (including tax policy, regulatory requirements, and health care reform)
Most respondents did not express allegiance to specific policies, but almost all expressed frustration at how difficult it is to make long-term planning or capital commitments with key policy decisions unresolved. Although we are confident manufacturers will make the changes necessary in their business to respond to whatever policies emerge, it is clear that business investment or significant expansion by manufacturers will be tempered until major policy issues are resolved.
This is the biggest irony (although expected by all who follow the industry) of this past recession, and a huge concern by respondents. At a time of sustained unemployment well over 8 percent, manufacturers are struggling to find qualified workers to meet customer demands. The shortage of skilled labor in this country has become an epidemic, and any attempts by federal and state officials to address the issue seem to have been wholly inadequate.
We need to change the perception of manufacturing in this country — with elected officials, teachers, and parents — if we are to increase the inflow of talent to fill the positions available. At the same time, manufacturers need to elevate their ability to train and develop young workers to become the employers of choice for the limited workforce supply. Some organizations have addressed this issue by creating programs that train workers to succeed in the manufacturing industry.
A strong future
The industry has clearly emerged stronger from the lows of 2008 and 2009, with a new appreciation by former skeptics for its contribution to the latest economic recovery. There will continue to be headwinds for small to mid-sized manufacturers, but there are many opportunities for proactive leaders who can adapt to changing customer demands and expectations.
Erik Skie, Manufacturing and Distribution Managing Partner
firstname.lastname@example.org or 847-597-1840