Manufacturing remains in flux, but growing Featured

8:00pm EDT July 26, 2010

By the time financial markets around the globe started to tumble in October 2008, much of the manufacturing industry was already deep in a recession that had stretched across the better part of a decade. Millions of workers had been sent home, their labor and their experience no longer needed because of more efficient machines and the rise of globalization. Thousands of factories had been shuttered. Whole companies just disappeared. None of it was coming back. It was all gone for good.

Manufacturing was not, of course, the only industry hit hard prior to the start of the larger recession. Publishing and newspapers had been on the decline for years, and the domestic automotive industry, technically under the umbrella of general manufacturing, had been in a slide for a generation. But perhaps no industry was affected more since the turn of the millennium than manufacturing. About a quarter of a million manufacturing jobs were lost over the course of a decade, the large majority of them prior to 2008. As the recession spread from one industry to another, millions of workers were laid off from the collective work force, but manufacturers often still let go of the most employees.

The cycle was vicious, and it continued, month after month.

How is it possible, then, that less than two years after the economy turned, manufacturing is on the rise again? Manufacturing activity increased again in May, according to the Supply Management’s index, the 10th straight month of growth. And even though that growth has started to slow a bit, growth is still growth. Were the 2008 levels just so low that any growth is significant? Or is the sustained increase in manufacturing a sign for the rest of the economy? Nothing is certain, not yet, but all of the indicators do point up, however modest, rather than down.

“Two years ago, we hit the wall, and as a result, sales volume dropped off,” says Stephen R. Ferrara, partner, regional business line leader, BDO Seidman LLP. “Most of our manufacturing clients have taken a look at their business and said, ‘OK, what do we need to do to improve processes, streamline our head counts and really make our operations as efficient as possible to maximize our potential in a down cycle?’ So I think most of the streamlining and cost cutting has been done, and now these businesses are poised as we come out of this recession to really improve the profitability of their businesses dramatically as we move into 2011.”

Prepare for more change

What was normal two years ago will almost certainly not be normal during the second half of 2010 or even during the first months of 2011. What was normal then, in fact, might never be normal again. Even though it might be a cliché, change really is the new normal in manufacturing — and plenty of other industries, too.

Among those changes are the new gaps in the supply chains of some larger original equipment manufacturers, the result of smaller companies closing during the last couple of years, which might cause delays and problems in receiving supplies in a timely manner. A number of industry experts say the availability of credit will also likely change, with banks starting to somewhat relax their requirements for the first time in two years. But the biggest change might be the addition of manufacturing jobs.

“Manufacturing is now the only business sector that has been adding jobs for five months,” says Emily Stover DeRocco, president, The Manufacturing Institute. “Manufacturers have added 126,000 new jobs.

“But the focus is going to continue to be more on what we call mass customization, as opposed to mass commoditization. This reflects, again, the industry’s response to globalization, which is that U.S. manufacturers, in order to maintain their global leadership, have had to move to a higher quality and a higher value product.”

And that higher quality product will almost certainly lead to more changes in the way manufacturers and so many other companies plan and do business. It is the ripple effect across industries.

For example, if you have not already reassessed your vision and your plan for your company — especially in terms of securing your position in the marketplace — that should move to the top of your priority list.

“You need to have a competitive advantage,” Ferrara says. “If you’re just a commodity, it’s going to be tough to compete. You need to have a differentiating factor in the product you’re taking to market. It’s like anything else. If it’s a manufacturer, if it’s a distributor, if it’s a service company, you need to create that differentiating factor. If you’re manufacturing a product that someone can take offshore and do it much more cost effectively, it’s going to be tough for you to compete at that level.

“You have to have a product that is unique enough that it can’t be produced elsewhere. What’s unique about what you’re doing that separates you from the pact?”

Doing so can also help you better position yourself and your company for the continuing changes and the eventual uptick in the economy and the industry.

Keep the long term in perspective

Two years ago, few manufacturers — few companies at all, really — were prepared for the recession. But you can prepare for the ascension, however slow and modest it might be, by being smart during these coming months and years.

You might think about diversifying your product lines into other markets, so you aren’t as dependent on single-source customers, and, more generally, diversifying your portfolio. You might also research how to best tap in to loans, grants or tax credits that are available from various levels and departments of federal, state and local government to help increase business during challenging times. And you will likely want to consider your risks, especially over the long term.

“I don’t think you can ever stop learning,” Ferrara says. “Now there are a lot of companies that, either on their own or after being driven to do it by lenders or private equity owners or someone else, are bringing in consultants to help them with turnaround and restructuring.

“But to be successful, you need to continually be looking to any successful business needs in order to continually be focused on improvement and what you can be doing differently to be successful, grow and evolve. If you become complacent, that’s how you die.”

Technology and education, as would be expected, can also play a role in increasing your business. Several experts discussed how the advantage of companies that are owned and operated in the United States is the technology that is developed in the United States. Domestic manufacturers continue to be at the forefront when it comes to utilizing technology in their processes, a trend that will only continue. To ensure that the technology is operated correctly and efficiently, workers should be more educated than they were 40, 20, even 10 years ago, and with so many quality workers still unemployed, there is a deep talent pool from which to hire.

How you handle all of that now might be the difference between a quicker return to profitability and increased production, and the far less appealing option of a long struggle back to respectability and some small sense of comfort in the market.

Most important, though, is to do everything with the long term — and that refers to years and decades, not just months and quarters — in mind.

“I think you’re going to see people continue to be cautious about investing as we move through 2010,” Ferrara says. “They’re going to wait to see some sustainable growth take place moving into 2011, and I really think that, as a result of this recession, you’re going to see businesses continue to be cautious as we move into 2011 and 2012 and going from there.”

Ask questions

As you prepare for the last months of 2010 and the first months of 2011, it will be important to keep any number of questions in mind. Write them down. Type them and print them out. Keep a copy on your desk. Distribute copies to your executive team, perhaps even all of your employees. Just keep them in mind. No matter how well you know your business and your industry, that list of questions will be as important now as it has ever been.

And just what questions should make the list? Well, a lot will depend on your industry, your goals and your financial standing at the moment, but there are some questions that all businesses need to be asking right now. And those are: What is happening in your industry? Is it expanding or contracting? Is your company expanding or contracting? Where do you see your company in 2015? In 2020? Is your company in the right market? Is it in the right position in the market? What are the strengths and expertise that your company has that could be adapted to another market or product line? Where can you turn to think through your situation? Will your company be able to receive a large enough line of credit during the next year? Will you be able to fund your growth? How sustainable are the current demands? And, the great unknown, how will global events affect your company?

“I think the cost of goods has been driven down,” Ferrara says. “For example, steel prices a few years ago were much higher, and as the economy softened and the demand has gone down, the cost of raw materials has improved. So I think you’re going to see better attention to detail with respect to efficiencies in the manufacturing process as people are working on thinner margins and trying to continue to make money.”

With all of that in mind, you will also need to consider whether your supply chain will be able to respond to the innovative approaches required for future growth and success, which means supply chain capabilities and locations become more important. The demographics of your work force are also important, especially with a generation of baby boomers still on the brink of retirement. And innovation is important, too. How will you move ideas from the collective mind of your company to the drawing board to the marketplace? Live in the present but remain focused on the future.

“Eyes on the future, but remember the volatility of this market,” DeRocco says. “There’s a constant threat to every business sector and there are some very large factors in play right now that will determine manufacturers’ cost structure for continued operations, so they’re keeping an eye on all of those — public policy, the global impacts around the world, certainly the European financial crisis.

“Every one of those issues has an impact and creates new challenges for manufacturers operating in that environment.”