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.

“Unlike during other economic downturns and recessions, this seems to be affecting different manufacturers very differently,” says W. Scott Balestrier, tax managing partner, BDO Seidman LLP. “I have clients who are in the manufacturing industry who are doing extremely well. And then I have others who are doing poorly. A lot of it might be related to the downstream issues, like if you’re involved in the housing industry, those manufacturers are doing very poorly. If you’re involved with something that is in the supply chain for automotive, again, you’re probably struggling quite a bit.

“One of the changes that has occurred in the last 12 months is that it’s very difficult to sort of predict how your business is going to do based on the fluctuations in the economy. If there’s been anything, there’s just been more uncertainty introduced into the marketplace.”

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 revenue generation — that should move to the top of your priority list.

“The focus needs to shift from efficiency and cost to revenue generation,” Balestrier says. “Revenue generation, distribution channels, acquisition opportunities, that’s where the focus needs to be. I’m thinking of my clients and the cuts they’ve made, and there isn’t a lot more to do.

“For the most part, I see my clients starting to focus more on the top-line revenue growth. They’ve done all they can do between net income and cost of goods sold, and it’s really now focused on how do we grow the top-line number.”

It 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.

“Everyone has spent a lot of time looking in the rearview mirror the last few years and saying, ‘Jeez, these results are awful; look at how bad it was,’” Balestrier says. “I think it’s time for people to pick their heads up out of the foxhole and start looking forward and say, ‘Where are the opportunities for growth and let’s start to get very aggressive and focused on capturing those.’”

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.

“We’ll continue to see an increase in acquisition activity,” Balestrier says. “You see what happens in the market every day and there are just so many things that are variables. What you do when you’re in a situation like that is you focus on what are your core competencies, you focus on distribution channels and you focus on cash flow.

“You should maintain the cost discipline that has been introduced in the last few years, but you should start to leverage into where you can get the best cash flow answers so you can continue to service your debt and be positioned for those opportunities that come.”

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?

“You can’t base it on a two-minute sound bite on CNN,” Balestrier says. “It really has to be based on where is your company positioned in this economy and who are your suppliers, who are your customers and what’s really happening for you specifically. The broad downturn in the market doesn’t affect everyone equally.”

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.”