Tucker Kennedy, vice president, marketing and public relations, of the Illinois Manufacturing Extension Center (IMEC), sat down with three manufacturing leaders to get their assessment of the manufacturing sector and its prospects for the future. IMEC is a non-profit organization that works with man- ufacturers to improve productivity and competitiveness.
The manufacturers include Hani Malek, vice president/general manager of Preco Inc., a Morton-based manufacturer of precision electronic assemblies; Mark Markovich, president of Illinois Machine and Tool Works, a North Pekin producer of machined parts for Caterpillar and other large OEMs; and Jerry Rooney, vice president of Hagerty Steel and Aluminum, an East Peoria steel distributor and contract manufacturer.
Kennedy: Describe your companies and background.
Rooney: Hagerty Steel and Aluminum is the outgrowth of the purchase of the Steel Division of Hagerty by Liebovich Brothers in February 2000. Hagerty is a company that’s been in the Peoria area since 1860. Liebovich began in 1939 in Rockford and was purchased by Reliance Steel of California in 1999. Reliance set about the business of positioning Hagerty to return to its roots as a metals service center. Hagerty had moved away from that as our core business and had started focusing on serving large OEMs. I came to Hagerty in October 2000.
Markovich: I actually started in manufacturing in 1979. After being bought out of my prior business in 1992, I began to look at buying a business where I could make a product for someone else. Peoria was a target city, and my first day here, I met Tucker at the Peoria area EDC. That day, he and his group led me to a company called Tompco, which had been in business for about 30 years. I purchased that company and changed the name to Illinois Machine & Tool Works. At that time, we were a job shop totally concentrating on Caterpillar with approximately 30 employees. We’ve expanded to 146 employees and do specialty work for Caterpillar, John Deere, Fisher Controls, and several Emerson electric companies.
Malek: My background is in sales and sales management in electronics and electronic components. Preco is headquartered in Boise, Idaho. We’re a full service electronic manufacturing services (EMS) company. Not only do we assemble an OEM’s electronic products, but also we help develop the product on the front-end and support it to the end of its life cycle. The reason we’re in Morton is because of Caterpillar; we were providing them with product out of the Boise division and migrated here in 1986 as a warehouse facility. Little by little, Caterpillar gave us opportunities to build customized electronics for them. From there, we evolved into a full-service contract manufacturer.
Kennedy: There are still many manufacturers in this region dependent on Caterpillar’s business for their well being. But it’s clear Caterpillar has some very specific performance expectations of its suppliers. What does this mean for your company and other local suppliers?
Markovich: Caterpillar isn’t at all unique in the performance expectations it has of its suppliers. What it means for our company and other local suppliers is we must find a way to meet and exceed those expectations. Caterpillar has also made it clear they would like to see us expand and become less dependent on them. There are other business opportunities in the market, but earning them isn’t an easy task. Over the last several years, every manufacturer, particularly the large ones like Caterpillar, have consolidated and eliminated vendors and cut costs as fast as possible. Survival for suppliers like us depends on finding a niche, a specialty that offers added value to our customer.
Malek: I agree. Caterpillar continually encourages us to diversify our customer base. They certainly recognize that would make us a healthier supplier to them. We’ve had success in doing so over the last few years. The challenge we have is that there are no other electronic OEMs that meet our customer profile in the central Illinois area. Our success will come working with companies based in cities like Chicago and St. Louis. This puts us at a disadvantage due to the physical distance versus our competitors.
Rooney: Our big challenge in diversifying is we’re geographically dependent. We have to put metal on a truck and deliver it. When you start getting too far away from the customer, there’s going to be a competitor who buys steel for the same price we do, works on the same margin or less, and can provide it cheaper due to lower transportation costs. If we develop all these new customers that are themselves selling to Caterpillar, we’re not really diversifying at all, we’re just farther down the supply chain. Within our delivery constraints, it’s critical we develop new customers. We’ve penetrated businesses in the south Chicago suburbs, St. Louis, and plan on testing the Indianapolis market later this year.
Kennedy: We hear from our clients about their struggles and the challenges in manufacturing in general. How would you assess the state of manufacturing in this country today?
Rooney: In one of our key markets, Rockford, the machine tool sector is in absolutely terrible shape. Ingersoll Milling, which had been around since the late 1800s, is gone completely. Down here, where we’re more reliant on construction, there are simply fewer customers out there. We want to be the absolute best at what we do, but all we’re really doing is stealing market share from our competitors. No new companies are starting, and our existing customers just aren’t growing.
Malek: We’re in a little different position. What’s interesting about the electronics industry is while it’s down, if you’re benchmarking against the Motorola’s and Cisco’s, it’s not down in the sense that we still have a market we’re able to go after. There are still a large amount of companies out there who’ve continued to build their own electronics, but the cost of new technology is forcing many to outsource to companies like ours that have already invested in state-of-the-art equipment. The OEMs we’re going after tend to be niche oriented as well, and they’re not looking to China to build their electronics. They want and need local service.
Markovich: The state of manufacturing in our company is in a very difficult position. There are low-cost countries all over the world that have a much lower standard of living than the United States and have dramatically increased their skills and can handle almost any product. If our customers are going to compete in the global environment that’s been established, they have to take advantage of having product made in those countries. The unfortunate thing regarding our country’s policies is that the barriers to import product to the U.S. are very low. However, most countries outside of the U.S. make exporting into their counties very difficult. Businesses of all sizes must find specialty niches if they’re to survive. Our government must also determine what the makeup of our country will be in the future. They control a tremendous amount of what happens through their policies and, unfortunately, the present open and free access to our country is going to continue to drive down the state of manufacturing here in the U.S.
Kennedy: What can you do to be more competitive?
Markovich: The pressure to cut costs, streamline processes, and increase quality is enormous. Not just on smaller manufacturers, but on all manufacturers. To be more competitive, we’ve examined every aspect of our business for cost reductions and cost controls. Externally, I’ve spent a tremendous amount of time trying to buy better, both domestically and overseas. Internally, we created teams whose predominant makeup includes our hourly work force to look for cost savings in everything we do and purchase at IMT. Based on the progress these teams made in 2001 and 2002, we made the investment last July to become a 6 Sigma company. Our focus in 6 Sigma is based on eliminating waste and improving quality in everything we do. A low-volume shop can’t afford scrap, and we’re hopeful the 6 Sigma methodologies will enable us to drive that scrap figure to zero.
Malek: We’re focused on controlling costs in three areas: manufacturing, purchase of material, and overhead absorption by increasing revenue. On the manufacturing side, we’ve implemented lean manufacturing programs to remove waste. It’s had an incredible impact so far. Additionally, material costs are a significant percentage of our sales, so it’s a huge area to target for improvement. We’ve saved anywhere from 3 to 4 percent year after year in materials alone. Like Jerry, we’ve combined some material purchasing with these other companies and saved there as well. On the sales side, we’re exploring different sales channels like going to distributors who supply product to us, and trying to get them to turn us onto leads. We’ve entered into strategic alliances with other contract manufacturers that are spread throughout the country, but wouldn’t be considered competitors. This has led to sales leads we otherwise wouldn’t have seen.
Rooney: A big focus for us certainly has been inventory turns and accounts receivable. As a family-owned business in the 1970s, 1980s, and early 1990s, business was so good, we were very profitable, and this kind of thing didn’t have to be a focus. As a corporation, we’ve really changed, and now look at all of the ways we can cut costs and improve production.
Kennedy: It must be difficult for smaller companies to have to respond to the demands of larger customers.
Malek: The dichotomy of this situation is that smaller companies struggle to make the investment in large initiatives and programs the bigger companies develop. However, these programs drive organizations to excellence and pay for themselves immediately. In the end, if you follow their lead, you’re a much better company whether you adopt 6 Sigma, Lean Manufacturing, or ISO 9000.
Markovich: It’s difficult for smaller companies to respond to the demands of larger customers. However, the programs our major customers have asked us to follow-whether it be their own company certification, becoming ISO 9000 or QS 9000 certified, or following the 6 Sigma methodology-enable a company to become better. We may all think we have a better way, and maybe some do, but the recipe or formula these programs prescribe are a proven way to run a business and, I believe, will help lead a company to increased productivity and efficiency.
Rooney: Hagerty went through a couple of quality managers trying to get its act together. Finally, we pursued the ISO certification and were certified in August 2000. Now we have to be re-certified to the 9001:2000 standard. We talked about whether we even wanted to do it. Caterpillar is pointing to the QS 9000 standard as their new requirement, but looking at the possibility that we may be doing very little Caterpillar business, do we want to make that investment? Finally, what we decided is the quality management program has become so much a part of the culture at Hagerty, that to go away from it and try to keep a living, breathing quality program on our own isn’t going to happen. So, for us, not only is it worth the effort, it makes us a better company. (Note: Hagerty was successful in achieving certification to ISO 9001:2000 in August 2003.)
Kennedy: People often don’t think of manufacturing when talking about high tech, but your facilities have pretty advanced capabilities and are highly modernized. How do your firms fit the definition of high tech?
Rooney: Compared to the other two companies, we’re probably at the lower end of the spectrum. We communicate with our customers using electronic data interchange (EDI), and some of our machinery is computer controlled. But we don’t have any lights-out operations, where machines run even if we’re not there. Everything we do requires human interaction. I think people would be amazed if they went into Mark’s facility, if they had any understanding of math at all, to see the kind of repeatability he has to produce on the parts he runs and the tolerances that are required. It’s pretty impressive.
Markovich: I’m not sure the average person would call what IMT does high tech. When you walk into our facility, your first perception is that of an old-line factory. Hidden, however, is all of the technology involved in computer-generated design, computer-controlled machines, and specialized tooling that enable one to machine extremely tight tolerances very efficiently and effectively. Our technological advances have increased by 100-fold since 1993, and we need to increase it another 100-fold over the next five years.
Kennedy: Hani, your "clean-room" facility is one you just don’t expect to see in the middle of a cornfield in central Illinois.
Malek: From an equipment standpoint, the manufacturing of the components that are used in electronics today have evolved to where the way we do it is the only way. You have to buy high-precision machinery to place minute sensitive electronic components. Our investment in this equipment and this building gives us a competitive edge over traditional "job shops" or "board stuffers."
Kennedy: With the loss of manufacturing jobs, area development leaders are focused on growing the bio-sciences and the medical technology sectors. At IMEC, we’re concerned that if discovery doesn’t lead to production, it’ll be hard to sustain any economic gains here. Where does manufacturing fit into the Peoria area’s future?
Malek: We all understand the plight of manufacturing leaving the U.S. for other places. We need our political leaders to do what they can to ensure manufacturing not only doesn’t leave, but that we encourage new money to be invested for future growth in manufacturing.
Rooney: I agree with Hani. I don’t think most people realize the importance of manufacturing to this country and how much damage countries like China are causing to our industries. It’s fine to develop the bio-sciences and medical technology sectors, but manufacturing can’t be forgotten. If our leaders take the proper steps to level the playing field, maybe companies can keep production in the U.S. without paying more than they would in a foreign country.
Markovich: In the 10 years I’ve been in Peoria, I’ve witnessed a tremendous diversification in the manufacturing area. I’m really not certain that 10 years from now Peoria will have half of the manufacturing jobs it does today in what we define as traditional manufacturing work. However, I’ve seen other industries enter Peoria and do extremely well. These companies range from high tech companies like Preco to expansions in the medical field, all the way to one of the top sunglasses manufacturers in the world. I believe manufacturing will always have a base in Peoria’s future but most probably with a different spin on it than it does today and has in the past.
Kennedy: How would you describe the infrastructure for manufacturing in the region?
Markovich: I don’t believe Peoria’s location puts it at a disadvantage. With modern technology and enhancements in transportation, doing business with China today is like doing business with your next-door neighbor. There is, however, a stigma with Peoria and the high labor cost the hourly workforce is paid as compared to other regions of the country. As a result, attracting industry and blue-collar work to Peoria will probably continue to be difficult.
Rooney: With manufacturing going to low-cost countries, it will be increasingly difficult to attract manufacturing jobs to the Peoria area. Unless the market you’re trying to serve is here and you must be close to the customer, it really won’t matter where manufacturers are located.
Kennedy: What can the U.S. do to restore its manufacturing base?
Markovich: Tariffs aren’t going to work, and trade barriers aren’t going to work. I believe our politicians need to change the political environment and create incentives for small manufacturers to invest in equipment and technology. The mindset that anyone who owns a business is rich and should be penalized has to change. There have to be incentives for small businesses to reward them for the risk and provide every tax advantage possible. Everything I have in the world is in this business. Without being provided with a level playing field, survival will continue to be a difficult task. I live every day being hopeful that politicians will see the deterioration and take the right steps to ensure manufacturing can, in fact, prosper in the U.S.
Rooney: Politicians across the board have to come to an understanding and a belief that manufacturing brings a tremendous value to this country-because it does. I know IMEC is trying to help tell that story, and our trade organization, the Metals Service Center Institute, is trying to do the same. I agree with Mark. The businessman isn’t the bad guy. We’re paying our employees so they can spend money and pay taxes. How much money has the State of Illinois lost in tax money due to the downturn in manufacturing? Where has that money gone? We’ll be meeting with our employees to explain what we’re up against. They might have a nice truck, a boat, and a home, and we may be competing with a person (in a foreign country) that lives in a dorm and has nothing.
Malek: We see now that Vietnam is emerging as a low-cost producer, so it looks like it might only get worse. Like Mark said earlier, if a manufacturer has a proprietary product they design, market, and sell themselves, they have an opportunity to create a niche. Also, providing not just a product, but a service is key to insulating manufacturers from foreign competition. In our case, there’s so much complexity that goes on in building 350 different assemblies for Caterpillar. In the end, you’ve got to be able to get together with your customer and manage the program, and China isn’t interested in that. I’m not saying low-cost countries aren’t competition, but for the niche we’re going after, they aren’t today. But we can’t ignore their tenacity and entrepreneurial spirit. We can’t fall asleep at the wheel. How do we restore our manufacturing base? We need to provide incentives for companies to build here and continue to foster the growth. If we don’t create that kind of environment, OEMs will have no choice but look elsewhere for production needs. We need to figure this out quickly before more manufacturing jobs are lost to low-cost countries. IBI