U.S. manufacturing accounts for two-thirds of all U.S. exports and employs roughly 14 million people, according to the National Association of Manufacturers (NAM). Yet many midsized manufacturers find it tough to stay in business. Manufacturing profits are down due to many factors. It’s not enough to work harder—companies that plan to survive for the long haul must become more efficient, control costs, and innovate.
Taxes, health care, retirement benefits, litigation, regulation, and energy—these external overhead costs add approximately 22 percent to U.S. manufacturers’ unit labor costs (nearly $5 per hour worked) relative to their major foreign competitors, according to a recent study by the Manufacturing Alliance/MAPI and NAM’s Manufacturing Institute. Companies tackling such issues require commitment, planning, and long-term solutions. With the right perspective and careful planning, manufacturers can take steps now to bolster profitability for years to come.
Challenges and solutions
To improve your bottom line, you can sell more or spend less. Like any change, cutting costs isn’t always easy, but a few fundamental shifts can make all the difference. Following are key challenges facing U.S. manufacturers and possible solutions many midsized businesses already are pursuing.
• Productivity. If your company already watches every dime, what’s the quickest way to boost profit? Find new ways to do more with less. Assess and implement lean-manufacturing best practices and process efficiencies throughout your organization to boost productivity. Talk to employees on the floor and throughout the organization about streamlining their work—often they have great insights and appreciate the opportunity to share. Work with your own quality-assurance team or outside experts to put the best ideas into practice.
• Energy. Several years ago, rising health-care costs seemed to command all the headlines. In 2005, crude oil hit a then-high of $50 a barrel, and fuel prices have been skyrocketing ever since. Today, some manufacturers are struggling to keep the lights on. One midsized manufacturer is contemplating closing its doors due to $1 million-a-month energy costs. Internal or external experts could help you increase energy efficiency. You could achieve energy savings by ordinary means, such as replacing bulbs, adjusting thermostats, and shutting things off after hours; or extraordinary means, such as exploring alternative energy sources or less energy-intensive activity. For example, a major U.S. shipping company recently re-evaluated its routes to eliminate left turns wherever possible, significantly reducing fuel consumption from idling and accelerating.
• Benefits. Health care and retiree benefits can help drive even the most lucrative business to the brink of financial crisis. According to the National Commission on Health Care, employer premium costs continue to climb at well over the rate of inflation, and employee spending for health coverage increased by 126 percent between 2000 and 2004. With large numbers of baby boomers beginning to retire and no significant reform to the U.S. health care system in sight, experts expect these trends to continue. Engage employees on issues of health care and wellness to start addressing related costs.
Not only should you help your employees afford health care without forcing the company to foot the bill (health savings accounts, for example, or more affordable, higher-deductible plans for healthy families), you also should encourage healthful living. Promoting healthful diet and exercise programs is a simple way to reduce claims costs and productivity losses due to sick time. Also encourage early investment in an employee-funded retirement plan. Many midsized companies offer a 401(k) or similar retirement savings plan. Help your employees understand their retirement benefits and encourage them to participate early in their careers—which could help reduce retiree benefits in the future.
• Litigation. The litigious U.S. society is no boon for business. The annual cost of the U.S. tort system is more than 2 percent of gross domestic product (GDP) and far exceeds that of international trading partners. Avoiding litigation is no picnic, either: the costs of regulatory enforcement and compliance in the United States also are climbing every year. During the past 30 years, asbestos litigation alone has cost the United States $70 billion, and asbestos-related bankruptcies have eliminated 60,000 jobs, according to John Engler, NAM president and former Michigan governor.
Be sure your organization establishes clear policies concerning regulatory compliance, ethical behavior, and so on. Communicate those policies clearly to all workers, and enforce them. Work with legal counsel to identify potential risks and take steps to safeguard your business from legal action.
• Globalization. What weapons do international manufacturers have in their competitive arsenal? Abundant and affordable labor, lower external overhead costs, and in many cases, a more favorable regulatory environment. While free-trade agreements can open vast new markets to U.S. products, gaining a solid footing in a foreign country can be daunting. Especially in today’s global economy, U.S. manufacturers need to focus on what many believe they still do better than anyone else in the world: develop and test new products. No other country has the speed and capacity.
According to NAM, U.S. manufacturing accounts for the majority of private-sector research and development. More important than developing the next great product, however, is developing your organization’s ability to deliver higher-margin customization and value to support existing product offerings. Offering proprietary, high-tech, or highly customized solutions to key customers not only increases profits, but also your value as a business partner and demand for additional services such as technical support, marketing, and applications.
Perhaps your company is interested in tapping overseas markets but hesitant to dive right in. You’re wise to be cautious. The lure of vast new markets in Asia, Eastern Europe, and South America represent a siren’s song to the many companies that enter these regions with little planning and no real expertise in international business. Cultural differences, regulatory and accounting distinctions, tax structures, and corruption all can be serious drains on the profitability of an overseas enterprise or even on simply exporting your products. Manufacturers need to know whom they’re dealing with on the other end and should consult with governmental or professional advisors to address business issues.
• Labor. U.S. manufacturers face a shrinking pool of trained engineers and professionals, as well as an uphill climb to attract talent to traditional factory jobs. Without a trained professional workforce, manufacturers will be hard-pressed to innovate to stay at the forefront of manufacturing. Work with human resources to develop an effective pay-for-performance program that rewards employees for desired behaviors and performance. Communicate your objectives, rationale, and incentives clearly to all employees—and be sure your supervisory personnel follow through.
With so many serious issues confronting manufacturers, it’s tempting to focus on profits, processes, and day-to-day operations. But, since many of these problems are policy issues, manufacturers must make their voices heard. By working in partnership with educators, professional associations, and local, state, and federal government officials, you stand a better chance of fostering a strong manufacturing economy. IBI