A Publication of WTVP

The results of the recent McGladrey Manufacturing & Distribution Summer Monitor, a nationwide survey of industry executives, indicate manufacturers and distributors continue to thrive and grow, with expectations for expanding sales domestically and internationally, and expanding their workforces. Meanwhile, the overwhelming majority continue to expect increases in raw materials costs. This is one of the key issues executives need to deal with in the coming year.

Other indicators show an increase in pessimism about general business prospects and a rising apprehension about key risk factors. More respondents are pessimistic about the outlook for the world economy, and, most strikingly, for the U.S. economy. In an earlier survey conducted in the spring, 38 percent were pessimistic about the U.S. economy. Among summer respondents, pessimism about the U.S. economy reached 60 percent. In addition, 64 percent are pessimistic about the world economy—up from 50 percent in the spring.

Risk perceptions shift from political to economic
Perceived risks from political unrest in the Middle East and Asia have diminished, while perceived risks from the U.S. economy, the U.S. political and regulatory establishment, and the global economy have all climbed significantly.

There are concerns that pricing has increased for 48 percent of the respondents (up from 43 percent in the spring), while the challenges of the U.S. economy and political fallout from the debt ceiling debate have become more pressing concerns for U.S. companies. With only a temporary solution in place for the debt ceiling, we expect these issues to continue for the remainder of the year barring some significant action in Washington.

Positive signals for employment
Continuing another trend from the spring survey, more than half of respondents expect to increase their workforces, by an average of seven percent. Yet, for some, hiring is generally seen as a last resort, when production levels can no longer be maintained through overtime and increased workloads of existing employees. Executives may be uncertain whether to believe the positive indicators they see in their business activities or the pessimism reported daily in trade and general media.

Operational effectiveness emphasizes process and production
The summer survey focused on operational issues to understand how companies were dealing with their greatest cost areas. Executives emphasize the mechanics of production and supply chain when initially discussing priorities for operational improvement. However, as they discuss how to achieve improvements, it appears that many may be undervaluing the importance of more effective measurement and management of the procurement process and vendor contracts to achieve cost savings.

In a world in which rising commodity prices are perceived as a high risk to continued business growth, the importance of monitoring procurement costs seems clear. Yet only 40 percent of respondents have formal measurements in place for doing so, and only 18 percent of those who do measure procurement costs feel they have an effective spend analytics tool to identify and monitor cost savings.

Since metrics for measuring just-in-time delivery, production cycles and schedules are commonplace, it is understandable that executives might concentrate on those processes. Effective measurement and monitoring of vendor spend is complex. Learning to integrate vendor spend issues into strategic and tactical management initiatives could emerge as the most important step industrial executives can take this year in order to preserve their profitability in a rising-prices environment.

Productivity is up while workforces are set to increase
With 76 percent of respondents reporting increased productivity over the past 12 months, bottom lines may show improvement. With 64 percent of these respondents also saying they plan to grow their workforces in the coming 12 months, executives may feel they are reaching the natural limits of productivity per worker and must begin to add to the employment rolls.

Most executives attribute their productivity gains primarily to process improvement and labor utilization rather than investments in new equipment or technology. Those companies that are thriving and growing, however, are more likely to invest in technology and equipment to control costs and take advantage of tax incentives currently provided to spur investment. The real challenge will be whether this new investment translates into additional job growth.

Passing along cost increases while pursuing other strategies
To deal with increasing costs, a surprisingly large 85 percent of respondents say they plan to pass increased costs of raw materials on to their customers through a variety of strategies: blanket price increases, selective price increases or surcharges. Additionally, one third of the respondents who are planning on increasing prices intend to raise them by six to 10 percent.

Green initiatives and green products
Almost three fourths (73 percent) of respondents report at least some green initiatives, and most of them (57 percent) cite long-term economic benefits as a primary motivation. In addition to it being the socially responsible thing to do, over 60 percent of respondents report selling green products, yet the majority of these executives do not know how profitable they are. iBi