Planning for the post-recession economy
By Jeff Owens
Executive Summary: To continue success, U.S. manufacturers must continue the good habits they adopted during the brutal recession. Executives must pay attention to the financial health and debt loads from all parts of their companies, approach work through their customers' points of view and nurture their work force's skill sets.
Regardless of whether manufacturers believe the recession is over, there’s no doubt that the economic hammer created a new mindset – and a new way of doing business. The shocking swiftness with which the recession hit, and the depths it reached, taught U.S. manufacturers that "wait and see" is no longer a business option. Going forward, the driver of all manufacturing trends is the realization that companies must be able and willing to act swiftly and decisively to address a business environment that can change with dizzying speed.
That need for nimbleness is driving three major trends among U.S. manufacturers. First, companies are intent on becoming financially healthy. Second, they are redefining "customer service." And, third, they are re-evaluating their work force needs.
It’s important to recognize that when I say "U.S. manufacturing," I do not include the inexpensive commodity consumer goods we can pick up at the mall. What’s left of that manufacturing in this country will continue to move offshore in search of low wages.
However, high-value, high-precision manufacturing will continue to be important to this country’s economy. Certainly, other nations’ economies will continue to grow, generating increased demand for high-value goods in those regions. But that will not end the market for such goods in the U.S. Global growth and demand will be in addition to, not in lieu of, demand in the U.S.
While the recession was the impetus for some trends, it would be an overstatement to say that’s the only cause. Manufacturers have learned that nimbleness is critical, not just to weather a downturn, but to prosper and take advantage of opportunities when times are good. Here are the major trends driving U.S. manufacturing right now.
A return to financial health
I see a renewed focus on the basics, including managing debt levels, strengthening the balance sheet and rethinking/revising the business model. In addition to the drive for growth, being credit-worthy is paramount.
It should be Business 101 to understand that cash is king and crushing debt is … well, crushing. But the golden glow of a seemingly unending economic expansion caused some companies to make foolish choices, and the most foolish is piling on debt to meet long-term expansion plans. The cruelest lesson of the recession is that credit becomes tight at best, nonexistent at worst. There is some truth that lenders mostly want to do business with companies that don’t need loans, ignoring those desperate for credit. It was lack of credit – credit-worthiness – that spelled the death knell for too many manufacturers in the past 18 months.
In a fast-growing economy, profits in some business units can mask the drag of other units that may be unprofitable, may be overburdened with debt or simply may be a bad fit for the company’s overall strategy. Complacent executives assumed there was plenty of time to work things out.
When the recession hit with stunning suddenness, many manufacturers were shocked by the weak links in their growth strategies. They realized – too late in many cases – that time had run out to identify the most profitable strategies and markets. Debt levels that were manageable when most business units were humming along profitably became unbearable when those units saw demand for their products literally dry up overnight.
It is not that growth is no longer desirable or possible. Clearly, most companies want to grow into new regions, product lines or both. But a business model that assumes never-ending economic growth and ever-increasing demand for some product lines won’t work anymore. A growth strategy needs to be supported by a financial strategy that can accommodate the worst of times.
Most executives probably argue that they’ve always pursued sound financial strategies. But the recession showed that many of those strategies were based on hope and false assumptions. Today, executives are looking at acceptable debt levels unit-by-unit to avoid such surprises in the future. In the quarters ahead, expect to see growth tempered by a strong balance sheet.
Another step toward financial health is thoughtful, deliberate shrinking. Certainly some manufacturers had no choice but to reduce production and lay off workers. But as demand slowly ramps up again, I see a trend of companies asking tough questions: What is our core business? Where are our profit centers? Where are our best growth opportunities? Should we get out of some lines of business?
In other words, smart executives are looking at the recession as an opportunity to rethink their overall business model. Shrinking may have been involuntary – and not necessarily well thought out. But growth is going to be careful and deliberate, with emphasis on products and regions that can contribute relatively quickly to sustained long-term profitability.
This trend predates the recession. Even when the economy looked very healthy, it was clear that some industries – such as U.S. automaking – were changing dramatically and permanently. Some companies that made parts for automotive original equipment manufacturers (OEMs) began adopting lean manufacturing practices to drive out costs; others began shifting focus to nonautomotive customers. These manufacturers are emerging from the recession looking prescient to their battered brethren.
Inventory’s not in
Another aspect of rethinking the core business is a more conservative approach to inventory. In short, inventory is out.
When the recession hit, major manufacturers discovered their inventory could serve the diminished demand. Recent increases in production levels do not signal an uptick in demand; rather, it signals that inventories finally are depleted, and companies must ramp up production to meet the still-low demand for high-value goods, such as avionics and critical castings.
Lesson learned: Building up inventory doesn’t drive business or profits. Today we are seeing these manufacturers producing product only upon order. Sophisticated manufacturing processes allow delivery of even the most complex products in only weeks, eliminating any compelling business need to build up inventory.
Manufacturers have learned the lesson that it’s wise to shrink, rethink the core business, strengthen the balance sheet and demonstrate credit-worthiness. Those companies will live to grow another day.
A new focus on customer service
As manufacturers rethink their business model, they also are rethinking customer service.
Building on demand allows manufacturers to make the product exactly as the customer wants, rather than expecting the customer to buy what the manufacturer chose to make. At the same time, manufacturers are streamlining production complexity by reducing options. For example, instead of a dozen styles of switches, there may be only two or three. This does not affect the efficiency of the product, but certainly increases the efficiency of production.
This trend also predates the recession, but the forced downtime allowed manufacturers to make these seemingly small changes without disrupting production. The result is increased speed, efficiency, accuracy – and profits. Expect this to continue.
It’s true that you learn who your friends are when the chips are down. Too often, we allow contract language or longstanding customary practices to drive how we do business. Before the lawyers strike out, there is a good reason to have clear legal language, and contracts are valuable protections in business. Similarly, it also makes sense to have business practices based on decades of experience.
But the best business practice is making your customers happy and loyal. That’s ultimately what leads to growth and profits. And the recession taught all of us that putting customers first can pay huge dividends.
Shortly after the downturn hit, one of our major customers asked us to rewrite terms of a contract, drastically reducing our scope of work and our fee. The request represented a significant loss of money for us. We were well within our legal rights to demand adherence to the original terms of the contract, protecting our fee.
On the other hand, our customer was a major OEM that we knew was experiencing a huge drop in demand. Forcing adherence to the contract would inflict a huge financial blow and almost certainly strain our relationship. It was tough for us, but we rewrote that contract and shared the financial hit. What we did not envision was the huge rewards our decision brought in terms of loyalty. The customer asked us to bid on expanding our scope of work to three additional plants.
This was an enormous lesson, and one I am glad to see was played out over and over in multiple industries in the past 18 months.
"Customer service" is a real trend, not just an adage for a poster. In fact, a common trait among the most successful U.S. manufacturers in the years ahead will likely be a demonstrated commitment to customer service. That translates to flexibility in interpreting or even revising contracts. It also means flexibility in managing day-to-day operations to meet even small shifts in customer needs.
"Flexibility" means approaching work from your customer's point of view, not from the "we’ve always done it this way" point of view. A good example is staffing maintenance and repair. Such employees traditionally were site-specific, resulting in idle people at one factory while their peers a few miles away may be working overtime to keep up. We now assign our maintenance and repair people to types of work, not to specific sites, and move people around within a small region to address shifting demand. It doesn’t cost us or the customer more but results in quicker response – something customers love.
Re-evaluate the work force
Renewed attention to customers’ needs is forcing manufacturers to take a long-overdue look at their work forces.
In the traditional manufacturing model, workers were trained in a single skill. Even the highest skilled workers – those in maintenance and repair – generally worked in teams to address all the skills needed. Have a problem on a machine? You’d send a pipefitter to cut the pipe and an electrician to fix the switch. It’s reminiscent of the "How many people does it take to change a light bulb?" joke. Only it’s not a joke. It’s expensive and time-consuming.
The recession forced deep, painful layoffs in almost every manufacturing sector. Just as the slow ramp-up is giving manufacturers time to rethink their business strategies carefully, it’s creating an opportunity to rethink the ideal work force to carry out those strategies. As production ramps up, I see manufacturers being selective in the workers recalled. Priority is going to workers with multiple skills or the ability to learn multiple skills.
Make no mistake about it: This trend is going to be painful to some. Longtime workers will not understand why skill sets trump longevity and loyalty. And plant managers will balk at making the tough choices. But it’s also important to understand this trend is real, and it’s a permanent mindset.
And the trend is new. High-precision manufacturing plants are expensive. The biggest cost is equipment, which is highly complex and computerized – and requires fewer people to operate. Because labor is a smaller and smaller percentage of total costs, there has been a tendency for companies to pay less attention to their work forces.
Certainly manufacturers have been vocal about the need for skilled labor, but for more than a decade they have not matched actions to words. Apprenticeship programs have been shelved in industry after industry. Parents, teachers and guidance counselors – even in communities anchored by factories – are pushing the next generation toward academic education and nonmanufacturing jobs. Business and public policy leaders are declaring, incorrectly, that manufacturing in the U.S. is dead, and the remaining jobs are a dead end.
I am not making any predictions about whether we can change that bias. But I do predict that manufacturers are coming to recognize that there is a small pool of people interested in factory jobs and that this pool needs to be recruited, trained and retained.
Necessity is indeed the mother of invention, so manufacturers will find creative ways to address the anti-factory bias and build strong work forces. A critical component is dispelling the notion that factory jobs are dirty, boring and mindless. We in manufacturing know – and we must teach – that today’s factory operations comprise expensive, complex equipment. The more complex the equipment, the more skilled the operators and maintenance/repair people must be. Training for these jobs is complex and lengthy. Our own training program, for example, includes a curriculum of algebra, hydraulics, pneumatics, electrical and mechanical skills – as well as professional development training.
Manufacturers that cavalierly shuttered training programs finally are realizing that strategy will create problems as skilled baby boomers retire. Their only options are to restart those programs (not an overnight process) or outsource jobs to companies that train people. While it’s not clear which trend will dominate, U.S. manufacturers are taking tentative steps down both paths. For example, some companies are partnering with community colleges to help fill the gap in training.
Investing in people is more than skills training. It’s demonstrating you value these skills. This isn’t about being touchy-feely. It’s about understanding that issues look different on a plant floor compared to the executive office. Executives who set strategy understand the goals. But as those goals cascade throughout an organization, they get fuzzy. The plant manager recognizes that he is responsible for meeting production targets, and he implements strategies accordingly.
The machine operator will ask: What’s in it for me? For example, a machine operator counting on overtime pay is not going to embrace the plant manager’s goal of minimizing downtime. It’s not enough to order an action; as goals and strategies cascade down, each level must communicate the value and impact to the next level.
This is old-fashioned communication, and it’s not a skill traditionally valued on factory floors. The most successful manufacturing companies will likely be those that effectively communicate goals from the C-Suite to the newest hourly hire. These companies will find innovative ways to communicate, although nothing will ever replace the face-to-face meetings and conversations.
Common sense dictates that people don’t want jobs that appear to be unchanging dead ends. Your work force needs a career path. Your employees need to know what that path is and how they can most successfully travel it. It’s that communications strategy again.
The dividends will be tangible and immense. It’s your skilled workers who operate and maintain your expensive machines. When they understand the value of their work and see it as a career rather than just a job, they’ll be happier and more productive. When they do their jobs well, your customers will be happy. If your customers are happy, your shareholders will be happy. So take care of the people who take care of your business.
Jeff Owens is president and chief operating officer of Advanced Technology Services Inc. (ATS). He joined ATS in 1988, where he held positions of increasing responsibility in sales and operations throughout the enterprise, including vice president of industrial parts and services and vice president of operations. Owens was named president and COO in 2005. In this position, he has expanded ATS’ operation into new markets domestically and internationally, paving the way for ATS to open offices in Mexico and the United Kingdom.