Census Of Manufacturers: On The Up And Up

Revenue and productivity rose for many manufacturers during the past year, but escalating raw material, energy and health-care costs clawed at those gains.

The story of U.S. manufacturing in the past year is one of good news heavily diluted by bad. Indeed, the 2005 IndustryWeek/Manufacturing Performance Institute Census of Manufacturers delivers a wealth of good financial news: Production output for three-quarters of respondents to this annual survey of U.S. manufacturing plants increased over the past 12 months; nearly 75% also increased sales per employee in the most recent fiscal year; return on invested capital is up; and more than 80% expect improved revenues in 2005 and 2006 over the previous years.

This same survey also confirms the many harsh realities of which U.S. manufacturers already are well-aware: Costs across health care, raw materials and other areas continue to escalate, forcing companies and plants to take measures that don't always meet with public, employee or even shareholder approval.

Input Costs Skyrocket

Selected Results From The IW Census Of Manufacturers
Few manufacturers were immune to rising raw material and component costs during the past year. Some 92% of respondents to the 2005 IW/MPI Census reported that component and raw materials costs for primary products rose in the past year. For nearly 39% of respondents, those costs rose by more than 10%. (These data were collected before Hurricane Katrina added new woes to rising energy and raw materials costs.)

The Census findings echo what manufacturers and media alike report almost daily. For example, Kraft Foods Inc. announced in October its third-quarter diluted earnings from continuing operations declined 11% versus the prior year, due in part to commodity costs that were above expectations and up about $200 million. The main culprits were coffee, nuts, energy and packaging.

At Wilmington, Del.-based DuPont, corporate economist Robert H. Shrouds noted in a September corporate report, "Higher prices for natural gas have an especially severe impact on costs for the North American chemical industry, which is heavily dependent on natural gas as a feedstock."

Eliminate the strain of rising purchased-material costs, however, and many manufacturing plants still continued to struggle with other escalating prices. Indeed, 50% of manufacturers reported in the Census that per-unit manufacturing costs rose in the past year even when purchased-material costs were removed from the equation.

Hammered By Health Care

Struggling to regain its competitive footing in the hyper-competitive automotive sector, General Motors Corp. in October said it reached a tentative agreement with the United Auto Workers that would reduce its health-care costs by some $3 billion on a pre-tax basis, with cash savings estimated by GM at about $1 billion. GM Chairman and CEO G. Richard Wagoner described the firm's efforts to reduce its health-care burden as "the cornerstone of our efforts to reduce structural costs . . ."

Most U.S. manufacturers face the same health-care cost burdens, if on a less grand scale, IW/MPI Census data show: The cost of employer-provided health benefits rose a median 12% in the past year among respondents, with an average increase of 14%.

For those folks, health-care cost projections for 2006 may appear almost rosy by comparison. Several recently released projections show health-care costs for employer-sponsored plans rising at a less than double-digit level next year, ranging from 8% to 9.2%. In flat dollar terms, next year's gross health-care expenditure is expected to rise by an average of $597 per employee, to an average total cost of $8,424, according to Towers Perrin, a Stamford, Conn.-based human resources consulting firm. That represents a 140% increase over the last 10 years, the firm says.

"The health-care cost crisis has become a chronic problem for U.S. employers and employees alike," observes David Guilmette, Towers Perrin managing director of health and welfare.

In the past, pricing pressures brought on by cheap imports and a strong U.S. dollar have limited U.S. manufacturers' ability to pass their own rising costs along to their customers. Census responses indicate that may be changing. Seven of 10 Census respondents said customer prices for their products have risen in the past year. And some of those increases were significant. For example, about 14% said prices charged to their customers had risen in excess of 10% per unit of production. Some 35% said prices had risen in excess of 5%.

Those findings shouldn't surprise. DuPont is just one of many companies that is raising prices due to spiraling raw material and energy costs. At its DuPont Performance Coatings business, for example, prices were scheduled to rise 12% to 25% for its OEM finishes, effective Nov. 1. And DuPont says its price increases alone do not offset the rise in the manufacturer's costs. Those increases, it stated, were necessary as part of a comprehensive strategy that includes ongoing productivity-improvement efforts and energy conservation.

Oakland, Calif.-based Clorox Co. reported that it would raise prices on about 40% of its product portfolio, effective Jan. 2, 2006. And while commodity-driven price increases boosted top-line growth at Kraft Foods in the third quarter, the food-and-beverage company said those increases "lagged the rise in commodity and energy costs."

The Census did not ask respondents whether increased health-care costs were being passed along to employees, although it is likely that many employees will be required to bear at least some of the burden of those increases. Additionally, nearly 30% of Census respondents report that their employee benefit packages decreased over the past year.

Solutions Prove Elusive

Manufacturers continue to deploy continuous-improvement methodologies to both stem costs and improve quality. Indeed, nearly 80% of Census respondents deploy some improvement methodology, be it lean manufacturing, Total Quality Management, Six Sigma, or something else (you have to wonder about the 22% who said they have no improvement methods in place). And lead times, delivery rates and quality yields have improved for many.

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Yet, Census and anecdotal evidence suggest that such efforts are not enough against external costs over which manufacturers have little control. Solving the health-care cost crisis is beyond the scope of individual manufacturers, said lean expert James Womack, founder of the Lean Enterprise Institute, during a recent IndustryWeek Webcast. While there exists a great opportunity for lean thinking in health care, "It's tough for the manufacturer to just say, 'Hey everybody, get in the cars, get in the vans, we're going to our health-care provider and are going to do kaizen,'" he noted. "It really is a stretch for isolated manufacturers to try to kaizen against the will of their health-care provider." He added, "Somehow or other we need an approach that is more likely to produce results."

Selected Results From The IW Census Of Manufacturers

Good Metrics

How has total production output (unit volume) changed in the past 12 months?
Decreased more than 20% 3.8%
Decreased 11 - 20% 4.5%
Decreased 1 - 10% 7.2%
Stayed the same 10.0%
Increased 1 - 10% 32.0%
Increased 11 - 20% 24.5%
Increased more than 20% 18.0%


How have sales per employee changed in the past year?
Decreased more than 10% 3.4%
Decreased 6 - 10% 5.5%
Decreased 1 - 5% 5.6%
Stayed the same 12.1%
Increased 1 - 5% 28.8%
Increased 6 - 10% 26.1%
Increased more than 10% 18.5%


What is the anticipated revenue change in 2005 vs. 2004?
Decrease 21% or more 1.5%
Decrease 11 - 20% 4.4%
Decrease 1 - 10% 9.2%
Stay the same 4.7%
Increase 1 - 10% 46.9%
Increase 11 - 20% 22.7%
Increase 21% or more 10.6%


What is the anticipated revenue change in 2006 vs. 2005?
Decrease 21% or more 0.5%
Decrease 11 - 20% 1.7%
Decrease 1 - 10% 5.8%
Stay the same 8.7%
Increas 1 - 10% 52.0%
Increas 11 - 20% 25.3%
Increase 21% or more 6.0%


Bad Metrics

How have per-unit manufacturing costs, excluding purchased materials, changed in the past three years?
Decreased more than 20% 2.1%
Decreased 11 - 20% 8.4%
Decreased 1 - 10% 26.2%
Stayed the same 13.7%
Increased 1 - 10% 33.9%
Increased 11 - 20% 11.6%
Increased more than 20% 4.2%


How has the price for primary products (per unit) charged to customers changed in the past year?
Decreased more than 10% 2.2%
Decreased 6 - 10% 2.9%
Decreased 1 - 5% 9.4%
Stayed the same 15.1%
Increased 1 - 5% 35.7%
Increased 6 - 10% 20.2%
Increased more than 10% 14.4%


How has cost (per unit) of components and raw materials for primary product changed in the past year?
Decreased more than 10% 0.5%
Decreased 6 - 10% 1.2%
Decreased 1 - 5% 3.3%
Stayed the same 2.8%
Increased 1 - 5% 24.0%
Increased 6 - 10% 29.4%
Increased more than 10% 38.9%


By what percentage has the cost of employer-provided health benefits changed in the past year?
25th percentile 6.0%
Median 12.0%
75th percentile 18.0%
Mean 14.0%


How did your employee benefit package change from 2004 to 2005?
Benefits increased 14.2%
Benefits stayed the same 57.0%
Benefits decreased 28.8%
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