U.S. Manufacturers Must Increase Efficiency, Strive For Growth

New product development is first choice for growth strategy.

The manufacturing economy may be stabilizing, according to the December performance of manufacturing index (PMI) reading of 51.4% -- an increase of 1.9 percentage points over November's reading of 49.5. If the January index looks similarly positive, this may signal the end of a contraction period that disrupted more than three years of expansion.

While U.S. manufacturers may take heart in such news, they aren't likely to rest on their laurels any time soon. With global competition threatening their market share -- and health care and energy costs eroding profitability -- U.S. manufacturers will need to keep their heads down, focusing on core strengths like innovation and identifying ways to reduce costs and run their operations with increasing efficiency.

And although economic indicators tell us manufacturers in this country are doing many things right, are there yet untapped opportunities to ensure future success?

Small And Midsized Manufacturers Missing Opportunities

Small and midsized companies represent more than 99% of U.S. manufacturers, accounting for more than 60% of all manufacturing output. But despite their role as a driving force in our economy, small and midsized manufacturers (SMMs) are particularly vulnerable.

With foreign manufacturers showing no signs of slowing down, SMMs can't afford to be complacent. Yet a 2006 survey by RSM McGladrey found that many SMMs are overlooking critical opportunities.

Survey Examines Manufacturing Leaders' Tactics, Decision-Making

The national manufacturing and wholesale distribution survey provided insight into what CEOs and CFOs feel are the most important aspects to maintaining growth and competing in the global economy.

The following findings reflect collected data on growth strategies, global economy, operational effectiveness, work force management and tax planning.

  • New product development was the highest-rated growth strategy, with more than 55% of respondents stating they rely on it. Since new products are quickly duplicated, innovation and enhancement are among the few strategies companies can use to stay ahead of foreign competition and grow their businesses.
  • Contrary to public perception, the survey showed low scores for "moving production offshore" and "moving sales and services closer to international markets." Although a fundamental benefit of free trade is access to foreign markets, half of survey participants expect no revenue growth in this area.
  • In 72% of cases, respondents said redesigning business processes is the initiative they are relying on to improve operational effectiveness. Few participants were reducing operating capacity as a means of improving operational effectiveness. Contrary to the belief that U.S. companies have excess operating capacity -- that is, the ability to produce more product than the market demands -- most survey respondents were seeking to increase their operating capacity.
  • Manufacturing companies still need technically capable and skilled workers. The survey found 43% of respondents seek their main source of skilled labor in the general marketplace. Few were sourcing employees from community colleges and vocational schools. If unemployment rates remain low, labor shortages across all industries are expected.
  • Among survey participants, 65% claimed state and local tax credits, 64% took advantage of the domestic manufacturers' deduction, 61% used R&D tax credits and 38% used international tax incentives. Few distributors participating in the survey took advantage of any tax programs. It's critical that manufacturers take advantage of all available tax benefits and leverage the savings to develop growth strategies.

Recommendations

Business is indeed good for manufacturing in this country. Overall, leaders are optimistic about their companies and industries, with plans for increased capacity and new product innovation.

But in order to build on this positive trend, it's increasingly imperative for U.S. manufacturers, particularly SMMs, to run their business more effectively. That means revisiting a variety of missed opportunities -- and doing it now. By the time we see bleaker economic indicators, we may already have squandered our advantage.

Tom Murphy is the executive vice president, Manufacturing and Wholesale Distribution at RSM McGladrey Inc. RSM McGladrey provides accounting, tax and business consulting. McGladrey & Pullen LLP (a U.S.-based partner-owned CPA firm) delivers audit and attest services. RSM McGladrey and McGladrey & Pullen operate in an alternative practice structure.Though separate and independent legal entities, they work together to serve clients' business needs.

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