Manufacturing After The Terrorist Attacks

Adjusting to market demand -- and rethinking business strategy

Between now and the end of 2002, some 20,000 to 30,000 of Boeing Co. commercial aircraft workers are likely to lose their jobs, a direct result of Sept. 11's terrorist attacks on New York and Washington. With many airlines in the U.S. and overseas reducing the number of their flights, the carriers simply won't need as many planes. Indeed, Chicago-based Boeing figures that its commercial aircraft deliveries could fall to as few as 500 this year, compared to a previously expected 538. For next year, deliveries could be "in the low 400s," compared to the previous forecast of 510 to 520 planes. And "current estimates for 2003 indicate a downward delivery trend will continue," Boeing says. For the U.S. aerospace industry generally, this year's sales are expected to decline a relatively modest $400 million from 2000's mark to $143 billion, estimates the Aerospace Industries Assn. (AIA), Washington. However, industry sales could decline by as much as $5.6 billion in 2002 and $6.7 billion in 2003, says John Douglass, AIA's president and CEO. For the rest of an already economically hurting U.S. manufacturing sector, much of the foreseeable future will depend just how U.S. labor markets, its financial markets, and especially consumers continue to react to September's terrible events. "The trouble now is that more than likely consumer confidence will be shaken enough by . . . events that consumer spending will drop . . . and the inventory problem will show its ugly head again," says Gary Shoesmith, a professor of economics at Wake Forest University's Babcock Graduate School of Management in Winston-Salem, N.C. "I try to be as optimistic as possible, but it doesn't look good." If the U.S. economy, which before Sept. 11 was perilously close to no growth, dips into recession as consumers cut back on spending, makers of autos, home appliances, furniture, and building materials will be among manufacturers adversely affected by dropping demand, Shoesmith predicts. "If housing goes down, then building materials will be one of the hardest punished in the economy," he emphasizes. Because electronics producers -- especially computer makers -- lack new technologies to spark consumer interest, they "are going to get hammered," contends John Di Frances, managing partner of Di Frances & Associates, a consulting firm in Wales, Wisc. Significantly, the impact of the terrorists attacks promises to extend beyond economics and production volume to manufacturing processes and practices such as JIT (just-in-time). The short-term effect has already been seen, with at least one automaker -- Ford Motor Co. -- shutting down some production because it could not get parts. Longer term, Di Frances foresees a general rethinking of supplier relationships, with distance between the manufacturing consumer and manufacturing supplier "going to become a [critical] factor." Indeed, Di Frances believes that private trucking companies may make a return as manufacturers with several large customers want the comfort and assurance of being able to control the movement of their freight. Meanwhile, although the topic seems distasteful as the recovery of victims from the attacks continues and there's the prospect of more people being put in harm's way, some sectors of the U.S. economy, such as defense, will likely benefit from new demand. "The impetus is now there to rebuild the military that has been suffering for years. So what we are going to see are much larger budgets beyond dealing with the terrorists," Di Frances contends. "What people don't realize [for example] is that on any given flight line, 25% to 30% of our planes aren't operational on a given day," he claims. "There aren't any parts." Increased sales in space and defense markets may offset to some extent declines in commercial aircraft sales in the aerospace industry, depending on how the Bush Administration responds to the terrorist attacks, suggests AIA's Douglass. Companies with products aimed at increasing safety and security are likely to see an upsurge in business. For example, CompuDyne Corp., a Hanover, Md., maker of bullet-, blast-, and attack-resistant building products expects to see an increase in demand. So, too, is demand expected to increase for surveillance cameras and detection devices, including face-, eye-, and fingerprint-scanning technologies. Teleconferencing equipment will be in greater demand as companies rush to upgrade their systems so that they can communicate with partners, suppliers, and customers when air travel is not possible, predicts John A. Challenger, CEO of Challenger, Gray & Christmas Inc., a Chicago-based outplacement firm. At the same time manufacturing executives are watching the marketplace and making tactical moves, they need to pay attention to strategic issues, including where companies place their plants and people. The attacks "may cause companies to think [about] concentrations of employees. There is an argument here for decentralizing [operations]," states Roy Vallee, chairman and CEO of Avnet Inc., a $12.3 billion Phoenix-based global distributor of electronic products. He suggests that in electronics there could be an acceleration of contract manufacturing. In places around the world where Avnet already serves as a regional material manager in an outsource supply chain, customers may be asking for "a more decentralized approach" to shorten distribution distances and increase delivery assurance, Vallee imagines. The bottom line for manufacturing: The attacks on the U.S. earlier this month bring a previously unthinkable dimension to risk management and planning. They make "us deal with things that, unfortunately short of these types of events, you really don't want to address," stresses John A. McCarthy, Washington-based senior manager for information risk management at KPMG LLC.

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