According to results of the 2012 Indiana Manufacturing Survey: “Halftime” for Indiana Manufacturing, Indiana manufacturers have weathered the storm of the Great Recession and are well positioned to compete in the future.
The report, commissioned by Katz, Sapper & Miller certified public accounting firm, was conducted by Scott A. Brown, partner, Katz, Sapper & Miller, LLP in conjunction with Mark Frohlich, associate professor of operations management and Steven Jones, associate professor of finance, on the faculty of the Kelley School of Business Indianapolis, Indiana University.
This report has tracked Indiana manufacturing for six years, from the end of the economic boom through the Great Recession to the present. The authors “view the past year as a ‘halftime’ break for Indiana manufacturing after what proved to be an incredibly difficult first half.”
The vast majority of companies surveyed (82%) responded at the company level, while 10% did so as individual plants and 7% are divisions of larger organizations. Privately owned companies represent 87% of respondents and the other 13% are publicly traded companies. The average number of employees is 306, and the largest organization has 8,000 employees.
About 40% of companies rely on job shop-type production, and 41% use batch manufacturing. Very few companies operate assembly lines (8%) or continuous flow processes (11%), both of which are capital intensive and used to produce relatively standardized, high-volume items.
The three largest industry groups represented are industrial equipment (19%), automotive (19%), and aerospace and defense (10%). Another 18% of respondents are almost evenly distributed between high-tech (5%), healthcare (6%), and furniture/home goods (7%).
In the four years since the financial crisis of late 2008, “manufacturers have faced challenges ranging from credit crunches and supplier bankruptcies to slumping consumer demand, soaring energy costs, and relentless foreign competition.” The report chronicles that “in 2008-09, Indiana manufacturers were mainly focused on cost-cutting and economic survival. By 2010-11, targeted investments aimed at growth began to reappear on the agendas of many manufacturers.” In 2012, “a significant majority now report that their business is either ‘healthy’ or ‘stable,’ with tougher times behind them” and “investment for growth is a priority for many companies around the state,” while “almost three out of every four manufacturers surveyed are investing for growth.”
“From a financial perspective, I think small- to medium-sized manufacturers have made it through the Great Recession, and they’re starting to recover,” said Jones. “That is revealed in the survey responses indicating there’s less concern about working capital management and renewed focus on investment strategy, rather than cost cutting.”
“One in 10 companies surveyed plan to open new manufacturing facilities in Indiana over the next two years, and 44% rate their financial performance as “healthy,” a significant increase from last year’s response of 30%.”
The survey did find that net profit margins increased more for firms that introduced new products sometime in the two years prior. In the 2012 survey findings, the companies introducing new products increased to 44% (up from 38% in 2011), and they saw a 24% improvement in net profit margin (down from 26% in 2011).
Seeking Superior Quality and Lower Prices
According to the 2012 survey results, business strategies have changed from 2011. In 2011, “the two most important underlying dimensions were superior product design and fast and reliable delivery along with superior customer service.” In 2012, “superior quality and lower selling prices have emerged as the two most important underlying dimensions on which manufacturers are differentiating their businesses.”
The authors “research reveals three key ways strategies are shifting as we move beyond the Great Recession toward a new era that is likely to be even more competitive:”
- Keep focused on the customer - strategies increasingly feature superior quality and lower prices, along with superior product design and customer service.
- Don’t underestimate the importance of technology – leading-edge technologies are playing a critical role in advancing these companies in conjunction with process improvement programs such as Lean and Six Sigma, advanced automation, and smart manufacturing technologies
- Collaboration remains critical – partnerships and collaboration with up- and downstream customers and suppliers in the supply chain
Frohlich and Jones recommend, “Indiana manufacturing companies stay focused on the customer, avoid underestimating the importance of technology and know that collaboration remains critical.”
"These results indicate a reason to be optimistic about the manufacturing sector and jobs investment in the State of Indiana,” said Jones.
A slightly higher percentage of companies are “on-shoring” (aka “reshoring”) manufacturing back into the United States. When asked if they expect to relocate or onshore any manufacturing back to the United States during 2012-13, or alternatively, do they plan on relocating, or offshoring, any production outside the United States during 2012-2013, 9% indicated they intend to onshore and 8% intend to offshore. The top four reasons why companies are “reshoring” were: better control over production (60%), proximity to customers and main markets (50%), closer to key suppliers (40%), and reduce total “landed” costs; i.e., customs/duties, transportation, warehousing, etc (40%). The main reasons for offshoring manufacturing out of the United States are: lower offshore labor costs and proximity to customers in new markets.
"What now are recognized as systematic errors in offshoring over the past 10-15 years were a lot of mistakes based on myopic financial decision making,” said Jones. “Firms made offshoring decisions assuming exchange rates wouldn’t change, which is wholly unrealistic in currency markets. Many made these financial decisions using only the data in front of them. Additionally, the real cost of labor has gone up in China. All of this represents what, in retrospect, may be an excessive amount of offshoring in the previous decade."
The survey revealed that the main reasons for Indiana’s competitive edge include:
- Better access to new technologies
- Better control over production
- Locations closer to customers, markets and suppliers
- Great accounting and auditing oversight
The report states, “The major remaining concern for the state is having a trained workforce that is qualified to pursue advanced manufacturing strategies.”
“These results clearly indicate a growing concern about access to an adequately trained Hoosier workforce, more so than in past years,” the report reads. “Consistent with the previous results indicating growing concerns about worker training, only 30% of respondents view Indiana’s workforce as a competitive advantage for the state.”
The authors conclude that “While Indiana’s manufacturers still face strong global competition, their practices and products are beginning to permeate all elements of operations; opening up new markets and sources of demand; driving innovation; and even changing industry cost structures.”
This report shows where Indiana’s manufacturers are right now, but the question is what to do next? The report indicates“astrong sense among Indiana’s manufacturers that execution is now the challenge to bringing about the new era of manufacturing. Confidence among business leaders about their progress toward this new era is strong, and their companies are taking concrete steps towards improving manufacturing…While today’s business environment provides a multitude of new challenges to manage, it also offers significant opportunities for those who can master its dynamics.”
The survey found that a new manufacturing era is on the horizon, and “there is widespread agreement about what the next era of manufacturing will look like. It is one where manufacturing is not only a separate strategic initiative, but also something fully integrated into the strategy and operations of a company. For example, manufacturers will need to develop a broader sense of what value creation means to customers as a whole.”
The underlying tone in this year’s report is that “the next five years could well determine not only the fate of some firms, but also, in significant ways, the success of Indiana and that of our country in the global economy for years to come…Manufacturing can and should continue to thrive if the right policies and strategies are pursued. Real and fundamental changes are continuing to take place across manufacturing in all kinds of capabilities.”
The authors conclude that “the message is clear: Indiana (and American) manufacturing has survived a tough first half. Now it must move forward to remain competitive in the future.”
This report is another example of how American manufacturers can survive and even grow and prosper in the face of global competition. The companies doing the best have implemented many of the recommendations contained in the chapter ─ “What can manufacturers do to save themselves? ─ in my book, “Can American Manufacturing be Saved? Why we should and how we can.” Innovative new products, fast, reliable delivery, superior customer service in conjunction with applying the principles and tools of Lean and Six Sigma are a few of the suggestions from this chapter. I encourage everyone to read the new 2012 edition of my book to find out what you can do as a manufacturer to grow and succeed, what national policies need to be changed and implemented to foster success of this critical sector of our economy, and what you can do as an individual to save American manufacturing.