After Belt Tightening, Manufacturing Sector Expects Growth in Coming Months

49% of respondents to Grant Thornton's Nov. 2010 Business Optimism Index say they plan to increase staff over the next few months

After three years of belt tightening, the manufacturing industry is poised for growth according to Grant Thornton's Nov. 2010 Business Optimism Index survey of manufacturing companies across the United States.

Despite an incredibly difficult three years, manufacturers are optimistic that the worst is behind them and that 2011 will provide a stable base for growth. Nearly half (49%) believe the U.S. economy will improve in the next six months, while only 5% think that the economy will get worse in the coming months.

The same number (49%) say they plan to increase staff during that period, compared to just 13% that plan to decrease staff. Manufacturing leaders are also optimistic about their own businesses, with 81% feeling hopeful about their companies' growth over the next six months.

This optimism is attributable to the resolution of the uncertainty surrounding some of the major concerns that have paralyzed businesses over the past two years -- tax rates, R&D tax credit extensions, environmental and related regulatory issues -- which have set the table for growth. This, coupled with the highest level of cash on corporate balance sheets in over 50 years, bodes very well for increased investment by the industry.

And it appears that U.S. manufacturers are also ready to open their wallets. According to the Manufacturing Performance Institute, the number of U.S. manufacturers that will increase their capital investments in 2011 will outpace those reducing their investments. Over 47% plan to increase spending on capital equipment purchases. In addition, 37% plan to increase their spending on information technology.

Improved Performance While Cutting Costs

Certainly manufacturers have slashed costs to the bone over the past three years just to survive the precipitous decline in demand for their products. In 2010, U.S. plants scaled back production volumes to a median of 60% of designed plant capacity, down from 75% of plant capacity three years earlier.

Yet despite reduced staffing levels and stricter customer mandates, manufacturers have been successful in improving their performance over the past three years, particularly in areas such as production cycle time, on-time delivery rate, scrap and rework, quality and warranty costs.

For example, over the past three years, we have seen a 20% improvement in cycle time, a 3% improvement in quality yield, a 1% decline in scrap and a 5% improvement in delivery time.

In addition, U.S. manufacturers increased their equipment operating efficiencies by 2.5% over this same three year period.

As a result, over 40% of U.S. plants reduced their per-unit manufacturing costs (excluding raw materials) in the last three years.

Looking Ahead: Opportunities to Improve Processes

Even with these gains, U.S. manufacturers have further opportunities to improve their operations or at least prevent future cost increases. While many companies have reduced costs over the last two years, there is room for most U.S. companies to eliminate waste and redundancies, streamline processes, and at the same time improve products and services. In fact, most companies surveyed agree: Only 35% of U.S. plants say they have made significant progress toward achieving "world-class" manufacturing status, as compared to 47% of international plants

To achieve world-class status, many companies can implement and increase focus on improvement methodologies such as continuous improvement, benchmarking, Kaizen events and value-stream mapping.

While many U.S. manufacturers were engaged in lean and TQM techniques within their plant walls, less than 20% extended such techniques throughout the supply chain with customers and vendors. These techniques emphasize a culture of continuous improvement of both processes and products, and strive to continuously bring various functional groups together (i.e. marketing, engineering, customer service, production), in order to focus on achieving customer satisfaction and the company's goals.

Since 50% of a manufacturer's product costs are raw materials (many of which are significantly increasing in cost), there is a significant opportunity to drive down these costs by treating suppliers and customers as business partners by sharing resources, intellectual property, cost savings, production and order schedules. Strong relationships with the vendors who supply the company with quality materials and services enable the company to provide excellent quality products and services to its customers. U.S. manufacturers should partner with their customers and suppliers to a greater extent than in the past, in order to maximize cost savings throughout the supply chain and share such benefits.

Improving processes, when done meaningfully and strategically, translates into improved profits: We find that there is a direct correlation between process improvement and sales-per-employee. Manufacturers that rate process improvement as "important" report sales-per-employee nearly $50,000 higher than those that do not value process improvement.

It's certainly an encouraging and eagerly awaited sign that U.S. manufacturers are pursuing a growth strategy in the coming years. But they must maintain their focus on improving their processes, since this is what has allowed them to survive the past three years. By eliminating waste, inefficiencies and costs throughout their business processes and supply chain, U.S. manufacturers can continue to drive down costs, improve quality and increase profits.

Wally Gruenes is national managing partner, Consumer & Industrial Products for Grant Thornton LLP.

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