Manufacturing 2.0 -- Building a Lean, Mean Profitable Machine

Recovery brings more focus on risk-taking, talent management and global markets.

Manufacturing is no stranger to the domino effect of an economic downturn. However, even for an industry accustomed to dramatic dips, the recent recession was game-changing. Along with historic unemployment rates and plummeting home values, the economy was rocked by frozen spending and curbed demand for manufactured goods. As factories closed and the industry consolidated, U.S. manufacturers by mid-2009 trimmed more than 2 million jobs in less than two years.

After these challenges, the manufacturing sector is slowly but steadily rebounding in 2011. Despite both economic and legislative concerns, industry executives are starting to show renewed optimism.

According to the NAM/IndustryWeek Manufacturing Index, 75% of respondents had a positive business outlook in the third quarter of 2010 -- the highest level of confidence since the second quarter of 2007. In addition, the recent Bank of America Merrill Lynch 2011 CFO Outlook survey revealed that more than half of U.S. manufacturing companies expect revenue growth and improved profit margins. Perhaps most tellingly, 47% expect to make new hires, nearly double the amount from the previous year.

These encouraging signs come as manufacturing continues to evolve in the 21st century. Prompted by global competition that eroded margins and market share, the industry began a fundamental shift years ago. As the economic recovery continues, manufacturing executives striving for stability and growth are giving more importance to the following aspects of their businesses:

Strategic Risk-taking and Investment: In transitioning from survival to growth mode, manufacturers are regaining their appetite for strategic risk. For evidence, consider the uptick in M&A activity, with manufacturers taking advantage of available credit to penetrate new markets, verticals and consumer segments. In the U.S. alone, 25% of manufacturing companies intend to participate in deals in 2011, with 91% of that group expecting to acquire, according to the Bank of America Merrill Lynch CFO Outlook.

U.S. manufacturers also recognize the role that technology, research and development play in keeping pace with stiffening foreign competition. Investing in those areas ultimately will enable manufacturers to deliver transformational innovation to the marketplace quickly and cost-effectively.

Talent Management: While headcount has shrunk significantly during the past two decades, productivity has jumped by a record 94%, according to NAM data. That's nearly 60% higher than any other U.S. business sector. Yet as production becomes more specialized and reliant on precision machines and technology, the industry is facing a dire shortage of skilled production workers, scientists and engineers.

Ensuring that employees are properly trained is essential to achieving long-term goals. Alarmingly, nearly 80% of senior manufacturing executives reported reductions in training programs last year, according to PriceWaterhouseCoopers. Given the constricted labor market in the sector, manufacturers could benefit from investing in training that addresses real-time skill gaps while developing capabilities to gain future competitive advantage.

Financial Positioning: While many companies remain focused on preserving capital and maximizing liquidity amid lingering economic uncertainties, a growing number of manufacturers are showing renewed interest in credit. Existing lines of credit are starting to see more use, and demand for additional credit has picked up slightly. In some cases, manufacturers have explored raising their credit lines by as much as 20% -- not for immediate use but for plans three or four years down the road.

Globalization: Buoyed by a stable U.S. dollar and rapid economic recovery in key foreign markets such as Asia, Latin America, Europe and Canada, international sales are emerging as a significant source of growth. In fact, according to the Bank of America Merrill Lynch CFO Outlook, 60% of manufacturers expect international sales to increase in 2011. Embracing continued expansion abroad is integral to insulating U.S. manufacturers from fluctuations in demand at home.

Even with the rise of imports in recent years, the United States remains the world's largest manufacturing economy, responsible for 21% of global manufactured products and $1.6 trillion of value each year. After remaining resilient through the recent recession, U.S. manufacturing is now poised to become leaner and more efficient, with companies better prepared to seize new opportunities.

Laura Whitley is middle market banking executive for Global Commercial Banking at Bank of America Merrill Lynch.

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