Tick Tock

Dec. 21, 2004
IW/MPI Census of Manufacturers shows challenges, reality and, yes, even optimism.
Editor's Note: Results from the IW/MPI Census of Manufacturers will appear as a five-part series in the January 2004 through May 2004 issues of IndustryWeek. The clock is ticking for U.S. manufacturing. At a competitive disadvantage in terms of labor, raw materials and energy costs, no other business sector has been transformed so deeply by globalization. It's telling when, after 39 consecutive months of declining job numbers, labor and business organizations trumpet the fact that the rate of manufacturing job losses is "slowing" and "below average." Yet there are plenty of reasons for hope. Every issue of IndustryWeek tells stories of U.S. manufacturing operations leveraging their advantages -- proximity, customer knowledge, process innovations, management skills and technology -- to serve their customers better than competitors halfway around the world. But as inspiring as these accounts are, they leave a lot of unanswered questions. What is the true competitive position of U.S. manufacturing today? How is industry responding to heightened customer and corporate expectations? What are manufacturers' biggest challenges and expectations for 2004? How are they investing for tomorrow? In conjunction with the Shaker Heights, Ohio-based Manufacturing Performance Institute (MPI), IW designed the IW/MPI Census of Manufacturers to provide just such information. We asked more than 100 questions and received 967 responses from manufacturers across the United States, those that are thriving and those struggling to survive. This overview of participants kicks off a five-part series on the Census results: what world-class manufacturers are doing as well as challenges identified in information technology usage, operations and human resources. When asked to name their biggest challenge, respondents overwhelmingly singled out two sides of the same coin: cost-reduction pressure from customers (38%) and foreign competition (27%). The customer mandate facing many manufacturers can be heard loud and clear: "Lower your prices, or we'll source it from China." Such demands and rising costs make it ever more challenging for U.S. manufacturing operations to come out on top of the profit-or-loss equation. In this environment, continually doing things better and more efficiently is not an option, but the ante required to stay in the game. To track how improved operational performance drives improved financial performance, this Census requested many more financial measures than we've asked for in the past. These included labor, overhead and material costs as a percentage of cost of goods sold (total manufacturing costs for products sold in a particular accounting period); scrap costs as a percentage of sales; inventory turns and sales per employee. Such indicators directly impact manufacturing companies' bottom-line performance and the all-important return on invested capital. (Note: Text continues after tables.)U.S. Manufacturing Scorecard
Value Chain Overhead, % of COGS Materials, % of COGS Labor, % of COGS
Median Upper Quart. Median Upper Quart. Median Upper Quart.
Aerospace 30.0 42.0 45.0 60.0 20.0 30.0
Automotive 25.0 40.0 50.0 65.0 20.0 30.0
Chemicals 20.0 30.0 60.0 70.0 17.5 25.0
Construction. 22.5 36.5 54.5 66.2 16.5 29.8
Consumer packaged goods/ nondurables 20.5 30.0 60.0 69.5 15.9 30.0
Consumer product durables 26.5 33.0 50.0 60.0 20.0 31.4
High tech 24.0 36.0 45.0 65.0 20.0 40.0
Industrial equipment/machinery 30.0 40.0 40.0 51.0 25.0 35.0
Pharma, biotech, medical devices 25.5 38.8 50.0 60.0 20.0 34.3
Printing and publishing 26.0 38.0 33.5 52.0 32.5 49.5
Other 28.5 40.0 47.5 60.3 20.0 30.0
All 25.0 37.0 50.0 60.2 20.0 30.0
Note: Upper quart. equals upper quartile. Profiles In Persistence First, the basic stats. Just as private companies represent the lion's share of the total economy, over three-quarters of the manufacturing plants in our sample (76%) are privately owned. Most respondents call the Midwest (43%) home, but they are spread across the country in the South (24%), Northeast (21%) and West (12%). Almost two-thirds report total corporate revenues of $100 million or less. They are almost evenly divided between facilities with fewer than 100 employees (53%) and 100 or more (47%). On the subject of employees, productivity and productivity growth will determine the future success of U.S. manufacturing at both the macro-economic and the individual factory level. For all manufacturing operations, median sales per employee measured $150,000 in 2003, and $220,000 per employee at the 75th percentile. U.S. Manufacturing Scorecard
Value Chain Avg. wage per production worker, $/hr Annual Sales per employee Gross margin
Median Upper Quart. Median Upper Quart. Median Upper Quart.
Aerospace 14.00 17.68 128,000 195,000 28.0 50.0
Automotive 13.05 15.86 164,000 234,500 24.1 40.0
Chemicals 15.00 18.00 264,000 436,000 35.0 40.5
Construction. 13.00 14.00 141,500 192,500 33.0 43.5
Consumer packaged goods/ nondurables 12.00 14.50 197,000 265,000 33.0 49.0
Consumer product durables 11.00 13.00 124,000 180,000 28.3 38.8
High tech 14.00 17.75 160,000 260,000 51.0 60.0
Industrial equipment and machinery 14.00 16.13 131,500 185,250 30.0 45.0
Pharma, biotech, medical devices 14.75 18.00 150,000 240,000 34.0 50.0
Printing and publishing 13.00 16.50 162,000 211,250 27.5 48.5
Other 12.00 14.89 148,500 205,750 31.5 50.0
All 13.00 15.50 150,000 220,000 30.0 47.0
Note: Upper quart. equals upper quartile. The overall results of the Census represent a cross section of U.S. industrial performance. To get a better idea of how different sectors are performing, we asked respondents to tell us which value chain they participate in. Of course there are vastly different types of operations within any one of these sectors. Aerospace, for example, includes everything from specialty bolt makers to operations that assemble the final aircraft. Still, such designations offer a useful indicator of margins as well as typical and superior performance within particular sectors. Looking at productivity again, industry medians range from a high of $264,000 sales per employee within the process-intensive chemical industry, to a low of $124,000 sales per employee in consumer product durables. As previously mentioned, one of the market advantages U.S. manufacturers have is close proximity to a $10.4 trillion annual GDP customer base. One measure that shows how well they're capitalizing on this advantage, and how much waste they're eliminating from the product pipeline, is inventory turns. U.S. Manufacturing Scorecard
Value Chain Raw material turns WIP turns Finished goods turns Total inventory turns
Median Upper Quart. Median Upper Quart. Median Upper Quart. Median Upper Quart.
Aerospace 6.8 13.0 10.0 20.0 8.5 15.0 6.0 10.0
Automotive 16.2 30.0 20.0 40.0 19.0 30.0 12.0 22.0
Chemicals 12.0 24.0 20.0 55.0 12.0 30.0 8.0 20.0
Construction. 8.5 15.5 20.0 51.2 11.0 27.5 6.4 12.0
Consumer packaged goods/ nondurables 15.0 45.0 24.0 81.5 13.0 38.0 10.0 23.0
Consumer product durables 10.0 20.0 20.0 38.4 12.5 24.0 8.0 17.3
High tech 8.0 22.0 12.0 30.0 10.0 24.0 7.0 10.0
Industrial equipment and machinery 8.0 13.0 12.0 20.0 10.0 12.0 6.0 10.0
Pharma, biotech, medical devices 8.7 15.0 11.0 18.5 8.0 13.0 5.0 10.0
Printing and publishing 12.0 20.0 25.5 90.5 15.0 88.0 10.0 16.0
Other 12.0 26.3 15.5 49.5 12.0 40.8 6.8 12.0
All 11.6 22.0 16.0 38.2 12.0 25.0 8.0 13.0
Note: Upper quart. equals upper quartile. Raw material turns is cost of goods (COGS) sold divided by average raw materials. Work-in-process (WIP) turns is COGS divided by average WIP value. Finished goods turns is COGS divided by average value of finished goods. Total inventory turns is COGS divided by average value of total inventory. Raw material turns -- a median of 11.6 for all plants, with 16.2 being the high for automotive -- indicate how well manufacturers are working with suppliers to deliver needed material when it is needed. Finished goods turns -- 12.0 or once per month for all plants, with 19.0 being the high, again in automotive -- offers a sign of how customer responsive manufacturers are, and how quickly they're moving what they make out the door. Another financial indicator, one that goes to the heart of the "make it in the United States" or "source it abroad" decision, is return on invested capital (ROIC). ROIC is the ratio of net operating profit after taxes to total operating capital invested. Successful U.S. manufacturing operations will not only exceed the cost of capital, but exceed the returns expected by investors' as well. In which case they are truly adding value. Looking at the midpoints, every value chain except aerospace achieved at least double digit ROIC in 2003, which would be expected considering the challenges that have hit that sector over the past several years. Comparing the difference between typical production operations and the higher performers (the median to the upper quartile) by value chain, the superior factories delivered at least 60% higher returns, and in several cases more than double that of most other plants. U.S. Manufacturing Scorecard
Value Chain Asset turn ratio ROIC
Median Upper Quart. Median Upper Quart.
Aerospace 3.5 4.0 8.3 20.0
Automotive 2.4 5.0 13.0 28.5
Chemicals 1.6 3.0 15.0 37.5
Construction. 3.0 7.4 18.0 34.4
Consumer packaged goods/ nondurables 2.0 4.0 15.0 27.9
Consumer product durables 3.0 5.0 12.0 27.5
High tech 2.0 3.8 10.0 17.5
Industrial equipment and machinery 2.3 4.0 10.7 20.0
Pharma, biotech, medical devices 2.0 3.3 15.5 25.0
Printing and publishing 2.0 5.8 13.8 23.3
Other 2.3 5.0 14.3 25.5
All 2.5 4.0 13.5 25.0
Note: Upper quart. equals upper quartile. Asset turn ratio is COGS divided by average assets. ROIC is return on invested capital. That's how U.S. manufacturers are doing in terms of financial performance. What do they see coming down the pike for 2004? Better Days Ahead When asked flat out whether they expected 2004 to be better than 2003 in terms productivity, profitability and overall stakeholder satisfaction, two-thirds of manufacturers say, "Yes." The remainder are split between a belief that things will stay the same and the dour prediction that their situations will actually deteriorate. Companies that serve the construction industry are the most optimistic about 2004, while U.S. producers of consumer durables aren't feeling nearly so upbeat. Great Expectations
2003 2004
Revenue to grow 51% 80%
Employment to grow 39% 58%
Capital equipment Spending to increase 44% 58%
A bare majority of all Census respondents (52%) anticipated revenue increases through year-end 2003. Only about two out of five manufacturers expected net growth in total employment for the year. In 2003, most plants either kept capital spending constant, or reduced it. Projections for 2004 are much more rosy. Four out of five manufacturers (80%) believe revenues will rise in 2004, with more than a quarter of companies expecting sales growth to exceed 10%. They're ready to gear up. A clear majority (58%) expect to boost employment, and a nearly identical percentage plan to increase capital equipment spending in 2004.
Methodology The IW/MPI Census of Manufacturers collected operations and business metrics and practices at individual manufacturing facilities. A four-page questionnaire with more than 100 questions, jointly developed by IndustryWeek and the Manufacturing Performance Institute (MPI), was mailed to about 30,000 leaders and managers of plants (primarily IW subscribers) in June of 2003. Each survey recipient received a letter describing the survey, a questionnaire, a business-reply envelope, and a survey participation card to ensure the anonymity of survey responses while enabling distribution of Executive Summaries and participation in a random drawing. Survey recipients were reminded by mail, fax and e-mail to complete the survey. By August 2003, IW/MPI had received 967 valid, completed survey forms that were keyed into a database, edited and cleaned to ensure responses were logical. For a summary of the complete results or industry-specific data from the 2003 IW/MPI Census of Manufacturers, contact the Manufacturing Performance Institute, (800) 603-2272, or [email protected].

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