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Inward Investment Guides

The Future of U.S. Manufacturing

U.S. manufacturers are looking to the future with a mix of optimism and caution.

Josh P. Cole, Principal, Manufacturing and Distribution Performance, Crowe Horwath and Doug B. Schrock, Principal, Advisory Services, Manufacturing and Distribution Performance Consulting, Crowe Horwath (Feb/Mar 10)
According to the National Bureau of Economic Research, the nation's official arbiter of economic peaks and valleys, the U.S. economy has been in a recession for more than two years. U.S. manufacturers, pummeled by shrinking demand and rising costs, have borne the brunt of the pain, reluctantly shutting down plants, slashing payrolls, and taking other extraordinary measures to remain in business until the economy rebounds.

How fast do U.S. manufacturers expect to grow during the next two to three years? And what steps are they taking to prepare for the eventual return to prosperity? To answer these and other questions, Crowe Horwath LLP teamed up with IndustryWeek Custom Research to survey a national cross-section of industrial companies about their expectations for the immediate future. A total of 360 companies, with average annual revenues of $2 billion, participated in the online poll in August and September 2009. Following are highlights from the study:

Manufacturers' Expectations
U.S. manufacturers are generally optimistic that economic conditions will improve gradually over the next two to three years, but they plan to hire and invest cautiously.

On average, manufacturers expect revenues to increase 8 percent in 2010 and 14 percent in 2011. Smaller companies anticipate higher growth rates than larger organizations do.

Approximately one third of companies with $25 million or less in current revenues expect double-digit growth during each of the next two years; in contrast, only 6 percent of companies with annual sales of $1 billion or more expect double-digit growth. Companies large and small expect budgets to be more conservative than in the past, as they continue to defer making nonurgent investments in infrastructural items that might be otherwise implemented in a normal year.

Many manufacturers are taking advantage of the downturn to invest in process improvement initiatives to eliminate waste or unnecessary costs. They are also investing in new product development and evaluating their current product portfolios for opportunities to generate new revenues. In addition, companies with strong working capital positions are taking advantage of bargain prices to invest in equipment for capacity or flexibility purposes.

Production Work Force: A Buyer's Market
When it comes to hiring, manufacturers have relatively modest plans. On average, manufacturers say their domestic production work force will increase 6 percent over three years, while they expect their non-U.S. production work force to grow just 4 percent. More than one third of the respondents, however, are forecasting an increase of 10 percent or more in their domestic production work force.

These gains in staffing levels, which are lower than manufacturers' anticipated sales increases, suggest that organizations are looking for investments that allow them to do "more with the same" by increasing their ability to manage greater capacity without investing in fixed costs such as labor. Such investments could include more efficient production equipment, warehousing automation, and information technology (IT) aimed at better supporting back-office labor as well as production labor. In addition, the use of temporary or variable-cost labor is rising as manufacturers manage swings in demand for both back-office and production employees.

Given the current high rates of unemployment in the industrial sector, manufacturers have a rare opportunity to add qualified new talent. Employee growth rates may understate the amount of personnel turmoil as organizations use this period as a time to "trade up" on their level of talent.

IT Investments: Making Up for Lost Time
In preparation for the eventual economic recovery, manufacturers are looking to increase current production capacities by making overdue investments in IT.

Seventy percent of the surveyed companies expect their annual IT spending to increase, and 80 percent are planning a major system investment during the next three years. Manufacturers are investing in technology to increase efficiency with improved workflows, automation, and shared-service models that centralize supporting functions - all while supporting greater access to information for key decision-making in difficult times.

The last major cycle of enterprise IT investment occurred a decade ago, during the "Y2K" era. Ten years is close to the average life span of an enterprise system before a major upgrade or replacement is required. Recent economic conditions and associated freezes in capital expenditures and budgeting have delayed IT investments, which are likely to become priorities in the coming months and years.

Large enterprise application systems - such as enterprise resource planning (ERP), engineering design, and customer relationship management - are among the most widespread investments that manufacturers expect to make. In addition, manufacturers anticipate upgrading packaged systems that have been modified over time. Many organizations no longer pay maintenance or annual support fees on such systems and now consider them in-house legacy solutions.

In addition, manufacturers are taking a fresh look at ways they can use IT capabilities to create a positive business impact. One key development is the emergence of industry-focused system platforms offering highly functional, cost-effective solutions that were previously affordable to only the largest companies. Using terms like "all-in-one" or "industry accelerator," software providers now offer lower-cost products that deliver preconfigured functionality to support specific industry needs.

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- Josh P. Cole, Principal, Manufacturing and Distribution Performance, Crowe Horwath

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