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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)
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Technology Trends
Other technology trends today are also represented in the survey. Leveraging the Internet or other electronic means of communication and collaboration continues to be a priority. In an age of forecasting uncertainty, advanced planning and forecasting solutions are becoming priority investments as manufacturers look to reduce uncertainty related to sales and operations planning.

As a result of strategic restructuring initiatives, some organizations have made wholesale changes to their business models. For example, many consumer product companies have outsourced much of their manufacturing and distribution base and now consider themselves marketing-, customer-, and sales-focused organizations. Such a change greatly affects the focus of their internal enterprise systems. In this case, the traditional manufacturing and distribution functions associated with an ERP solution no longer support their future strategy. More focus is given to demand planning and forecasting as well as investing in customer-focused technology.

Manufacturers are clearly embracing flexible-cost models, which enable them to apply external IT resources as needed without committing to permanent operating expenses. Middle-market organizations are also using external variable-cost support models.

For example, IT providers are packaging services such as server and infrastructure hosting with support models often promoted as "managed operations." Such models compete directly with internal IT support expenditures - which include not only people, but also costs associated with data centers, servers, other hardware, and back-up and recovery solutions. The providers use "shared space" to defray the costs and provide the combined benefits across multiple customers.

Market Pressures a Concern
A variety of market pressures are taking their toll on manufacturers' operations. Heading the list are competition from low-cost countries, the cost of U.S. healthcare, and the cost of raw materials. Nearly half of all the respondents cite these factors as the top market pressures affecting their business today and during the next three years.

There is much less concern about attracting and keeping skilled labor in the current environment, given the surplus of talent available in the marketplace. Manufacturers expect this opportunity to be short-lived, with respondents assuming a future tightening of available employees and subsequent retention concerns rising again in three years.

Supply-chain disruption is a concern for about 10 percent of the surveyed companies. Larger organizations, in particular, are devoting a lot of attention to the financial strength of critical suppliers and to the potential risk to the organization if one or more of those suppliers were to fail. The financial stability of suppliers is a significant concern for manufacturers - one that is difficult to manage, as many suppliers are reluctant to share financial statement data with their customers.

Another area of growing concern is governmental influence, as manufacturers struggle to deal with not only ever-increasing taxes, but also a rising volume of regulatory and compliance issues. The most widespread of these concerns are environmental regulations, such as potential cap-and-trade programs designed to reduce harmful emissions. Manufacturers fear such regulations cut into their profitability as well as put them at a competitive disadvantage in the global marketplace if other countries do not require their industrial companies to comply with similar laws.

International Outsourcing to Grow
Manufacturers report that 18 percent of their products are manufactured or directly sourced abroad, and they expect this number to increase by one third during the next three years. There is no question that organizations see global sourcing as a clear fixture in their supply chains and that it will continue to increase for the foreseeable future.

The use of offshore resources reflects a change in existing supplier-customer relationships. With higher pressures for cost-cutting and efficiency, there's no longer room for sourcing managers to remain in long-term partnerships just because of historical success. We expect to see continued increases in the willingness for customers to switch from existing suppliers to new entrants that offer better prices or terms and still deliver acceptable quality and timeliness.

Looking Ahead
The next three years should be better than the last three for U.S. manufacturers. Those companies that have used their surplus capacity over the past several years to prepare for a resumption in demand will be well-positioned to capitalize on opportunities that emerge; those businesses that have not yet taken steps to become more productive may still have time to do so before the markets for their products return to their former status.  

Note: To read the survey report, go to: www.industryweek.com/articles/the_future_of_manufacturing_2009_20206.aspx

Josh Cole is a principal with Crowe Horwath LLP in the Grand Rapids, Mich., office. He can be reached at 616-752-4274 or josh.cole@crowehorwath.com.

Doug Schrock is a principal with Crowe Horwath LLP in the Indianapolis office. He can be reached at 317-706-2643 or doug.schrock@crowehorwath.com.




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

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