Josh P. Cole, Principal, Manufacturing and Distribution Performance, 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:
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.
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
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
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.
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.
Josh Cole is a principal with Crowe Horwath LLP in the Grand Rapids, Mich., office. He can be reached at 616-752-4274 or firstname.lastname@example.org.
Doug Schrock is a principal with Crowe Horwath LLP in the Indianapolis office. He can be reached at 317-706-2643 or email@example.com.