MFG Meeting: Improve exports, business strategies

“A growing world still wants much of what we produce. ‘Made in America’ still is desired around the world. Government can’t guarantee, growth, but government can cut down barriers.”

03/07/2011


With the stirring story about how American manufacturing played the crucial role in the rescue of 33 Chilean miners last year, the MFG Meeting in Phoenix in March discussed how better business strategy, better government cooperation and better innovation could drive the continued recovery of the manufacturing sector.

A video produced by The Edge Factor told the story of Center Rock Inc, a Pennsylvania drill manufacturer who developed the drill bits that bore through the rocky hills of a Chilean mine to rescue miners trapped for more than a month. That inspiring story of ingenuity and engineering became the reference point for a number of speakers at the two-day MFG (Manufacturing For Growth) manufacturing strategy meeting co-sponsored by the Association for Manufacturing Technology, the American Machine Tool Distributors Association, the National Tooling and Machining Association and the Precision Metalforming Association.

The topics of manufacturing growth settled on a number of areas, including increasing profitability by managing costs and increasing exports. On the second point, Peter Perez, the U.S. Department of Commerce’s Deputy Assistant Secretary for Manufacturing, encouraged the more than 700 attendees to concentrate on growing exports as an engine for driving manufacturing “I’m proud to say spent last 43 years in the manufacturing world,” Perez said. “I know challenges you face. I spent every day spent my professional life living them, in good times and in bad. I consider myself a manufacturer.

Perez pointed to some positive signs, including a drop in the unemployment rate to 8.9% and growth of 136,000 jobs in February. But he also pointed to the desirability of U.S. goods at a time of a growth spurt for the global middle class.

“A growing world still wants much of what we produce. ‘Made in America’ still is desired around the world,” Perez said. “Government can’t guarantee, growth, but government can cut down barriers.”

He noted several recent initiative in the Obama Administration to improve Small Business Administration lending, the delivery of more than 32% of stimulus-related jobs to small- and medium-sized businesses, and the reduction of many business taxes. He also defended the global free trade agreements as delivering jobs and revenue for American manufacturing.

“Private sector investors proven again to be engines of growth,” Perez said. “The history book confirms 17 free trade agreements created positive trade balance of $70 billion in the last three years. If we’re going to increase exports, these free trade agreements are key.”

Perez also made a strong push for the National Export Initiative, which he described as President Obama’s top priority. “NEI have five main goals: to improve trade advocacy, increase access to credit, remove barriers to sales abroad, enforce trade rules, pursue global policies for growth,” said Perez. “Exports increase jobs,” he added. “In 2008 exports produced 7% of total employment of our total employment, providing $1 trillion in exports and supporting 10 million full- and part-time jobs. We produce $1 of every $5 in manufacturing around the world.

But the U.S. is seriously underperforming as exporter of American goods. The U.S. ranks 13th out of 15 countries in terms of the manufacturing that it exports. “We as a nation ignored trade in the past because so much was focused on domestic growth,” Perez said. “Growth in the world economy today is driven by more by rest of the world than by the U.S. economy. Just 1% of our businesses currently are exporting. That’s 288,000 companies, and of those, 58% export to just one other market. Exporting represents real opportunities for U.S. growth. A 100% focus on North America is no longer viable. As this new global middle class develops, U.S. goods will be high demand. We must reset the way we think about exporting.”

Perez pointed to some improvement, as exports increased 17% in 2009, the largest growth rate in more than 20 years. In order to reach the U.S. goal of doubling exports in 5 fives, Perez said the U.S. needs an average growth of 14.8% over that five-year period.

MFG participants questioned Perez about making things easier for U.S. manufacturers to exports products, and he acknowledged the process needed to be streamlined. “The State Department and Commerce Department working to harmonize export lists. We want to make changes as fast as possible on export controls,” said Perez. “We have be aggressive, we have to be demanding. This is 50 years after the Cold War. Things are different today. We have controls on products that are no longer defense-sensitive. I’m impatient. I will be your advocate.” He said the importance of manufacturing is “a matter of national urgency.”

Business imperatives

In discussing the business side of manufacturing, Dr. Albert Bates of the Profit Planning Group in Boulder, CO advocated for tighter controls on payroll costs as opposed to simply driving more sales to increase gross profit margins.

“AMT members’ return on assets less than 2% in 2009 compared to 7% in 2008, and 5% as a baseline. If you can get to 10% ROA, that’s pretty good. I’d still like to be in the 15-20% If you can get to 15% range, that would be Nirvana,” Bates told the audience. “How do we do better? Only two things you have to worry about:

  1. Improve gross margin percentage. Buy low, sell high. Got to get control of gross margin, or you will never be profitable. I can’t let my idiot competitors set my prices.
  2. Control payroll. That does not say lower payroll. I need to control payroll.”

Bates said reducing expenses has a bigger impact on gross margins than increasing sales “Expense control is more profitable than sales. Expense control has terrible PR, but sensational at profitability,” Bates said.

To drive those controls, Bates suggests a 2% gap between sales growth and payroll growth. “However much sales increase, payroll must increase 2% less. It is extremely difficult. Payroll and sales want to go up together,” Bates said. “I’m going to ask you to unnatural act. I want Sales to go up faster than payroll. If you increase payroll faster than sales, profit goes down despite sales.”

If your competitors drive your pricing, just let them run your whole business.



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