The economy is struggling. Energy and raw materials costs keep rising. Inflation is a serious problem for U.S. manufacturers.
Manufacturing in the United States is clearly facing a bumpy road, according to the 2008 Manufacturing and Wholesale Distribution National Survey by RSM McGladrey.
“Companies’ energy costs are rising, and they are at the point where they can’t pass along those costs anymore,” says Tom Murphy, Executive Vice President of Manufacturing and Wholesale Distribution at RSM. “That leads to reduced profitability, as well as a reduction in orders for equipment.”
The survey, conducted in April, found that companies were not encouraged about the future outlook, Murphy said, though the level of optimism varied by industry segment.
The number of companies saying their business is “thriving and growing” dropped 9 percent from 2006 to 2007, and dropped another 10 percent from 2007 to 2008. Meanwhile, the number of respondents saying their business is declining has tripled in the last two years.
But there is light at the end of the tunnel.
“Exports are surging, and it’s not just because of the weak dollar,” Murphy said. “U.S. products are usually better and foreign countries can be growth markets. To put it simply, we make good stuff here and people want it.”
Those exports can be a strategic opportunity for growth. In fact, Murphy noted that companies that employ a global strategy have upwards of a 4 percent higher gross margin than those who do not.
Companies that have been aggressive with lean and have improved efficiencies in their supply chain are navigating the current economic situation better than others.
Additionally, almost half of the participants are employing at least one green initiative. Twenty-three percent have been asked to adopt them by customers.
“Businesses are also looking to increase revenue by acquiring new clients,” Murphy said. “It’s more expensive to find and court new clients, but companies are more willing to do that because of the economic slowdown.”
And despite the foundering economy, companies are still reporting that they need to hire skilled workers.
“Over 20 percent of respondents are looking for skilled workers,” Murphy added.
As costs are increasing in other countries, fewer companies are making the move offshore. Of the products that are made offshore, Murphy notes that only about one-third are brought back to the U.S., indicating the growth opportunities available in foreign markets.
Those who do opt to offshore often face a backlash from angry Americans that are upset at high-paying jobs going overseas. According to the survey, that may not be the case.
“Companies who go offshore actually hire more people in the U.S.,” Murphy said. “For a U.S.-only company, the hiring rate was 0.8 percent. For U.S. companies involved in offshoring, the rate doubles to 1.6 percent. Offshoring activities increase the need for support services and can make the U.S. operations more robust, driving the need for more workers here.”
Rising raw materials costs still remain a concern, survey participants indicated. Energy is still the bigger issue, but a company’s ability to pass on the extra raw materials costs has slowed. Healthcare is another key issue of concern.
“Everybody is talking about energy and raw materials costs, but we can’t forget about healthcare costs,” Murphy said. “There is a 10 percent increase in healthcare costs this year. Companies are passing more and more of the costs onto employees, and they’re investing in wellness programs and disease management programs. They’re trying, but it remains a problem.”
To help companies handle the increasing financial pressures, there are tax credits and government programs available, which provide an inexpensive way for manufacturers to get money or grants.
“There has been an improvement in the number of companies indicating that they are familiar with these programs,” Murphy said.
He adds that only 18 percent report using government programs, making it an underutilized resource.
“Companies need to make sure they are running their business strategically. They need to make short-term decisions, but they also need to look at the long-term too,” Murphy suggested. “They should look at the global market and maximize their use of tax strategies and government programs, in addition to looking at lean.”
While the current economic situation is affecting manufacturers and consumers alike, by taking a hard look at your operations, as well as investigating government programs and aid, you can protect yourself and put yourself in a better position to ride out the downturn.
RSM McGladrey is a professional services firm providing accounting, tax and business consulting. For more information, visit http://www.rsmmcgladrey.com.