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What The ISM Report Doesn't Say

After years of stable pricing, suppliers of "pieces and things" all now see a reason to reinitiate their prior practice of providing their manufacturing customers with periodic price increase letters. To find out how to better cope with this trend, read on.

The recently released July 2006 Manufacturing Institute for Supply Management Report On Business provided a much anticipated overview of the nation's manufacturing activity as assessed on a national level.

The report describes the United States manufacturing base as "proving to be quite resilient in the face of higher interest rates and weakening consumer spending." It describes how most industrial sectors appear to be growing, despite higher commodity and particularly raw material prices, with many metals hovering at or near record levels.

It all sounds good.

But let's translate the economist's vernacular to see what's really going on beneath the surface of the manufacturing enterprise.

While the report certainly provides a scholarly and useful snapshot of an increasingly complex economy, what it doesn't say may be even more important. The report carefully describes the business and economic characteristics of manufacturers without really addressing a critical element of their health: profitability.

While manufacturers are generally busier, producing and shipping more goods, pressure is continually building on the profit margin side of the equation. Profits are what drive company success, even more than expanding sales, no matter how much emphasis Wall Street analysts put on the need for growth. Profits are under increasing pressure in an odd economy that is suffering from massive price increases in what manufacturing companies have to buy, and distressed pricing in what these same manufacturing companies have to sell.

What had been a relatively quiet and uninteresting economy for a number of years suddenly got hotter. Oil prices gushed, metals glowed hotter, and everyone supplying anything and everything to manufacturers suddenly saw the opportunity to jump on the price increase bandwagon. After years of stable pricing, suppliers of "pieces and things" all now saw a reason to reinitiate their prior practice of providing their manufacturing customers with periodic price increase letters.

Whether you attribute it to supply and demand theory at work, the gluttonous materials consumption of anything and everything by China, unstable and threatening political events, producer strikes in various parts of the world, price manipulation, or just plain greed, dramatic price increases have led manufacturing into a new and more complex phase of business.

"Consuming" companies, represented equally well by the modest-sized manufacturer buying raw materials to build products for eventual sale to the public at a "big box" home improvement retailer, and the manufacturing giant buying steel and the myriad other materials required to build an automobile, are all feeling the pressure of relentless increases in the prices of what they buy, and the equally unyielding pressure of their customers' resistance to price increases in what they sell.

Profitability is the name of the new game. While selling more is important, profitability is the critical element. The old business tale of making up for little or no profit with increased volume has long since vanished. Recently, burdensome legacy costs, dramatic raw material increases, fluctuating exchange rates, and ruthless foreign competition have been the favored excuses. Unfortunately, smart operations executives and CEOs understand that excuses don't cut it.

So what's a company to do?

Short of taking the drastic and highly impractical step of reinventing Henry Ford's early 20th century vertical integration model, domestic manufacturers are going to be faced with uncertainty and likely higher prices for their needed commodities in the future. It's equally likely they will face a buying public that will ruthlessly demand, and get, stable or lower pricing as choices widen and global competition continues to expand.

To regain lost levels of profitability manufacturers need to reinvent themselves into faster, more efficient and more agile entities that focus on efficiently converting the voice of the customer into must-have products that their customers wait in line to buy.

Manufacturers must embrace best practices that promote lean and agile operations, and stress customer targeted value-added work instead of traditional paradigm-based, "feel good" activities. Manufacturing companies also need to turn a critical eye inward to apply Value Engineering principles to identify and remove the design creep that's made their products unnecessarily complex and expensive to produce.

Don't know Value Engineering principles? Call me.

Key words for profitability in the new millennium include lean, agile, quick, pull, short, straight, clear, simple, clean, at-hand, velocity, and value-added. Ironically, words that once defined business dominance and success, such as "we know how", inventory, and capital-intensity are today's kiss of death.

To achieve the profitability that will ensure prosperity, businesses must determine who in their industry does it best, and how can they implement industry-leading practices that they can improve on even further. They must understand their customers and competition like never before, and be willing and able to service their customers better than anyone else. How simple, straightforward, and quick can their operations become? How appealing can their products be? And it doesn't matter whether the product is processing insurance applications or manufacturing cars.

Unfortunately, day-to-day activities can become so tightly woven into the fabric of a business that it becomes difficult, if not impossible, for these businesses to internally recognize the need for change. Intelligent and well-intentioned employees at every level often become protective of their space, function, and what they know, typically to the detriment of their employer, the company's performance, and its customers. The added work and the overly embellished products ultimately drain the company's bottom line.

This is where the techniques employed by consultants specializing in operational improvement, business simplification, and profitability can be of great benefit. Whether under the title of Continuous Improvement, Lean, Kaizen, 6 Sigma, Value Stream Mapping, Value Engineering, or some other creative combination of these headings, the mission is to objectively assess and improve the flow of the business and its products to enhance profitability.

A successful consultant (or an enlightened internal facilitator) will quickly separate what matters from what doesn't. They will identify and promote a critical path process that includes what must occur, and specifically exclude what does not contribute to the high-value, profitable, outcomes.

If your company already happens to be profitable enough, good for you. For the rest, however, take the steps described above. If there's any doubt about how to proceed, hire a consultant.

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