In November, IMEC co-sponsored a briefing hosted by RSM McGladrey for area manufacturing leaders. The agenda focused on several critical challenges facing the U.S. industrial sector and featured remarks from company leaders, private equity firms and from RSM’s own consulting and financial managers. It was a fast-moving and interesting program.
One portion of the briefing, in particular, caught my attention. Thomas Murphy, who heads the national Manufacturing and Wholesale Distribution Practice for RSM McGladrey, shared the results of an extensive study commissioned by his firm and the National Association of Manufacturing. The report, “State of Manufacturing in the United States,” is packed full of useful data about the strategies manufacturers are deploying to cope with growth, operations, change, cost management and IT. Murphy did an excellent job providing context to a report that is a must-read for any manufacturer looking to get a feel for where manufacturing is heading in this country.
The majority of the 947 survey respondents were from companies in the 50-to-499 employment category, with more than half located in the Midwest. As such, the findings are a representative sample of manufacturing in central Illinois. Many of the key findings were not surprising—high healthcare costs, the need for qualified labor, implementation of proven business process improvement methodologies, etc. Despite apparent downturns in some sectors, overall business remains good for many industries, with 45 percent of the respondents reporting higher gross margins than in 2006.
What stood out to me in the report and in Murphy’s remarks, however, was what the data revealed about the strategies small and mid-sized manufacturers are implementing to grow their companies. Increasing sales was cited by most as an approach they are focusing on. No surprise here. However, a high number of respondents also said that they are reducing operating capacity as a strategy to improve operational effectiveness. As growth and productivity coaches, this dichotomy in the data certainly gave us pause, in part because of a widely-held belief that most mainstream manufacturers prefer to grow through efficiency and cost reduction, or by increasing capacity and filling the pipeline with additional sales.
Almost all companies would like to grow sales and reduce costs. However, if forced to pick between the two, most companies have a bias towards cost cutting. It’s what they do best. It’s in the shop, on the floor. It’s waste removal. The measurements, systems and behaviors we witness every day are driven by this efficiency goal.
One of our mantras at IMEC is to help manufacturers balance efforts on cost reduction and sales. We’re coaching manufacturers to create a “pipeline” of ideas so that several are in discovery, development and release at any given time. The average success rate for new products, services and marketing messages is only 10 to 25 percent, so disciplined development is critical when businesses from core customers erodes.
So, how does one explain the reduction in operating capacity strategy?
“I suspect some companies may need to get more targeted, and focus on the most profitable business they have,” said Ken Owen, VP of Operations for IMEC. “With a downturn in some segments, and increasing cost-reduction and quality pressures some are facing from their large customers, consolidation may be the first step manufacturers need to take in order to even consider growth long term.”
In 2008, what will you focus on to grow your company? IBI