Manufacturers can't predict the future —
especially these days — but they can keep their bases covered with proper planning.
As the status of the United States' economic future remains unclear, a trend is emerging in American business: Companies are reevaluating their financial strategies to not only become more efficient but to simply stay afloat in an increasingly competitive environment.
For manufacturers, this is no different. In Northeast Ohio, 17.7 percent of all nonfarm jobs are in the manufacturing sector, compared to 12.8 percent in the rest of the country, according to a 2002 survey by the Center for Regional Economic Issues at the Weatherhead School of Management at Case Western Reserve University. In other words, the area continues to be very reliant on manufacturers for jobs and products.
For this reason, it is important for local manufacturers to prepare for an economic future that could determine their company's and their region's chances of success.
'The price tag of making mistakes is going up,' says Richard Fleischman, professor of accountancy at John Carroll University. In a slow economy, manufacturers need to recognize that competition will increase, and they need to plan accordingly.
'It's clearly the case that manufacturers are going to have to have a greater
concern with their risk management,' he says.
Keeping Overhead Under Control
One factor that manufacturers need to consider is overhead costs, which can be considerable for many businesses. It is valuable for any company to study how it allocates its overhead expenditures to see if they are efficient, Fleischman says.
The easiest cost-saving ideas may not always be the best, such as when manufacturers look outside the country for cheap labor, he says. This can hurt the local economy by taking away jobs from the area, he says, which in turn leaves people with less money to put back into local industries.
Then again, outsourcing employees may be the best route for some companies, says Oya Tukel, associate professor of management at Cleveland State University. It can be a great money-saving tool, she says, because it allows a company to focus on its strengths.
'You are able to take advantage of someone else's skills,' Tukel says.
Dropping Stock
Excess inventory can drain a company's expenses if it is not needed to serve the customer.
'Too much of U.S. production is production-push,' Fleischman says. Manufacturers cannot afford to have money tied up in inventory, especially with the risk of obsolescence and high insurance rates, he says.
Instead of stocked inventories, Fleischman says that companies should focus on serving a demand-pull market and offer just-in-time product manufacturing.
This will allow the company to move away from excess production and dependence on salespeople.
'If you build an inventory, you're increasing your risk,' says Bill Barnes, senior director of consulting services at CAMP Inc., a Cleveland-based nonprofit organization that helps manufacturers with budgeting, training and allocation of funds. 'Become very effective at producing to customer demand. ... A company needs to be able to make every product every day.'
Of course, manufacturers cannot just wave goodbye to inventory, says Lori Burt, vice president of M&M Business Solutions at Cleveland accounting and consulting firm Meaden & Moore Ltd.
'There are many things to consider,' she says. 'What utilization of our resources do we need ... do we have the right safety stock levels in inventory?'
Manufacturers need to study their products carefully and figure out exactly
what the factory can produce to initiate the highest return on investment, Burt
says.
Keeping an Eye on the Checkbook
Having the knowledge of where your money is being spent is essential to manufacturers as they plan for the future, says Rebecca A. Morgan, president of Fulcrum ConsultingWorks Inc. in Cleveland.
'Focus on what matters: equipment, employees and processes,' she says. Common practices such as equipment maintenance cuts, employee layoffs and across-the-board budget cuts can be a big mistake for companies, many of which do not evaluate the impact of their decisions.
'There is no justifiable reason ... for across-the-board cuts,' she says, except for the fact that they are easy to explain. In reality, companies need to realize that certain departments are going to need more funds than others, where others might be able to withstand a budget cut with less detrimental results.
Barnes suggests that manufacturers consult an organization such as CAMP to
help them initiate a cost segregation study. These studies provide the manufacturer
with a compiled report of exactly where money is being spent, and how financial
efficiency might be improved.
Being smart about it
As business has become increasingly dependent on information technology, companies need to make sure that they are using the right system for their business. A good way to save money on IT is to cross-train employees so that they can operate the system without hiring new people, Tukel says.
'Not every company needs a whole crew of IT people,' she says. 'It can be an area where you can save a lot of money.'
One way to analyze department productivity is to have an Enterprise Resource
Planning system, which is a computer program that helps a manufacturer gain
efficiencies, Burt says. 'Many times, putting these systems in helps reduce
cost.'
Bracing for (Economic) Impact
Manufacturers should develop contingency plans for all situations, because the better plans you come up with, the more prepared you are, Tukel says.
'There are always uncertainties in the economy,' she says. 'You have to have protection for just-in-case situations.'
This is especially valid for mid-size and small manufacturers, where competition can become fierce in a slow economy. Tukel recommends parallel production planning, where production plans mirror budgeting decisions.
It is essential to have an operations strategy that relates to your financial
strategy, because it will serve as a measuring stick for the manufacturer to
decide whether changes must be made. Reactions are almost always more expensive
than strategic decisions made beforehand, Morgan says.
Customer Service
Maintaining product individuality and serving the customer are essential concepts for manufacturers who want to succeed in a competitive environment, says Dr. Charles Watts, professor of production and operations management at John Carroll University.
'Firms get stuck in this mode that their product is a commodity product, and they can only compete with price,' he says. He says manufacturers must make their product unique to the buyer.
Watts has a somewhat different approach to tackling budgeting issues as a manufacturer. Rather than focus on cutting expenses and overhead costs, Watts believes that manufacturers should push to generate more sales to cover existing expenditures.
'Sometimes we get hung up in the accounting mode when looking at costs,' he says. Overhead costs must be paid regardless, so manufacturers should look at how much they should produce to cover those costs, he says.
When preparing for the future, manufacturers need to look at what the customer really wants and make their product satisfy that customer's needs.
'Don't sell totally based on price ... look at what the customer's needs are,' Watts says.
He also urges manufacturers to make their products stand out in the crowd.
'Buyers don't really know what the value of your product is unless you tell them,' he says.
Putting Theory Into Practice
At Spirex Corp., a Youngstown manufacturer of plasticating components for both injection molding and extrusion, vice president Bill White has used a combination of all of these concepts to create a successful business despite the economic downturn.
'You have to look beyond the short term,' White says.
Spirex measures projected future performance to past performance to create a working budget, White says.
'We view [the economy] as a guideline rather than a hurdle,' he says.
Aspects of the company that White keeps in mind as he plans for the future are IT efficiency and machine utilization and efficiency.
'IT has become important for manufacturing,' he says. 'You can use it as a tool, but don't use it as a main and only resource ... you have to have flexibility.'
Overall, White says that the biggest factors for Spirex's continued success are good communication among all areas of the company and knowledge of the market. Every three months, he speaks with all departments to make sure that he is in tune with company needs and wants.
'Any head of manufacturing should be able to walk through their plant ... and know what their key problems are today,' Morgan says.
Adapting and changing to the market's needs is vital for a manufacturer, White says.
'Keep a finger on the pulse [of the market],' he says. 'Stay in tune with what your customer requests.'
Experts agree that one of the best ways for a manufacturer to stay above water is to continually watch the market. Market needs change, and manufacturers need adapt to that change, Morgan says.
'The common mistake is not knowing your markets,' Barnes says. He believes that regardless of the economy, manufacturers must keep planning for expansion and growth to fit the market's needs.
'Resting on your laurels is a problem for some businesses,' he says. 'You
may have the money [to expand] in the good times, but you need to do it in the
bad times.'