Manufacturing Renaissance


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Manufacturing Renaissance

  1. 1. Manufacturing Renaissance Endeavor Management 2700 Post Oak Blvd. Suite 1400 Houston, Texas 77056 P + 713.877.8130 F + 713.877.1823
  2. 2. Manufacturing Renaissance State of the Industry US manufacturing, after undergoing ‘globalization’ and surviving the Great Recession, has reached a ‘strategic inflection point’ – the opportunity for a ‘US manufacturing renaissance’ and it could mean an opportunity to rise to new heights for some - but it may signal the beginning of the end for others. Currently standing at $1.86 trillion, US manufacturing, if treated as a stand-alone economy, would be the 10th largest nation in the world. According to the Q1 2013 Manufacturing Barometer, released by PwC, 55% of respondents expressed optimism about the 12-month outlook for the U.S. economy during the 1st quarter of 2013, up seven points from the 4th quarter, and only 5% were pessimistic. US manufacturers are expected to increase their share of GDP, from a low of 13% in the past decade, to about 20% within 10 years. For this to happen, manufacturers must invest in new products and innovative technology. Globalization Globalization has had a huge impact – as manufacturers sought to increase access to developing markets and control costs. Companies would move production anywhere in the world in search of materials, expertise, and low labor costs. The result was the globalization of supply chains, as firms around the world competed for business. American and European firms benefited from this arrangement because they were able to purchase materials and labor at lower prices. But it also opened them up to fierce competition. Great Recession Beginning in late 2007 the world entered the worst recession – The Great Recession - since the Great Depression. Lasting officially, from December 2007 until June 2009, the impact on the US manufacturing sector was especially dramatic - production dropped by more than 20%, and nearly 2.3 million manufacturing jobs were lost. The last time the country had so little growth, such high unemployment, and such terrible national finances was at the bottom of the Great Depression. However, in the 1930s and 1940s the U.S. still had the manufacturing and industrial base to build itself out of the downturn. In 2009, due to the “globalization” of the US manufacturing sector no such base existed. Recovery from the Great Recession in the US has been characterized as the slowest and weakest on record. © 2013 Endeavor Management. All Rights Reserved. Page 2
  3. 3. Manufacturing Renaissance Several factors impeded US manufacturers (especially small to mid-size firms) in the early days of recovery. One, they faced a lack of available capital as well as production challenges due to the massive layoffs that had occurred. But perhaps the biggest stumbling block of all was the impact of “off shoring” characterized by mass job exodus and the strong presence of low cost competition as many firms, especially large companies, opted for offshoring. During the recession manufacturing companies felt they had little choice other than major costcutting and adoption of a survival mode mentality. In the years since the “official” end of the recession, companies either tried to go back to ‘business as usual’ and hope that business would return to the way it was pre-recession; or improve their manufacturing base to meet future growth with a more efficient business model. Faced with a shortage of capital and/or limited resources, many chose to re-start or begin lean manufacturing and six sigma process improvement programs. The results of those efforts have been mixed – despite slow but steady growth there have been many peaks and valleys and many sectors remain dramatically behind 2007 volume. Recovery Since the recovery began, US manufacturing production has increased by 5.5%, nearly 2.5 times the overall gain in gross domestic product (GDP). It was the strongest manufacturing performance since the 1990s, while the three percentage point spread over real GDP growth was the largest in over three decades. This achievement was reached by controlling costs and improving productivity. For example, wage costs (hourly compensation) have risen on average by 3.1% per year since 2000, according to the Bureau of Labor Statistics (BLS). That’s much slower rate than the average of 5.0% for 17 other large countries (Display). US manufacturers have also curbed wage growth much more effectively than the rest of the domestic private sector. Productivity has also been impressive. According to the BLS, the US manufacturing sector has averaged annual productivity gains of 5.2% since 2000. That’s near the top of the global rankings, with only Taiwan and Korea ahead of the US. Wage restraint and productivity improvements have combined to reduce US unit labor costs over a decade. By sharpening its competitive edge, the US manufacturing sector has removed a serious handicap in the international marketplace. Indeed, in 2000, only 18% of overall US manufacturing shipments were destined for overseas markets. But in 2012, a record 28% of total US manufacturing shipments were directed overseas, with nearly 58%—a record share—going to emerging economies. In 2000, the emerging-market share stood at 43%. © 2013 Endeavor Management. All Rights Reserved. Page 3
  4. 4. Manufacturing Renaissance US manufacturers are expected to increase their share of GDP, from a low of 13% in the past decade, to about 20% within 10 years. For this to happen, manufacturers must continue to invest in new products and innovative technology. While the worst of the recession has passed and the overall global economy is on the uptick, there remains a fiscally-challenging climate. Manufacturers, especially in the mid-size market, will have to be extremely saavy in how they position themselves to capitalize on opportunities for growth. US manufacturers are entering a new age – a renaissance based on innovation, a shift in how they go to market, emerging technologies and markets. Various industries and individual companies are positioned differently along the continuum from recession to renaissance. Inflection Point U.S. manufacturing has reached a strategic inflection point – when its fundamentals are about to change. Trends indicating this inflection point include: • Move to ‘regional manufacturing’ in order to improve time to market, product quality, reduce costs, supply chains efficiency, and control over the business. • Adoption of the Internet and other technology advances that decrease the costs of innovation, increased speed and increased collaboration • Shift in strategy – away from cost containment and risk management to top-line growth and market expansion Transformation While manufacturing has generally been cited as a consistent bright spot in a wobbly US economy, overall manufacturing productivity (in early 2013) was still 4% below 2007 levels. Why has this recovery not been as strong or robust as those that had always followed a recession? And what can be done to change that? Perhaps the answers lie in the direction most manufacturers have ‘looked’ - internally with a focus of becoming as efficient as possible. While there is definite benefit to be had with that approach, perhaps manufacturers have gained all they can with those types of initiatives and it is time for a fresh approach. The key for manufacturers to “rise to new heights” and be part of a true manufacturing ‘renaissance’ (characterized by strong, sustainable growth) vs a ‘rebound’ – (characterized by erratic, ups and downs in growth) is to transform how they look at the world. Manufacturers must first look externally – to the market – to form an understanding of the changing dynamics in the marketplace. They can then build the capacity to expect the unexpected and to continuously © 2013 Endeavor Management. All Rights Reserved. Page 4
  5. 5. Manufacturing Renaissance reinvent business models and strategies as circumstances change – the keys to long-term, sustainable growth. Renaissance Transformation calls for the leadership at US manufacturers to alter their perspective of how they do business – the next era of manufacturing is about getting closer to customers, reassessing drivers, and taking action in new and creative ways. Further, there is a generational change at the executive level across all segments – this new manufacturing leadership will eschew stock buybacks and dividend increases in favor of longer term growth initiatives. Transforming how they look at the world, manufacturers must focus on the external – at changing customer priorities, an expanding marketplace, and to expect competition from new/different players. We will see a shifting of mindsets industry-wide – the new will be characterized by: 1. “Optimizing Growth” - moving from limiting risk to pursuing expansion opportunities 2. “Strategic Investments” – getting away from cutting costs to driving innovation 3. “Made in the USA” – leaning towards a “build-it-here, buy it here” approach (vs offshoring) No longer cash-strapped - IDC Manufacturing Insights - "Manufacturing companies are sitting on a record stockpile of cash …” - Equipment Leasing & Finance Foundation states – “…in 2013, $1.3 trillion is projected to be invested in plant, equipment and software. …." - this era will be characterized by considerable investment by manufacturers into their businesses. Production challenges will be off-set to a large degree by the rise in advanced manufacturing. This will change the way manufacturers design and develop their products; as well as how they plan, organize, and operate their manufacturing activities. Another factor that will have significant impact is the rise in advanced manufacturing. This will change the way manufacturers think about how they design and develop their products; and, how they plan, organize, and operate their manufacturing activities. The impacts will be felt in capital budgets as businesses will need to invest in new technologies and equipment; and, in talent costs, as jobs in the sector become more sophisticated demanding higher wages for a better educated workforce. Advances in automation technologies continue to fuel efficiencies on the packaging line, helping to bring some previously off-shored production back to the U.S. Lisa McTigue Pierce, - Packaging Digest, 2/4/13 © 2013 Endeavor Management. All Rights Reserved. Page 5
  6. 6. Manufacturing Renaissance Barriers There are three primary barriers to manufacturing organizations seeking to capitalize on the evolving ‘renaissance’. 1. A self-limiting view of the market – seeing market needs from the perspective of their own products rather than through the eyes of potential customers 2. An inverted investment focus – emphasis on cost containment and risk avoidance vs revenue growth and innovation 3. A skills/expertise gap – a shortage of workforce “know-how” specifically in the use of emerging technologies Manufacturers are going to have to become industrial marketers – and transition from a focus on internal processes to a focus on external customer and market issues. What’s Needed To successfully move thru this transformation manufacturers will need detailed insight into markets, customers, trends, performance and the supply chain. It will require new levels of collaboration all along the value chain. Innovation will be a primary driver of the industry’s transformation as well as a key competitive advantage for individual forms. Manufacturers who continue ‘business as usual’ and are slow or fail entirely to make this transition will be at a tremendous disadvantage in the marketplace. About Endeavor Endeavor Management, is an international management consulting firm that collaboratively works with their clients to achieve greater value from their transformational business initiatives. Endeavor serves as a catalyst by providing pragmatic methodologies and industry expertise in Transformational Strategies, Operational Excellence, Organizational Effectiveness, and Transformational Leadership. Our clients include those responsible for: • Business Strategy • Marketing and Brand Strategy • Operations • Technology Deployment • Strategic Human Capital • Corporate Finance © 2013 Endeavor Management. All Rights Reserved. Page 6
  7. 7. Manufacturing Renaissance The firm’s 40 year heritage has produced a substantial portfolio of proven methodologies, deep operational insight and broad industry experience. This experience enables our team to quickly understand the dynamics of client companies and markets. Endeavor’s clients span the globe and are typically leaders in their industry. Gelb Consulting Group, a wholly owned subsidiary, monitors organizational performance and designs winning marketing strategies. Gelb helps organizations focus their marketing initiatives by fully understanding customer needs through proven strategic frameworks to guide marketing strategies, build trusted brands, deliver exceptional experiences and launch new products. Our websites: © 2013 Endeavor Management. All Rights Reserved. Page 7