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Manufacturing in Northeast Ohio: Where We Stand, Where We’re Headed
The document discusses the state of manufacturing in Northeast Ohio, covering topics such as economic updates, innovation benefits, and challenges in hiring qualified candidates. It highlights the importance of research and development (R&D) tax credits and the need for innovation in product creation and processes. Surveys indicated trends in economic expectations, innovation methods, and challenges in workforce recruitment.
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Manufacturing in Northeast Ohio: Where We Stand, Where We’re Headed
- 1. Manufacturing in NortheastOhio Jon Shoop, CPA April 29, 2019 Where We Stand, Where We’re Headed
- 2. 2 Objectives / MattersCovered General industry economic update Innovation and its benefits R&D tax credits as a financing source Labor struggles and employment avenues
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- 4. 4 Kahoot #1 Which doyou anticipate? 1. Economic expansion 2. A flat economy 3. Economic contraction 4. A recession
- 5. 5 Survey Says… 35% 48% 12% 5% Economic expansion Aflat economy Economic contraction A recession Which do you anticipate?
- 6. 6 Kahoot #2 How isyour company innovating products? 1. Through new product creation 2. Through new/improved processes 3. Entering New Markets 4. Not actively innovating
- 7. 7 Innovation Today 83% New products 56% New/ improved processes
- 8. 8 New Product Innovation Investingin new product innovation can have several benefits such as… • Helping to diversify product offerings • Entry into new markets • Addressing seasonality or a potential expiring Intellectual Property (IP) in your business • Helping determine the “value” of your products which may impact/inflate selling price.
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- 11. 11 Industrial Internet ofThings (IIoT): Success Story
- 12. 12 Money Money Money $$ $$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
- 13. 13 Kahoot #3 What percentageof your sales do you expect to invest in R&D? 1. 0-2% of sales 2. 3-5% of sales 3. 6-9% of sales 4. More than 10%
- 14. 14 Survey Says… 43% 34% 12% 9% 2% 0 -2% 3 - 5% 6 - 9% 10 - 20% More than 20% What percentage of your sales do you expect to invest in R&D?
- 15. 15 R&D Questions forYour Business • Was a Form 6765 filed with your corporate taxes If so, good your organization is taking the credit • Whether you have or have not taken the credit, your advisor should be asking the following annually to maximize the credit: Did your organization produce trials/samples of new products? Did trials/samples require new processes? Did you automate or streamline a process? Did you design tooling, jigs, molds, etc.? Did you conduct testing for certification of new products?
- 16. 16 The Final Kahoot Whatwould you say is the biggest challenge to hiring qualified candidates 1. Lack of work ethic, commitment and interest 2. Lack of needed skills or education 3. Lack of applicants for positions 4. Inability to pass a drug test
- 17. 17 Survey Says… 33% 30% 24% 13% Lackof work ethic, commitment, interest Lack of needed skills or education Lack of applicants for positions Inability to pass a drug test What would you say is the biggest challenge to hiring qualified candidates
- 18. 18 It’s Not Me…It’s You 40% of survey respondents actively engage with high schools and/or vocational schools
- 19. 19 It’s Not Me…It’s You 82% Use employee referrals to fill open positions 28% Use trade / training programs
- 20. 20 It’s Not You…It’s Me 60% 38% 37% 34% 31% 30% 29% 23% 6% Increasing wages for current workers Rotating workers to different positions Offering more on-the-job training Increasing rewards Offering more coaching and mentoring Offering better benefits and compensation to retain employees near retirement Offering more flexibility to retain employees near retirement Promoting sustainability Reducing drug testing IN TERMS OF RECRUITING NEW EMPLOYEES, WE ARE:
- 21. 21 Recap General industry economic update Innovationand its benefits R&D tax credits as a financing source Labor struggles and employment avenues
- 22. 22 Want More Information? JonShoop, CPA Partner, Manufacturing and Distribution Group (440) 449-6800 jshoop@skodaminotti.com
Editor's Notes
- #2 I wanted to thank everyone for coming, the audience is full of friendly faces, so again, thank you for taking the time out of your day to spend it with me and my team and is everyone ready to talk about MFG in NEO? I sure am!!!
- #3 As we have in the past, we partnered with MAGNET and Manufacturing Works to survey over 500 individuals nationally of which comprised over 375 survey responses from NEO. Our survey had over 40 questions, and I have decided to focus on a few of those questions today. As we see our matters covered today, we’ll start with a macro update on the economy, stroll over and through innovation, talk a little “technical accountant” via R&D tax credits and conclude with a different spin on Labor struggles and some things your organization can think about when addressing labor struggles.
- #4 As we mentioned at check-in, we are going to be using a Kahoot to poll the audience on the four matters we intend to discuss today, with the hope that we could “check the temperature” in the room as it relates to the four matters discussed today. The technology/website we are going to use is Kahoot. So please open up the browser app on your smartphone (for example Safari on you iPhone) and type in the web address “kahoot.it” as you see it displayed on the screen. When the website launches your smartphone screen should look similar to the graphic on the LEFT of my presentation. In the GAME PIN area, enter the numbers you see on the Slide Presenation. After you click enter it will ask you for a nickname, and you have the freedom to type whatever you want in there…there is a potential for the names to be displayed during this presentation, so if your nickname is something like “Shoop’s silly socks” we’ll all get a good laugh if it is displayed on the screen. Is everyone logged in and ready…looking for head nods!!! Good, let’s tackle our first survey question…
- #5 This question was question #39 in the survey and I wanted to poll the audience today and compare those results, real-time, to the survey respondents from 3 months ago to see if there is a change in sentiment? Survey Says… JON TO WRITE DOWN answers
- #6 In front of us our the results from our survey. And to me it isn’t surprising that we had a majority of responses indicate “flat economy.” The survey question specifically wanted to know about 2019, and now that we are 4 full months into 2019, I am glad to see our Kahoot results telling the story they are telling. My thoughts on why these results “FEEL” right: 1.) I think there is a general cautious optimism about the economy, which is a great thing yet much like a game of thrones episode, we may feel something bad is going to happen 2.) I also think the survey respondents possibly looked through two lenses when surveyed. A.) Internal, they answered this question from the perspective of their business and how they feel about their business expansion, prospects, etc.; and B.) External, they answered it based on news, trends, general skepticism, etc. they are hearing about external to their Company. 3.) If I could skip trying to guess at the internal perspectives, I would like to focus on a few macro factors on why this makes sense to me. A.) economic expansion is generally measured through consumption, business spending and trade but the speed limit, or governor per se, to those measurements is productivity and labor growth which is a supply side metric. B.) With slow/limited labor growth, our macro growth continues to track towards 2% annually. So to me, that means we are growing, not rapidly and survey responses that expect a flat economy align with this sentiment C.) Secondly, if we make it to June 2019 without having our economy fall off a cliff, the United States will be in the longest expansion in US history since before the CIVIL WAR! I look at that statement to mean, we are skeptical growth can continue and we are waiting for a re-trench. 4.) My last point on all of this is, what about tech improving productivity, can’t that speed up the economy? A.) Tech, generally, makes our lives easier and correspondingly can make us more productive, but tech doesn’t increase prices which is how growth is measured. B.) For tech to have an impact on macro economics, that tech, needs to raise prices, or enable it’s benefactors to raise prices…what is the one thing we know about tech…it probably lowers prices at a macro level IS EVERYONE READY FOR OUR NEXT KAHOOT??????
- #7 Specifically this question was #9 in our survey and again, I would love to see the current sentiment on the topic? Survey Says… JON TO WRITE DOWN answers
- #8 Let’s see how the Kahoot aligned with our survey respondents. The top two responses in our survey where that: 1.) 83% of Companies were innovating their products and 2.) 56% of Companies were innovating their processes I would like to explore these two concepts in greater detail.
- #9 The survey speaks towards NEO companies innovating products, and specifically new products. Investing in new product innovation can have several benefits to name a few as seen on the screen: I would like to talk through the last bullet on the slide such that your teams are thinking about this concept when they go to market with products, but especially new products. 1.) Increasing sales price has transcendent benefits to a Company, and a new product launch is the perfect time to address sales price of that item as well as look at your product lines in an effort to increase price. 2.) Increasing sales price is immediate big dollar impact to Net Income and company profitability. 3.) Often times manufacturers focus what they can control, and that is their own “house” per se, and may not look at opportunities to increase pricing, what better time than with new products. If you’ll bear with me, I would like to demonstrate why increasing sales price is so impactful to an organization…. Take a small manufacturer that operates at a 5% net income level, a 1% increase in sales price will increase net income by 20%. Let’s add some math to this: $10,000,000 million in sales with 5% Net Income is $500,000, if I increase sales price by 1% I will generate another $100,000 in net income since that is the only variable in this concept. Sales can be a tough one to sell to a sales team, and manufacturers also like to focus on matters they can control…so now lets turn the page to innovating process:
- #10 More than half of the survey respondents said they were innovating products through new/improved processes. I see this constantly with my clients, 1.) they invest in LEAN/Six Sigma, 2.) they invest in training and development; 3.) they invest in new machinery and equipment to facilitate a new product or innovate and existing process. Why do they focus their time, energy and resources here…I believe a component of that is because it is something they can control. If they can lower their cost it will improve productivity of the entity but at a slower pace and a less impactful relationship than sales, but again, it is within their control. When I speak to increasing sales price or reducing costs in your organization, I don’t put them in mutually exclusive buckets, since they are the ying and yang of business both efforts should be part of your growth strategy… so now let’s talk about DATA
- #11 Only 8% of our survey responders said that their Company has used Big Data or predictive analytics to make decisions. Our question asked about Big Data so I am not certain how much, if any, the results would changed if “Big” was left off, but let’s explore the fact that production data may not be used in your organization to its fullest potential. We are going to explore it in a case study/client story…
- #12 Some of you may have heard Bowden’s story about how the implemented an IIoT solution to help 1.) boost productivity in their production environment, 2.) be much more responsive to maintenance and idle machine time and 3.) improve scheduling For those that haven’t heard the story, Let me tell you a little about the Bowden and their IIoT solution…Bowden is a CNC machine shop in Lake County that runs about 46 separate CNC machines… Bowden’s President was looking for something to help with his lower machine time utilization and production inefficiency, so Andy McCartney looked towards and IIoT solution to monitor his machine run times. To test the pilot initiative, Andy installed electrical load sensors on the power source of 12 of his CNC machines. He let those sensors collect data for 2 weeks without telling his staff so that he could understand the data being collected and determine how he would analyze the data being captured. After the two weeks were up, he told his ops team members that they were monitoring sensors on 12 of their CNC machines: As a result of the monitoring they rec’d a 20% productivity bump, which has normalized to about 13% increase in productivity but that amount now serves as the new standard. What about maintenance or scheduling? For Scheduling: Bowden runs three shifts and looks for jobs/customer orders to be completed across multiple shifts, another benefit of the up time/down time reporting is that the system reports this data to each shift manager before the shift begins via email, which enables the incoming ops crew to assess the productivity/progress of jobs as they are walking in and shift/pivot where the days ops will dedicate their time to finish a job or perform maintenance which helps with scheduling. For Maintenance- to be clear, the technology isn’t helping with predictive maintenance, but one of the incidental benefits of the system reports being sent after each 8 hour shift is action. Those reports have compelled his team to be assistive off the clock to help the team on-shift since the off the clock managers can see that certain machines are down for maintenance or idle for extended period of time, which has compelled human inquiry from those managers to support the on-shift team members. This usually manifests itself on weekend and second shift. On the slide you’ll see a Flat Screen TV which is showing machine numbers on the left and up time, down time throughout the day. There are now 46 machines hooked up to the system, and 10 of which are shown on the screen every 5 seconds. I acknowledge that there is a lot of red on the screen, but that was more a factor of when I took the picture and when the Flat Screen was cycling through those machines, but this flat screen serves a visual aid/reminder to the ops folks of how the shift is proceeding. Now that Andy has gotten some productivity increases in his shop floor as a result of this technology, he is now looking for other uses of the same data. And wouldn’t you know it, Andy has taken this data and begun working towards a value proposition with his customers. Currently Andy is looking to Guarantee a delivery date when he takes an order all made possible through tracking machine up time and down time. I would argue that if he is going to guarantee delivery dates, he’ll have an opportunity to sell this value with higher sales prices since they selling this value to the customer. Why does this work for Bowden, Low human interaction with the technology, system emails sent to the incoming shift supervisors, shift/productivity metrics compiled, etc. etc. The challenge I pose to the group, is to look for opportunities to bring in technology to educate your workforce, analyze production data, share the data with those responsible and realize benefits in productivity. Then after the data has normalized, look for other business opportunities for that data, for example Bowden is now looking to use this data and begin “guaranteeing delivery dates” to customers which is value they believe they can sell. The parts I like about this 1 example, is they are using technology to both improve processes and create customer value (remember that 1% sales price increase analogy) which are tremendously impactful to any organization. Alright, I’m off my soapbox and the natural question is cost? Or Time is money? So let’s talk about that
- #13 We have spent a lot of time talking about product and process innovation, all of which costs time and money and time is money, so what if you could get some of that money back, well you can…It’s called the R&D tax credit, but first let’s start with another Kahoot…
- #14 Discuss the results while looking at the Kahoot screen (Shoop to write down %)
- #15 The R&D tax credit is a Federal tax credit that offsets income taxes paid in the period the credit is taken. I look at the R&D tax credit as an additional benefit of an expense. 1.) certain expenses paid by the company can qualify for the R&D tax credit, so before anyone entertains taking the credit, they have already received an ordinary deduction on their tax return for paying for the certain expenses (call that a 20-30% savings on those expenses) 2.) Now the R&D tax credit takes those expenses, puts them through a calculation and in rough numbers can generate a tax credit valued at 10% of your spend. So let’s walk through an example and leverage the survey results to put this in perspective. In a $10MM company 2-5% of revenue is $200K-$500K spent on R&D which could mean their tax credit could top $50K. Again, this credit is on dollars your organization is spending anyway so don’t leave it on the table, since the R&D tax credit could leave enough money on the table to hire another employee or expand product innovation. I would also ask the audience to consider that far more expenses can qualify for the R&D tax credit than you may initially think…
- #16 Since we have given the audience they slide deck we wanted this slide to serve as the leave behind so that each of you could look back at prior tax returns to see if the credit has been taken or not. Also this slide has some basic question you can use to reflect on your organization (or your clients organization) to help them find extra dollars from business activities they are doing already. 1 additional take away is that if you and an Ohio based business, not only is R&D help at the Federal level with the IRS, but currently you can offset your Ohio Commercial Activity Tax with your R&D tax credit, so much so that it may eliminate your Ohio CAT obligation. So we talked through general economics, product and process innovation and how the R&D tax credit can be used as a financing source…now lets talk for a little while on labor…
- #17 Here is our 4th and final kahoot (Shoop to write down %)
- #18 Question 31 in our survey has the full list of results, but what we see on the screen here is the top 4 responses as a percentage of the top 4. I would like to approach hiring and the challenges associated with it from a different perspective. In looking at the survey results, 63% of the respondents implicitly are saying my biggest challenge is NOT receiving applications, they are not saying I can’t find anyone for my posted jobs. I interpret the responses to mean applicants that do apply, DO NOT have the rights skills for the position or fit in the organization. This angle is based on the results that only 24% of the survey respondents noted that the applicant pool was lacking…LETs TALK a little bit about candidates though…
- #19 So as we talk about finding qualified candidates, I’d be remiss if I didn’t mention our trade and vocational schools as a pipeline/feeder. To put into context schools in this space…Cleveland we have Max Hayes, in Lake County we have the Auburn Career Center. Less than half of the survey respondents affirmed that “when it comes to workforce, we actively engage with high schools/vocational schools.” this response was the 7th most popular choice and I felt it was worth mentioning/reminding the audience about this feeder system. I know our friends at Jergens leverage Max Hayes for some of their apprenticeship programs, heck I read articles/news releases about it, and my guess is that they are in the 40% listed here. Could this be a competitive advantage for your organization or client base? I think there is some opportunity for your organization… So we spoken a little bit about access to candidates on the past couple slides, but what about looking inward to your organization…
- #20 We discussed access to candidates over the last few slides now lets touch on how your organization recruits and retains your talent Q21 in our survey noted that the most common path to recruiting new workers/filling open positions was employee referrals. I like this trend, as the current employees are probably both your biggest cheerleaders and correspondingly could be your biggest dissenters. If both of those statements are correct, I want to see employees as cheerleaders as much as possible. In my eyes, to achieve that , I would 1.) challenge every organization to onboard and retain their talent with the most cutting edge technology afforded, 2.) invest in training for the individuals to hone their job skills and 3) Further develop their leadership and collaboration, whether for promotion or cross training. Additionally, when I look at the 28% metric on the slide It signals to me that there are/is significant apprenticeship/intern opportunity in Northeast Ohio, which may be another pipeline, or an attractive differentiator. Let’s take my last bullet of further development of leadership and collaboration…what if we instituted an apprenticeship program, whereby we ask our ops folks (and not just the managers) to train and develop those co-op with your organization. This both asks certain team members to stretch in their role, and also benefits the candidate pool as your organization is targeting individuals with less experience and more upside…they can be trained. I am viewing the labor shortage as an opportunity to improve your organization to make your organization an employer of choice, and some of these concepts may do just that….
- #21 Lastly…as we are working towards becoming an employer of choice, as highlighted in Question 32 of our survey…a significant amount of responses relate to compensation and benefits… Top answer: 60% are increasing wages for current workers Mid-pack answers: 34% are increasing rewards, 30% are offering better benefits and compensation to retain 3 of the top 6 essentially deal with money…I would challenge the audience to increase the market exposure of your company, and the way your Company is “different” heck maybe even a service industry business would be a good fit to model off of… 1.) Internship/apprenticeships are a good well to create exposure and tell your story 2.) Does your company host plant tours, again more exposure 3.) Does your Company think personality assessments ala Birkman could benefit existing working relationship amongst employees which in-turn will help spread your story through word of mouth. If you’ll indulge me I’ll speak a little bit about Birkman and what it has done to our organization. Every employee, even interns, take a Birkman assessment whereby their results fall into 1 of 4 categories (similar to a DISC profile). The cross section of those four categories is people versus tasks and Extrovert versus Introvert. My reason for sharing isn’t so much that our thing is the right thing, but it is more about how we use it. Every person has their “Colors” prominently displayed on their office doors, in their IM profile, and in internal emails. Often times when we are walking folks through our office we’ll get the question as to what those “colors” are on everyones work station and it generates a conversations, demonstrates that we invest in our people, even interns since we want to know how to work with each other better. Again, it is a differentiator for us, maybe try it on for size. As I close out the workforce section I feel it is worth mentioning the benefit we have here in NEO is that we are close knit community which can accelerate the figurative “bridge building” to hiring candidates and retaining employees. An investment in your people outside of comp. and benefits would be a game changer in your recruitment and retention, based on these survey results. So let’s recap
- #22 We spoke about the general economy, the benefits of innovation, R&D as a funding source and possibly a different spin on addressing labor challenges. Questions?...