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Sailing in a Storm

“Geoff Forester photograph, courtesy of the New Hampshire Community Loan Fund”.

“Geoff Forester photograph, courtesy of the New Hampshire Community Loan Fund”.

I had a meeting of my CEO Peer Group on Monday.  As a treat to ourselves at the end of our 2012/2013 meetings, we met on the sailboat of one of our members, a 38 foot Catalina.  Moored at an ideal spot in Portsmouth, NH harbor, we boarded quickly and were soon in the Gulf of Maine sailing out to the Isle of Shoals, about ten miles off the New Hampshire coast. The weather was spectacular – a light breeze, calm seas, and sunny, with a few puffy clouds. The forecast was for the possibility of scattered thunderstorms later in the afternoon. No problem. It took about two hours to get out to the islands, and looking back we could see some darkening, but nothing too concerning. We spent the next hour conducting our meeting, enjoying the cool breezes and the slight rock to the boat. Getting ready to go back, we noticed a significant change toward shore. Scattered thunderstorms was not quite correct. A dark mass with some ugly clouds, indicative of a front rather than isolated thermal storms, was covering the shore. Now we were concerned that the weather was going to be much worse than forecast. We decided to head back,  stowing the sails and motoring at full speed. The seas and winds picked up. We headed in toward the coast,  then  turned to run with the storm a little to give us more maneuvering room. By the time we turned toward the coast again, the storm was upon us and we headed through it. The seas rose to six to eight foot waves and the winds exceeded 70 knots. It was more like being in a hurricane than a scattered thunderstorm. Even without the sails, the boat heeled in the swirling wind. Waves crashed over the bow. Our helmsman kept his eye on the seas and the weather, applied his knowledge of sailing and his boat, and got us through in good shape.  When we re-entered Portsmouth harbor the water was calm, and the sun was out. Damage on shore was significant, including parts of a nearby dock which had fallen into the harbor. Our experienced captain said it was the worst weather he had ever sailed.

The business metaphor of this trip is too hard to avoid. Know you business. Know your markets. Look at the forecasts. Enjoy the propitious weather and the profits of a good run. Be prepared for changes. Use your skills to navigate the worst economic storms, surviving with your business and bringing it to calmer times to prepare for another profitable journey. This sounds a lot like the last five years. There couldn’t have been a better lesson for a boat full of business owners.

What Would Small Manufacturers Occupy?

“Geoff Forester photograph, courtesy of the New Hampshire Community Loan Fund”.

We have the Tea Partiers occupying Congress (or at least a part of it) to protest intrusive government. We also have the 99 Percenters occupying Wall Street to protest an intrusive banking and financial services industry.  Although some of us in manufacturing may sympathize with these other protest movements, if we formed a coalition unique to small manufacturing, what would we protest? Government regulations? Government gridlock? Ineffective public education? Predatory banking? Labor unions? Red tape at all levels of government? Globalization? Is there one issue we could all rally around that would help us, or are we too regionalized and diverse to have a common gripe? I certainly don’t have the answer, but you may. Let’s hear from you.

Are You Ready for “The Sixth Wave”?

“Geoff Forester photograph, courtesy of the New Hampshire Community Loan Fund”.

No, I’m not talking about surfing. I’m talking about an economic wave that’s in its early stage of emergence and will drive our economies for the next 50 to 60 years. In the 1920s, a Soviet economist, Nikolai Kondratiev, studied capitalist economies and noticed that they went through repetitive cycles of expansion and contraction. These  “Kondratiev Waves” last about 50 years. He identified the first wave as occurring in the early 18th century. His ideas eventually lead to his execution in the late 1930s, but other economists continued his work, trying to understand the reasons for these cycles. Although this theory is not universally accepeted, it does offer insight into societal, political, and technological changes that have occurred throughout history.  In the 1980s, Cesare Marchetti offered supportive research when he wrote about society as a learning system and decribed Invention/Innovation Cycles whose ebb and flow correspond to these economic waves.

The Kondratiev Wave consist of four periods. As liquidity expands in the initial phase of the cycle, commodity prices rise reflecting the increasing business activity and inflation. As business activity and inflation accelerate, speculators bid up commodity prices due to their fear that inflation will continue to accelerate. After the rate of inflation peaks and starts to fall, the acceleration premium is removed from prices. Thus, commodity prices start to fall despite continued but slowing inflation, a trend called disinflation. At the same time, a change in psychology away from fear and toward feelings of relief and hope induces people to channel the excess purchasing media created during disinflation into bidding up the prices of investment assets such as stocks. Because inflation continues, the wholesale prices that manufacturers charge for finished products, the retail prices that stores charge for goods and the levels of wages that employers pay for labor all continue to rise but at a continously lesser rate, following the rising but slowing trend of business activity and inflation. Near the end of the cycle, the rates of change in business activity and inflation flip to zero. When they fall below zero, deflation is in force. As liquidity contracts, commodity prices fall more rapidly, and prices for stocks, wages and wholesale and retail goods join in the decline. When deflation ends and prices reach bottom, the cycle begins again.

Most who subscribe to the Kondratiev Wave theory identify our current economic situation as being in the last phase of the fifth wave cycle. The authors of The Sixth Wave have suggested that the emerging wave will be powered by the economics and technology of scarcity. Those who can do more with less and reduce waste will prosper. Industrial trends such as Lean Manufacturing, Six Sigma, and Theory of Constraints are all associated with elimination of waste, reduction of variability, and improvement of production velocity. These practices support a Sixth Wave mentality. 

At Graphicast, we recently described our experience with a customer who worked with us to take an expensive assembly of four machined components and turn them into a single, economical casting that was stronger, more rigid, and less wasteful to produce. There are many more opportunities to reduce costs by redesigning and rethinking your needs, than by just making the old design “cheaper” by outsourcing to a low labor cost area. In the long run, the better design is the most productive way to succeed in the Sixth Wave economy.

Good luck getting ready for the next wave. We may not yet be out of the Kondratiev “winter”, but prosperity awaits those who embrace the upcoming “spring”.

The Pain and Promise of US Manufacturing

“Geoff Forester photograph, courtesy of the New Hampshire Community Loan Fund”.

NADCA, the North American Die Casting Association, has just published a great synopsis of the path, and promise, of US manufacturing.  Here it is, in its entirety:

“The common wisdom emerging from the national media frequently notes that the American economy has lost its ability to “make things”…that we lost most of our manufacturing capability to China and to Mexico. The common wisdom notes that we have simply become a nation of hamburger flippers, as well as a nation where we merely trade information with each other.

The common wisdom largely adds the U.S. to other formerly powerful nations on the scrap heap of history, a nation whose best days are behind us. The facts are a bit different.
Job Losses
There is no question that employment losses within the U.S. manufacturing sector over the past 30 years have been massive. We all know a neighbor, a friend, or family member who lost their job in manufacturing, particularly in the industrial Midwest.
Total U.S. manufacturing employment peaked in 1979 at 19.6 million people. That total has fallen consistently and painfully to 11.6 million now…a loss of eight million jobs…a loss of 40% of all manufacturing positions.
The common wisdom notes that most of these jobs left in search of less costly havens, initially Mexico and then China. This is certainly true for a share of the jobs. However, the most important factor leading to lesser employment was major gains in worker productivity…we simply make more goods with fewer bodies. While overall U.S. worker productivity gains have run just under 3.0% annually over the past 10 years, productivity gains in manufacturing have run 2-3 times higher.

U.S. Ranking
It might surprise you that the U.S. continues to lead the world in manufacturing output. We produce more than the Chinese, the Japanese, the Germans, etc. U.S. output exceeds that of China by 40%

It might surprise you that the U.S. share of global manufacturing output, at 20%-25%, is essentially the same as it was 40 years ago

It might surprise you that output per U.S. worker is three times what it was in 1980 and twice as high as it was in 1990

Making a Comeback?
U.S. manufacturing employment actually rose by 136,000 net new jobs during 2010, the first annual increase since 1997. Moreover, the weather-distorted January 2011 employment data saw an estimated jump of another 49,000 jobs, the largest monthly gain in 12 years.

Various estimates suggest that the American economy will add 300,000-350,000 net new manufacturing jobs this year, a rise of roughly 3.0%. Longer-term estimates suggest the manufacturing sector could add one million jobs over the next 4-5 years. Such a rise clearly won’t make up for the loss of two million manufacturing jobs in the Great Recession, but it helps.

U.S. manufacturers have largely thrown in the towel on lower cost, lower skill, lesser profit margin manufactured products such as toys and electronics. At the same time, U.S. manufacturers have moved aggressively toward more complex and expensive goods requiring specialized labor, including health care products, jet fighters, computer chips, and industrial machinery (The Associated Press).

Outsourcing of Jobs
American companies have continued the exodus of former American jobs to other less costly parts of the world, although the pace has slowed. The rationale has also changed somewhat.

Hundreds of American firms had sent production and jobs to China, with products then shipped back to the U.S. to be sold. The current environment finds more and more of that production sold within China, or within other Asian nations. This change is identical to that of major foreign automakers who build billion dollar facilities in various communities within the U.S., with the intent of selling those cars not back home, but within the U.S. market.

“Onshoring” of Jobs
One very favorable development within the U.S. manufacturing sector involves decisions by more and more American companies to bring back production and jobs previously sent to China, Mexico, and other low cost production locations. Companies such as Ford, General Electric, and dozens of others have seen the costs of operations, particularly wages, climb dramatically across China while shipping costs have surged.

Issues of shoddy products and the theft of intellectual property have blackened the eye of outsourcing. The reality of too many midnight telephone calls and frequent trips halfway around the world to deal with problems has also taken its toll.

Another painful reality faces companies within the U.S. and from around the world with an interest in setting up production in China. The unspoken but understood fact that a company must typically give up its most sensitive trade and technological secrets to the Chinese in order to get in the door, as one might expect, muddies the water as well.

Many foreign companies have set up shop in China, only to then see products nearly identical to their own soon marketed by Chinese competitors, at substantially lower prices. The laundry list above has provided solid incentive for additional onshoring of jobs in coming years. Drug cartel violence across Mexico has also led hundreds of American firms to reconsider doing business south of the border.

Similar issues are at play in the white collar world of back office operations and call centers, where the American job shift to India has drawn great concern. Sharply higher wage costs and higher levels of worker turnover (note: these people are working during their nights to handle our daytime phone calls) have also led to some jobs coming back home. The emerging issue of cloud computing will also impact white collar outsourcing decisions.

“Rural” Outsourcing
More American companies based in large metropolitan areas are taking advantage of “outsourcing” some of their business operations to rural American communities, especially those where a university might be located. The rationale? Access to talented people with lower wage and housing costs, similar operating hours, and a common language come to mind.

Down the Road
The U.S. still accounts for 40% of total world R&D spending. We lead the world in science and technology, although that lead is slipping, according to the Rand Corporation.

Despite more recent successes, major challenges remain. Millions of lost jobs will never return. At the same time, ninety percent of manufacturers report having difficulty in finding skilled production workers. In addition, a large share of the manufacturing workforce will retire sooner rather than later, with the average U.S. manufacturing worker being 50 years old (The Agurban).

Greater cooperation between local universities, community colleges, and high schools to provide quality training for local manufacturers remains a challenge largely unmet. Parents and educators need to promote a career in manufacturing as a highly desirable outcome for tens of thousands of new graduates.”

Many feel “uncertainty” is the new normal

“Geoff Forester photograph, courtesy of the New Hampshire Community Loan Fund”.

For many companies, the past was prelude to the future. Response trends could be developed for a host of inputs, and planning was a tedious, but often reasonably accurate corporate exercise. Fewer companies feel this way as we work our way out of the recession. Many now are trying to plan for uncertainty. This can be an expensive undertaking, as contingency planning ties up time and resources. But there may be no alternative for many, as being caught off guard is more risky than planning for numerous alternatives. A recent survey by Tompkins Associates, “Uncertainty is Certain – Perceptions of Future Risk on the Rise” highlights the thoughts of many global companies are they try to find their way into the future.

Manufacturing in 2011 – Up, Down, or Sideways?

“Geoff Forester photograph, courtesy of the New Hampshire Community Loan Fund”.

Although there are many polls out there indicating the manufacturing pundits’ opinion on 2011, it seems we’re all still guessing about the future. Some say up, but slowly. Others say up and steady. There a few saying up, but volatile. From our view of the world, I think I will agree with the last group. We can clearly show an upward trend beginning in June 2009, but the path is anything but steady. Month to month can fluctuate +/- 40%, but year to year is measurably up. It’s a tough way to plan and execute. Is this the new normal, or will we finally settle down to some stability, perhaps with a new landscape? We’ll keep on the lookout for any clues.

Manufacturing Capacity Utilization is on a Steady 40 Year Decline. Will This Recovery Buck the Trend?

“Geoff Forester photograph, courtesy of the New Hampshire Community Loan Fund”.

In looking at manufacturing capacity utilization trends over the past forty years, a sobering realization emerges. As expected, capacity drops during a recession. But for each recession, the ensuing recovery brings manufacturing to a capacity level lower or no greater than the peak preceding the recession. This trend continues, recession after recession. From a high of 89% back in January of 1967, capacity utilization is now at about 75%. In the last ten years, the highest it’s been is about 82%, in November of 2007. At the bottom of the current recession, capacity was about 68%, the lowest in the past forty years.

A very high capacity utilization rate can fuel inflation and lead to late orders and lack of agility; it is not necessarily a good thing.  Surprisingly, a low utilization rate can be beneficial. Companies can be more responsive and agile to demand because they have the excess capacity available. However, this works only if you recognize the opportunity and have the means to put the capacity to use – cash for growth and skilled labor to run the capacity. For many small manufacturers, both are currently in short supply.

It will be interesting to see if US manufacturing can use the current low utilization rate to increase market share and improve agility. If it can, it will be bucking the trend of the last forty years. Such a reversal of the past would indicate that manufacturers are wisely looking at their market opportunities  and manufacturing abilities, not just blindly playing a numbers game of cost reduction and capacity abandonment.

Governments – Stop Trying to Pick the Winners. Give Manufacturers a Stable Foundation.

“Geoff Forester photograph, courtesy of the New Hampshire Community Loan Fund”.

Have you noticed the recent headlines on manufacturing? President Obama has  been all over the Midwest, touting the latest  high tech industrial start up. Senators and congressmen are becoming outspoken advocates for revitalizing our manufacturing sector. State and local governments are falling all over themselves offering  incentives for companies to relocate to their particular area. Everyone wants to get in on the high tech or green bandwagon. Government officials love all this stuff. It makes great press. Unfortunately, it’s not great  industrial policy.

Other than support for basic and applied research, governments have a terrible record in picking market viable technologies to support. These decisions are influenced by political winds that usually overlook the defining economics of an industry. Let the markets take the risk, not the taxpayer.

Some will argue that start ups are the source of most of the new jobs and that we need to support start ups to get out of the recession. However, a company that is already established and has a marketable product can add jobs much more efficiently if there is a place in the market for their increased output or new products. Indeed, conflicting analysis of Census data makes it easy to support either side of the argument about which firms create jobs – start ups or existing companies.

In the August 23 & 30, 2010 issue of  Newsweek , an essay by three authors from McKinsey concludes that instead of trying to pick winners, government should focus on getting the basics right – stable laws and legal systems, efficient infrastructures,  strong competition within sectors (no subsidies), transparency in regulated sectors, and providing workers with on-going education and skills needed for the 21st century.

Instead of a local official having a press conferences with a high tech entrepreneur who will create four or five jobs in the next year with his $1 million government grant, how about a press conference with a company that can create four or five jobs this month with a stable business environment and a $10 thousand training grant. It’s not as sexy, but it’s a lot more effective.

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Taking Innovative Casting Technology to Your Bottom Line™

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