My dad was the first to call when I got home. He’s a retired history professor, so he usually doesn’t have that much input on my job-related travels, but last week was different. I had driven to Advanced Technology Sales & Service, a Mitsubishi dealer in Greensboro, N.C. ATS held its grand opening of its new facility on May 25, and Joe Gibbs gave a speech for the event.
Did I mention Dad is a lifelong Washington Redskins fan?
As it turned out, so were many fabricators who turned up for the event last week. The former NFL coach heads Joe Gibbs Racing (JGR), an organization that has had a partnership with Mitsubishi since 2005. JGR now has Mitsubishi laser cutting and EDMs on the shop floor in nearby Charlotte. More racing teams, including JGR, are bringing manufacturing processes in-house, and for good reason. Race cars are a little like consumables used in manufacturing. Each race puts serious wear and tear on many parts, and outright destroys others.
At the end of the day, communication wins races. The driver tells engineers and other team members how the car feels and responds, and then engineers and shop floor machinists and fabricators work together to design and fabricate new components in a matter of days, in time for the next race. As Gibbs and his son J.D., president of JGR, explained, this is why choosing the right people--those who can communicate and work effectively as a team--is so vital.
Driving back from the event, I listened to an NPR program, “On Point,” which focused on a report from Boston Consulting Group that claimed the U.S. may experience a manufacturing renaissance in the coming years. It was an opportune time to talk about manufacturing: On May 24 in Chattanooga, Tenn., Volkswagen officially opened its first manufacturing facility in the states since the 1980s.
The host and other talking heads seemed to focus on the labor rate issue. They also questioned a few manufacturing executives who said they were hiring entry-level workers at $7.50 to $14 an hour. The host and several others then asked whether the U.S. should have these jobs. After all, shouldn’t America want more jobs that can help build a stable middle class? How can these jobs do that, offering only $7.50 an hour?
The executives retorted, saying that these are entry-level jobs, usually in the assembly area. Skilled jobs paid more, and employees are given the chance to climb the ladder to higher pay that can support a middle-class lifestyle. When it comes to those starting wages for low- or unskilled workers, they said if they paid more they just couldn’t compete in a global marketplace.
They touched on some good points, including manufacturing’s ripple effect--how, unlike retail, manufacturing can really support entire communities by requiring a network of parts and service suppliers, most of which employ workers that make far more than minimum wage. Susan Helper, an economist at Case Western Reserve University, may have provided some of the best insight. She said that outsourcing overseas may lower direct labor costs, but it may make other costs rise significantly, such as rework cost and management time; it costs more for managers to visit a plant in China than one down the street.
The program generated plenty of responses online, and one from a Milwaukee foundry and machine shop intrigued me: “We lost 60 percent of our business in 2009 and reduced our workforce by 60 percent. Combining lean manufacturing, we are nearly back at 2008 levels of sales, but doing it with 40 percent fewer workers. We pay top competitive wages and have trouble finding qualified machinists and foundry workers. Our customers have come back to us from offshore suppliers due to the desire to reduce inventory levels. Manufacturing is coming back.”
He was the first to mention inventory levels in the comment string, and he also happened to have one of the more optimistic outlooks. I think there’s a connection.
During all the talk about a manufacturing comeback, inventory rarely makes it into the conversation, even though it may be one of the most important factors in bringing manufacturing back stateside. Direct labor is just one piece of the manufacturing cost pie. A bigger slice is material, and not just the cost of buying it, but the cost of holding it.
Consider the Fabricators & Manufacturers Association’s 2009 Cost of Doing Business survey. In it, the most profitable companies reported direct labor cost ratios (labor costs divided by plant-produced sales) of 20.7 percent; low-profit firms had a lower labor cost ratio, at 18.8 percent. Meanwhile, materials costs ranged from 33 to 40 percent of overall sales. However, both labor and material costs really weren’t dramatically different between highly profitable and money-losing firms. A key factor was how long they held that material.
Yes, less inventory helps cash flow, but it may do much more. According to the survey, those that held on to that material (inventory turnover) for less time experienced dramatically higher profits. Companies that held on to material for a median of 53 days made an operating profit of 17 percent, while those that held on to material for 100 days or more were losing money.
Idle material is like extraordinarily expensive, skilled workers sitting around on the clock doing nothing. Time is money, and the more time those materials sit on racks, the more they eat away the company’s profits.
To be sure, stateside OEMs are looking to nearby suppliers to provide high quality parts. But they’re also looking for suppliers to provide those parts in smaller batches, quickly and more frequently. If these OEMs can reduce inventory levels, they can improve cash flow and improve profits.
That’s not a bad way to grow a business. And as luck would have it for U.S. manufacturers, for this business model, supplier proximity matters.