On heels of the Commerce Departments Section 232 Report, the Trump Administration indicated they will impose aluminum and steel tariffs on those imported materials: 25% on Steel and 10% on aluminum. As written about previously, there are several concerns about the basis of the section 232 report and its assumptions of how steel is a national security concern. With the steel tariffs imminent, it is time to move from critiquing the report to considering what effects this may have on business and in the market. What situations could this protectionist move cause? How will interest rates affect consumers of steel? How will steel sourcing change the trucking market.

Inventory

Inventory costs will increase, a concern for manufacturers that fund their inventory through revolving credit. This will decrease how much inventory they can effectively carry or it will impede them from using their credit line for other needs, such as unplanned maintenance. With the Federal Reserve expected to increase interest rates three times this year, that will amplify the inventory challenge for manufacturers by making it more expensive to service their credit facilities.

Challenge: Cost Increases

Response: ???

Raise Prices?

When input costs increase, particularly raw materials, there are a few options in response. Manufacturers could raise prices. In an expanding market, it is possible to do so with minimal concern of losing market share. But in a tight market, and in the current environment, where customers could search for another vendor, who may have a lower price as they are working off older, less expensive inventory, there is a potential to lose business.

Product Redesign

The challenge can be put to engineering to redesign products to decrease the requirement of expensive materials. Is the material cost impact enough that a product can be redesigned to use non-metallic material? For example, with the cost of steel going up and oil remaining steady, could a manufactured sheet metal component be replaced by molded plastic? This has already occurred in consumer products, such as Honda’s polymer lawn mower deck.

Lean Lean Lean

Manufacturing operations may review how to reduce the non-material costs of production. This is typically thought of as reducing labor, which can be accomplished by re-evaluating the manufacturing process and adopting automation. Depending on the industry and whether the manufacturer is an OEM or a subcontractor will change whether selling price can be adjusted, product redesigned or changes in the manufacturing process.

The Capital Question

One solution is increasing automation. Those well-capitalized manufacturing companies can invest in more automation to reduce the labor component of their manufactured product cost. Hopefully, the employee can be redeployed on some other function in the business, and based on the shortage of technical workers, this should be realistic.

In an environment where raw material costs and interest rates are increasing, the investment in automation is limited to those that can pay cash for capital expenditures or are able to service an increased debt load. The option of investing in capital equipment is limited to those with sufficient, unused cash in the bank, as increased material cost and stagnant prices reduce cash flow.

Choices: Inaction and Investment

For those companies manufacturing who have used the last 8 years to right the balance sheet and build a rainy day fund, this is a time to separate themselves from illiquid competitors. The question then becomes strategy:

Do you keep prices down, absorb the cost increase and wait out competitors, who cannot do so, in an effort to gain market share?
Do you take this as a challenge to make that next step in automation, to decrease the labor cost of the product being manufactured?

The biggest concern I see is these market challenges causing a greater dichotomy among manufacturers of steel products. As mentioned in the previous review of the Section 232, right after the Commerce Department’s announcement, a local midwest distributor took the opportunity send out 15% price increases on steel material. Manufacturers can invest in automation, to reduce labor, as a way to counteract that material cost increase. For those manufacturers that have not been able to pay down debt and do not have the flexibility to invest in automation, the gap will expand between them and their market’s leaders.

An edited version of this article, THE NEW MANUFACTURING LANDSCAPE, appeared in the September 2009 issue of FF Journal

The recession of the last 18 months and its causes have been well documented. The decrease is spending and capital availability has cascaded throughout manufacturing, resulting in layoffs, rolling shutdowns, and factory liquidations. The cutbacks have created a range of challenges for those of us in manufacturing and manufacturing services. Spread thin, limited internal personnel, a lack of cross training, outsourcing and furloughs have caused an uncertain landscape for employees.

Outsourcing

Since the 1980s, layoffs of production, engineering and support personnel have been a common action to reduce costs during declines in business activity. These layoffs, along with retirements, have wittled away the manufacturing base in the United States to the point it is today. For many companies, with the pool of direct labor stripped to its core of personnel required to conduct business, other avenues have been pursued to cut costs. With the decreased business activity, it has created an environment for manufacturers to take the chance and outsource administrative activities, such as human resources, purchasing, and even accounting. As automotive and appliance manufacturers have done over the last several decades; small and medium producers are testing the waters with local outsourcing of component and production activities that may be done by job shops. Though these outsourcing activities may be a necessary step for businesses to survive this economic climate, it presents new challenges. For example, the outsourcing to local job shops may reduce the need for some on-hand inventory, but the manufacturer is no longer in control of the lead times or the opportunity to fill rush orders, which are more common as everyone has shed inventory to meet demand. This can be frustrating for customers and manufacturers alike: eventhough no one is ‘busy,’ ie., at or near full production, leadtimes for manufacturered items are nearly unchanged, or longer than usual.

In-Sourcing

Several years ago, because of the overwhelming cost savings touted by offshoring components, for some manufacturers it was automatic to try this. As offshore costs have approached parity with local capabilities, in-sourcing has become an admirable way for manufacturers to maintain a level of self-reliance and insure work for their remaining core of employees. In-sourcing has presented complications, though. For example, a manufacturer of scaffolding brought back their production of planks. Upon assembly they found their planks and fasteners, still offshored, no longer fit together per their print. Since they had purchased this fabricated subassembly for years, it had changed from the original specifications but went unnoticed because the deviated subassembly still fit within the overall system. Because the supply of offshored planks could not be instantly turned on, it was necessary to retool their plank. Additionally, a manufacturer of vacuums found their quality problems increased when they insourced production because they no longer had technical personnel familiar with the critical assembly of their equipment.

Cross Training

The recession and layoffs have pushed a lot of companies to no longer have backups in their workforce, there is one person to do each job or there are a handful of personnel that are doing all the various disciplines that are now required on a smaller scale. This has emphasized the need for cross training core personnel; on a given day it may require an engineer to design a component, purchase the materials, and schedule the production. It’s as if small business structure is being projected onto larger businesses.

Productivity?

Since this recession has proliferated the use of furloughs to meet business demand, it has caused a delay in opportunities. For the companies with liquidity to pursue capital projects, the possibility of purchasing new equipment or automation to increase productivity or in-house capabilties, the rolling layoffs impede the justification process. For example, a company furloughing on a four week rotation, the week off and week of catching up can cause the process of justifying a capital project by two or three fold, when considering the time required to coordinate technical personnel with outside vendors, review quotations and successive revisions.

Taking Risks (expanding in a down economy)

Developing technologies and new industries are a common sources for increasing economic activity or ‘green shoots,’ as has become the common buzzword lately. Even as some companies pursue the opportunities to create or expand their business to pursue these new opportunities, they are finding substantial roadblocks, particularly fiancial. Major banks and financing companies have restricted leasing to any LLC without several years of credit history or businesses of any kind that are less than a year old. It’s also disheartening that banks are resistant to finance capital equipment, even when the suppliers are willing to back the loans to some rate. For example, a small business that was not eligible for equipment financing because the banks no longer considered their debt ratio acceptable. The business was eventually able to lease the equipment, a used model financed directly by the manufacturer, at a 12% interest rate.

Inventory & Maintenance

As demand decreased, manufactruers have been forced to lower minimum order sizes. A few tubing manufacturers have been forced decrease their minimum production run from 100,000 feet to 30,000 feet to maintain orders. This adjustment to demand has caused the manufacturers to changeover tooling every single shift. These lower production quantities have resulted in more changeover time for products, higher scrap rate and more wear and tear on equipment. In the short term, manufacturers have met the maintenance needs of these demands by using parts from one of their mothballed production lines to keep the other one(s) running. When happens when the economy picks back up? Will the mothballed and scavenged equipment be operable to bring back online?

Flexible Employment

Where is manufacturing going? What will it look like when things rebound. Several manufacturers have commented that they will never have the number of employees they did before. They have found their ability to do more with less. A portion of our current unemployment rate are baby boomers who are still willing and able to work as well as people only a few years out of school that were fulfilling entry level roles. It seems that we are coming to a new era of freelance employment. Industry veterans, who may have been pushed out earlier than they desired, may be available on a a consulting basis. Additional personnel may fit into the puzzle as temporary employees, to fulfill fluctuations in business demand, since companies may choose to stick with their core of compotent, cross trained personnel.

Tag: Productivity

Section 232 Steel Tariffs – How to Respond