Enterprise Minnesota Magazine - February 2012
HELPING MANUFACTURERS GROW PROFITABLY
Executive Focus Group: National Association of Manufacturers
In January, an elite group of OEM executives, who are members of the National Association of Manufacturers, gathered at Donaldson Company in Bloomington for a candid discussion about the industry’s present and future concerns and opportunities. This is the first State of Manufacturing® focus group to probe the perspectives and opinions of OEM executives at the senior level.
Michael Orrick, Sr VP and GM, Governance, Risk & Compliance at Thomson Reuters Paisley; Bob Kill, President and CEO at Enterprise Minnesota; ; Joseph Puishys, President and CEO at Apogee Enterprises Inc.
As manufacturers and job creators here in Minnesota, do you think things are on the right track or are they on the wrong track, and which direction are they trending?
• In my business, we are tied to commercial construction, and what we are seeing in the business is better than what you would see every morning in the paper, frankly. In spite of the words we hear, or what we continue to use as we bump along the bottom of this cycle, the secret is we’ve not been bumping. We’ve been growing. If you take out acquisitions and foreign exchange, we are still growing in mid-single digits. I think the market is recovering, but I think everyone would admit it’s fragile.
• We’re in power generation, agricultural construction, mining, etc., and various markets are in various stages of recovery, but in general we see a positive trend in just about all of them. We have a defense business that would probably be the one exception, primarily because of funding, but that’s not a large portion of our portfolio. We are quite optimistic, our guidance calls for our sales to grow from the prior year. Some of that we can say is our own success with our products and our technology, and some of it is the market recovering quite nicely for us.
• I think everybody in this room is a customer of mine. We’re specifically an end-use market and purchaser market, and our customers have been getting healthy for the last six months. That includes commercial construction. Anything attached to the final consumer, including residential construction, continues to be quite soft. When you try to compare yourself to 2006-2007, you have to realize that it was a bubble. We’re not going to get back there for many years, because it was not accurate. We can’t compare ourselves to 2007. We have global operations so we spend a lot of time at global manufacturers, and what I can say with more than 21 years in this business is that U.S. manufacturing is as strong as ever. U.S. manufacturers have become extraordinarily efficient, extraordinarily automated and are stronger than any other manufacturer in the world. The one exception may be Germany, which relies on technology more than the U.S. manufacturer does. I’m very bullish on the near-term.
• They are now predicting a 2 percent decline in nonresidential construction in the U.S., which is odd because every indication I’ve seen has gotten slightly better in the past six months. We’ll be planning on up to 2 percent growth.
• From my perspective, we are cautiously optimistic. We’ve seen our business bounce back to nearly the ’07 levels, but with our December earnings release we had a very slight record for the company sales. We feel good, and the order board is particularly strong internationally. We sell golf course, commercial and residential equipment. My profitability changes rapidly depending on the price of plastics or steel at any given moment. We feel really good about our plants, and cautious about the things that we can’t control.
• I agree.
• I travel the world with my job. Eighty percent of our sales are right here in the U.S. and 20 are in other markets. I’m seeing all these other markets picking up manufacturing, but it feels like we’re the best-kept secret. Everybody is telling it worse than it really is and that suits us just fine. Keep the U.S. where it is, keep the business trading where it is.
How has the supply chain’s evolution over the past 10 years aected your business, and what are you doing differently as a result?
• At my previous company, we became more local, especially as the economy got more challenging. We actually started bringing more and more supply inside.
• When I started at my company 20 years ago, all of our suppliers were either U.S. based or they were German. Today, our supply base is entirely global. So, we provide the same things everywhere in the world, and our prices are global prices. As a supplier to manufacturers, our whole strategy has been to follow them wherever they go. Our product needs to be manufactured locally. Otherwise, it becomes far too expensive.
• All of our engineering efforts have been focused on doing the same amount of work with a smaller factory, so that we can build more factories closer to our customers.
• We used to have the philosophy that we wanted to do business with the biggest companies that had the largest research laboratories, and place our future in their hands. Over time, we learned that that was not right, and we’ve changed our whole approach to our relationship with our suppliers. We now see them much more as partners and co-innovators than just sources of component materials.
Considering all of your suppliers, what are the smart ones doing in order to put themselves in a position to get more and more quality work from you?
• They’re doing what any good manufacturer does; they focus on their costs. While I understand we don’t always get to control the price of commodities, I do expect them to control their internal costs and be more efficient every day. Good quality delivery and having confidence that they understand their supply chain has also been really important to us over the past two years.
• You follow your customers. Our good suppliers follow us. When we built a new LED light line in one of our factories in China, our supplier from Japan moved their factory right next to our building. It’s beneficial for them as well. It makes it easier for them to do business from a logistics standpoint. It also gives them better insight into what’s going on in our factory and so it gets them closer to the entire supply chain. I think following your customers is one of the key things you want from your good suppliers.
Is this collaboration something that will grow in importance as time goes on? Where is the equilibrium between nurturing your collaboration and ensuring that you get a good price?
• The price will always be a concern. All of us have product lines that are being driven along global lines to lower price points. That doesn’t mean you can forego other factors such as delivery and quality, because there is a high expectation on those. The collaboration is part of how you get the price, so you don’t just give somebody a quote sheet and hope for the best. We work collaboratively with suppliers to drive costs down the best we can.
• For me, it’s a matter of total cost. There are a lot of ways suppliers can add value to us. One of the things I really hate is when you get a great price, but you’ve got to take a month’s worth of the product. I don’t need a month’s worth of anything. I need constant, just-in-time supply.
How does government regulation affect your business?
• In our industry, whether it’s through regulation of manufacturing processes or product regulations or using regulation to accomplish some social engineering and picking winners and losers in the marketplace in the process, government regulations have just been on steroids.
• Maybe I’m the odd one out here. In the businesses we run, we’ve found regulation to be a good thing. Most of everything we do involves energy savings in one way, shape or manner. Regulation is good. Subsidizing is a bad thing because it creates blips and artificial peaks and valleys, so we cringe whenever we hear about subsidies. But we like product regulations or outcome-based regulations because they make companies that invest in technology more valuable.
• We’re in a similar industry with energy efficiency and product regulation. One of the problems that I see is that through the Energy Star program and the efforts of the EPA in partnership with a lot of NGOs, there is a very pronounced trend, I believe, to ratchet-up product performance, regardless of the cost of that performance relative to the benefit.
• We’re in a product line that promotes safety inside other factories. We sell dust collection devices that improve the environment in plants, and we sell emission devices that we put on vehicles to improve the environment. We’ve benefited from legislation that has helped clean up factories and the environment.
Theoretically, if you were to open a new plant, would the potential location’s regulatory climate or availability of qualified workers be the primary reason you’d either say yes or no to it?
• Taxation is a big deal. In terms of regulation, we haven’t really found that we’d shy away from building a factory where there are a lot of regulations, but the tax policies that exist in one country vs. another and one state vs. another are important in deciding where we put factories.
• I agree. We ask ourselves, “Where do we need to be for the market?” and then, “Where do we have the most favorable financial outcome?”
Do you think reducing the corporate tax rate would help the U.S.? Some presidential candidates are saying that reducing it dramatically will increase the overall domestic/gross domestic product. Do you agree with that?
• Changes in the tax rate won’t make a lot of business decisions change, because in four years it might just change back. It’s more about the long-term costs of doing business in our region.
How much of a challenge is the availability of qualified workers for your business?
• I will say, in the northern half of the U.S., it is becoming more of a challenge. I have terrific luck in finding very good workers in Mexico and in Europe. I think the widespread misperception of manufacturing means there’s fewer people going to tech schools and learning to become welders.
• We do business in a lot of smaller towns, and actually the mobility is an issue too. There are two incomes, so it’s not just one person you’re trying to move. Instead, you have to think of two people you’re trying to move.
• Once you get the folks onboard in small-town USA, don’t you find that they’re a relatively loyal group? You still get turnover of course, but we find more loyalty in the small towns.
• I would agree. Once you have them, everything that made it hard for you to try to hire somebody makes it hard for another employer to hire them away from you.
• Attracting skilled workers to replace retirees is a major concern. Our belief has been that we have to be more proactive about training people. This is funny, but our guys in HR tell me that our best ads are in Field and Stream. We get our highest response for employment through people that want to be in the north and hunting fish. It’s a lifestyle choice first, and then we have to train the people who choose that lifestyle.
How does health care affect your ability to run your company?
• Well, there were two major value choices that our company’s family made. One was to not have any layoffs and the second one was to maintain quality health care. It’s something we’ve worked very hard at and relative to national averages have done very well. We’ve invested in wellness, and we got ahead of some of the things that Obama-care has mandated or will mandate. But not withstanding all of those good things, I think as a company in 2014, we’re going to have some really big decisions to make about whether we can maintain our healthcare approach.
• We are all moving towards health maintenance and preventative care programs that promote wellness. We’re working very, very hard to avoid double-digit growth in cost.
To learn more about National Association of Manufacturers and its members, go to www.nam.org.
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