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Why Manufacturing is Leading the Economic Recovery

By Dr. Chris Kuehl*

This may come as a shock to those pundits ready to declare the U.S. a manufacturing wasteland, but this really doesn’t come as a big surprise to those in the industrial community. In 2010, more jobs were added in manufacturing than were lost—130,000 of them. This is the first time this has happened since 1997. This gain follows total job losses of close to 10 million in the last 20 years. 

The point is that the trend is heading in a positive direction, and some expect a net job gain of 500,000 by the end of this year. One burning question often raised is why manufacturers have played such an important role in this stage of the economic recovery. Here are three ­reasons:

Better Management. Manufacturers have become far better managers than in the past. Most companies’ executives today are engaged in strategic planning, market development and human resource management. There was a time not many years ago when this was not the case. Most manufacturers focused on operations and ignored all the other stuff. It was all about the fastest and cheapest way to get something out the door.

But somewhere along the way the system forced a change, and now far more attention is paid to the nuances of running a company. This is not something that has come easily to some of the small- and medium-sized organizations, but they have taken full advantage of the resources that have come into play in recent years. These range from the services provided by their professional and trade associations, the material available on the Internet and from the people who have developed into solid consultant resources for manufacturers.

Emphasis on Strategy and Marketing. An emphasis on strategy and marketing has meant major expansion into places these companies have never been before. This either means that companies have launched new product lines to access new markets or they have taken existing products into the global marketplace. As recently as 10 or 15 years ago the majority of small and medium manufacturers did no business at all overseas. But the average company now does about 30 percent of its business in global markets, and some have much higher rates.

The weak dollar, making U.S. goods cheaper to foreign buyers, has accelerated this trend. This will not last forever, but few analysts have expressed much concern about a strong dollar anytime soon. It is likely that the euro will gain sooner than the dollar, which will add more luster to the price of U.S. goods.

Even as the dollar regains value, manufacturers engaged in global business are far more prepared to sell in foreign markets. They have made contacts in these markets and have started to develop customer loyalty. This will not completely replace the value of a weak currency, but it will make these markets a little stickier than they have been in the past.

Adaptation. Completing the trio of reasons for manufacturers’ role in the recovery is how the sector has aggressively adapted to new business environments. Manufacturers have become much more capital intensive and are relying more on technology to stay competitive, and yet they are paying attention to other factors as well.

They understand the power of the Pareto 80-20 principle in many contexts. Manufacturers have long understood that 20 percent of their customer base accounts for 80 percent of their sales, but they also understand that this applies to other things as well. It seems that 20 percent of their workers do 80 percent of the work, and 20 percent of their customers account for 80 percent of their problems, as well as their business. Managing to that 20 percent makes businesses more efficient.

The Pareto principle has been at the core of business strategy for many decades, but it is far easier to say that than to manage to it. Many know that 20 percent of one’s customers are the heart of the business, that 20 percent of these customers present the biggest issues facing the company, and that 20 percent of the work force is key. The question is—which 20 percent? In recent years, better tools and techniques have helped identify those that fit into that 20 percent category, now and in the future.

In looking ahead, it is apparent parts of the world will have an advantage when it comes to production costs in many situations. This means U.S. companies must out-manage and out-strategize their competitors, and it would appear that many U.S. companies are doing just that.

For many decades, the manufacturing community was the safety valve for the U.S. in terms of employment. Generations left high school (with or without diploma) and went across the street to work in the plant where they made a decent living. Those days have ended as today’s modern manufacturer is a highly skilled and specialized employer with a work force that is as talented as any in the world. As the ads say—these are not your father’s manufacturers.

*Dr. Chris Kuehl is economic analyst for the Fabricators & Manufacturers Association, International, Rockford, Ill., and managing partner of Armada Corporate Intelligence. Dr. Kuehl is the author of Fabrinomics, a biweekly economic analysis e-newsletter for members of the FMA. For more information go to fmanet.org/fabrinomics.

  
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Thursday, August 28, 2014