Last updated on May 13th, 2019 at 02:34 pm
Rising health care costs, price hikes on raw materials, low-cost competitors in China and consumer demand for quality at a low price create a fatal imbalance for unprepared Wisconsin manufacturers, according to Thomas Hood, chief executive officer for Heath Corp., a Brookfield-based management consulting firm.
However, even in a time when overseas outsourcing is seen as an epidemic by some and health care costs are increasing for all industries, there is no need to panic, Hood says. These are just the latest issues businesses must face in the ever-changing manufacturing marketplace, he said.
"It is never a straight line. There are always pockets. For example, the current price of oil," Hood said. "It is the basic economics of supply and demand."
Wisconsin manufacturing companies need to prepare for spikes and valleys to stay afloat, Hood said.
"Companies have to be adaptable and have the agility to move and flow with the times," Hood said.
Some manufacturers are adapting to challenges.
Since energy costs have increased, manufacturers are looking into conservation by installing energy efficient lighting with motion sensors to cut down on costs, Hood said.
The cost of transportation has increased due to the price of gas and a shortage of truck drivers. Manufacturers have responded by maximizing each truck load, Hood said.
Because customers are still demanding quality products at the lowest possible cost, many manufacturers cannot pass along the rising costs of raw materials. Instead, some manufacturers apply temporary surcharges to products. They remove the surcharge when the price of the materials decreases, Hood said.
Some manufacturers that are experiencing sporadic productivity increases are hiring temporary employees instead of seasonal employees, while others are revamping their products to have a more competitive niche in the marketplace, Hood said.
RB Royal Industries Inc., a Fond du Lac-based manufacturer of fluid components for original equipment manufacturers (OEMs), has been able to combat cost issues in manufacturing by building stronger relationships with employees, clients and suppliers, said John Valek, chief operating officer and executive vice president.
"The relationships we form with our customers and suppliers are key to our ability to do business," Valek said. "We are a very fortunate company in that we have great relationships with some wonderful people. You have to give, and once in a while, someone else has to give. It cannot all be take."
RB Royal has implemented multiple wellness programs to encourage employees to stay healthy, both for their jobs and to keep the costs of health care down with fewer doctor visits. The company offers health care screenings and multiple options for coverage, deductibles and premiums.
In addition, the firm compensates its employees 100 percent up to a certain dollar amount for wellness programs, including gym memberships and weight loss programs, Valek said.
As a result, RB Royal has seen employee health improvement and has lowered its overall health care costs since 2003, Valek said.
"We have really put a focus on consumerism, and we encourage people to ask questions as if they were buying an appliance or a service," Valek said. "They need to be involved in their health care."
RB Royal takes the same approach with its clients and suppliers, Valek said. The company consults with its customers when prices are expected to increase to explain the jump and to ensure customer loyalty, Valek said.
"Many times, the cost comes out of our bottom line, but when you have commodity increases like with steel and brass, we do pass some of those costs down after negotiations with customers," Valek said. "They recognize that we are being hurt by this and that their stability is dependent on our stability. We have been successful with passing on those material increases, not with all of our customers but we try to demonstrate increases that have occurred to justify our requests."
RB Royal has also offered long-term contracts with raw material suppliers to be able to order smaller amounts of materials at one time for a discounted price while agreeing to remain a long-term and reliable customer, Valek said.
The company has reduced some costs by keeping inventory down and tries to reach the same type of agreement with its customers to keep their inventory down, Valek said.
"I liken it to an accordion," Valek said. "When the customer is squeezing you from one end and the supplier from the other, you do not make music."
Despite the challenges, there is optimism in Wisconsin manufacturing and more manufacturers are planning to grow or plateau than expect to decline, said Michael Klonsinski, executive director of the Wisconsin Manufacturing Extension Partnership (WMEP).
"One thing people don’t realize is the spread and impact of manufacturing in Wisconsin," Klonsinski said. "When Harley-Davidson is doing well, it does not just impact the city they are headquartered in, but it impacts small suppliers across the state."
WMEP recently completed a survey that studied the suppliers used by Harley-Davidson Inc., Oshkosh Truck Corp. and John Deere Ltd. The findings showed that the three OEMs combined purchase $1.7 billion worth of products and services annually from 1,876 Wisconsin suppliers, 1,200 of which are manufacturers.
The suppliers are located in 58 of Wisconsin’s 72 counties, and 10 percent of the suppliers sell to more than one OEM, according to the survey results.
Wisconsin manufacturing is not only strong because of the use of local suppliers but because of the diversity of industries that the state has, Klonsinski said. States such as Indiana and Michigan feel a large negative impact when the automotive industry struggles, while Wisconsin does not, he said.
Wisconsin manufacturers have also undergone tremendous upgrades in the last three years, improving their production processes and the quality of their products, Klonsinski said. With these improvement efforts, it is no longer inevitable that manufacturing is going to be dominated by China, because many Wisconsin manufacturers have proven that they can still succeed and grow locally, he said.
Some manufacturing companies that were losing business to China are now taking some of that business back because their location allows them to be more flexible and to have a fast response time to market changes, Klonsinski said.
"Wisconsin manufacturers have somewhat of an advantage because if all of a sudden we experience a rainy spring and the demand for lawn tractors and gardening equipment increases, a supplier from China takes six weeks to react because shipments can only go so fast on a barge across the ocean," Klonsinski said.
If manufacturers are more aware of their data, they can become more flexible to the market, Hood said. By reviewing productivity levels and comparing shipments during times of high and low sales numbers, manufacturers can gauge their capabilities and know their limits, which helps to ensure customer loyalty, Hood said,
"We are now in a world market, and it is forcing companies to be all that they can be," Hood said.
July 8, 2005, Small Business Times, Milwaukee, WI