Despite pervasive negative news, many respondents to Modern Metals’ 10th Annual Consuming Industries Survey are optimistic about 2012
January 2012 - Day to day, the economy drags on, and signs of a rapid, sustained recovery are few and far between. However, bright spots exist and optimism for 2012 is percolating throughout the industry.
“We are hearing a lot of optimistic customers out there saying that the forecasts look good and business appears to be strong, whereas sometimes you get into this holiday season and some people are concerned or nervous about what the future looks like,” says Mark Schoenborn, purchasing agent at DeWys Mfg. Inc., a Marne, Mich.-based precision sheet metal fabricator. “We’re hearing a lot of optimism from our customer base, as well. We’re very diversified, serving many different sectors, and all of them seem to be optimistic, from furniture to industrial equipment. They all have a really good perspective of what’s coming, which is good. The last few years, [customers said,] ‘We really don’t know, there’s a lot of volatility.’ But a lot of them seem to be preaching the same thing, saying that things should be up in 2012. We’re excited about that.”
Despite the underlying optimism, there will be myriad hurdles to above-average growth. Sixty-six percent of service center, 59 percent of fabricator and 57 percent of OEM respondents to Modern Metals’ 10th Annual Consuming Industries Survey think overall economic uncertainty will be the main factor impeding growth in 2012. Coming in second was government policy with 19 percent of service centers, 19 percent of fabricators and 18 percent of OEMs.
“Economic and political uncertainty is causing lower consumer confidence and also delaying any recovery,” says Joe Perillo, director of supply chain, logistics and lean enterprise for PTR Baler & Compactor, Philadelphia, Pa., a manufacturer of balers and compactors. “Because of the uncertainty, most customers are reducing debt and increasing savings. This applies to business, as well. With that said, at some point, the economy will begin to recover the increased borrowing capacity because of the debt reduction along with high levels of cash reserves can cause a potential hockey-stick recovery. Before any prospects of a recovery, the European debt crisis and the U.S. political turmoil has to be settled. In any case, being ready is the key to taking advantage of the inevitable spike in demand.”
“There are many positive signs, but they do not make for good news coverage,” says William Vitucci, vice president/CFO of Vitco Steel Supply Corp., Posen, Ill., a supplier of slit steel products. “Manufacturing output and confidence have risen for 28 months, and unemployment just recently went down. GDP, albeit slow, has been steadily rising. But the perception and fear of a double-dip recession lingers, and most small manufacturers and service centers are as lean as they can get and may not withstand another recession. The volatility of commodities is greater and more often than ever experienced, and this affects all of our inventories. Until the roller coaster is leveled out, fear of another recession will linger.”
Orders out on time
A majority of survey respondents expect customer orders to either remain flat or increase in 2012—in line with predictions for slow growth. Fifty-one percent of service center respondents anticipate customer orders to increase during the next six months, and 42 percent expect them to remain flat. Fifty-seven percent of OEMs expect customer orders to increase in the next six months, while 38 percent expect them to remain flat. Forty-six percent of fabricator respondents expect customer orders to remain flat, and 36 percent expect them to increase.
Until the economy begins a full-fledged recovery, survey respondents say maintaining customer relationships and diversifying business are keys to survival.
“In my position, we’re looking for a supply base that can offer many different value-added services, and I think our customers are looking for the same thing,” Schoenborn says. “We’ve added a lot of secondary processes. We have our own paint, powder coat facility and internally, we have fabricating, bending, stamping. We offer a majority of the services when it comes to value-added sheet metal fabrication, and it has really helped us grow. Our customers want to consolidate their vendor base, and they want that short lead time. That’s one of our biggest advantages. Not only do we have the additional value-added services, but the short lead time is really what we see as the new norm in this marketplace. If you have the shortest lead time, customers are coming to you. Lean has always been one of our big practices, and it seems to be keeping us ahead of our competition and helping us grow with customers.”
In addition to customer communication, it’s important to seek out new markets to ensure continued growth. “Being able to ‘buy’ market share when commodities fluctuate so fast is most important to survival and potential growth,” adds Vitucci. “Nothing new is being made of metals. Therefore, gaining someone else’s customer is the only way to grow a business. As an industry, we need to grow the use of metal into more products.”
A list of concerns
Service centers, fabricators and OEMs are uneasy about threats to growth—from the upcoming elections to taxes, prices and inventory management
Despite an underlying trend of optimism, respondents to Modern Metals’ 10th Annual Consuming Industries Survey say they face myriad challenges in 2012. Top concerns for service centers include pricing, business activity levels, cost of health care and transportation costs. Fabricators and OEMs also cited pricing, business activity levels, the cost of health care and transportation costs, along with fixed cost increases, training and energy costs.
One service center respondent commented, “The poisoned political environment will do more to harm the economy than all other factors combined. I believe growth will continue to stagnate until post-election 2013 as a result.” Another said his business would be impacted by the “inability of customers to predict or schedule requirements accurately beyond two to three weeks and global supply/demand issues in the commodity market.”
The uncertain state of the economy is a “huge concern,” says Antoinette Brahm, president of marketing for Clean Air America Inc., Rome, Ga., a manufacturer of industrial air cleaning and dust management systems, noting the “ever-rising cost of transportation” is also high on her list of concerns.
William Vitucci, vice president/CFO, Vitco Steel Supply Corp., Posen, Ill., a supplier of slit steel products, says three issues need to be resolved for the economy to recover: “The nomination and upcoming elections and the process it will take to get there, the European debt issue, and the erosion of consumer confidence.”
“America has one of the highest corporate tax rates in the world, and I think it’s the smaller companies who provide the bulk of the jobs that feel that the most,” adds Brahm. “We have our federal, local, state taxes, health care, workers’ comp. It goes on and on and on. We’re competing with a lot of other companies globally that have a very small corporate tax rate.”
Jerry Leary, president of Koike Aronson Inc., Arcade, N.Y., a supplier of cutting machines, welding positioning equipment, portable cutting/welding machines and gas apparatus, says concerns for his company include rising health care costs, which “will worsen going forward under the new government mandates,” and “the uncertainty of business’ tax burden, both federal and state.”
He says to mitigate the impact of these issues, “unfortunately, we have been forced to go to less [health care] coverage already because of these costs and are concerned that we will have to ask our employees to increase their share of the costs as they increase in the future. We continue to look at alternative health care programs as do many of our customers. However, we don’t want to do something that will have a significant impact on our employees’ costs and coverage.”
However, he points out, “outside of the above, our business has done extremely well this year, and we are planning on double-digit growth in 2012. The major worldwide markets for mining equipment, nuclear repair, shipbuilding, trailer bodies, railcars and farming equipment are strong, and all indications are that this will continue in 2012. Our export business has grown from approximately 7 percent of our revenue eight years ago to over 30 percent of our revenue to date. We do see this continuing to grow in 2012. We have incorporated a Koike company in Brazil and will be establishing a manufacturing facility in 2012 in Brazil for products to be made and sold in Brazil.”
Prices and inventory management
A majority of service center, fabricator and OEM respondents plan to maintain inventory levels in the coming months, while 24 percent of service centers, 14 percent of fabricators and 25 percent of OEMs plan to increase stocks.
More inventory and more orders increase the challenge of managing the metal in the warehouse. “While lead times have remained short, pricing has been so volatile that it has added to the uncertainty of laying in inventory,” commented a service center respondent.
“Distributor inventories have been spottier than previous years, and [there is] ever-present price fluctuation,” said a fabricator respondent. Other fabricators commented regarding supplier performance that they’re seeing “unreliable lead times and quality problems,” “we have a few trusted suppliers and a few that cannot perform, i.e. high pricing, late orders, back orders and wrong items,” “high prices, somewhat slow in delivery” and “quality, delivery good. Price is too much and price administration is nonsensical.”
OEMs had similar complaints, saying, “Everyone has cut inventory, so getting material quickly is an issue,” and “I think service centers need to get back to providing more service and truly listening to their customers.”
“Mills seem to be further out on delivery times than previously,” said a service center respondent. Others noted suppliers “struggled to maintain shipping performance as destocking-related increase in business has outpaced ability to increase capacity, even with lead-time change from two weeks in January 2011 to six weeks now,” “staff reductions in mills have made for poor communications and performance,” “the majority of our mill sources are continually improving from both a quality and a customer service profile,” “lead times are short. Mills are hungry for business. Service has been excellent.”
The majority of service center, OEM and fabricator respondents rated their suppliers’ performance as a 5 or better on a scale from 1 to 10, with 5 designating performance remained the same and 10 representing excellent performance. Many respondents commented the key to good supplier relationships is nurturing partnerships and working together on deliveries and forecasts, enhancing future market visibility.
“We have a very good group of suppliers that we have worked with for years, and our relationship with them is as partners,” commented a fabricator respondent.
“Part of being prepared is developing a strategic partnership with our suppliers providing long-term forecasts, thus sharing the risk but also sharing the benefits in cost, lead-time and inventory exposure,” says Perillo.
“We haven’t had any issues with supply and demand,” adds Schoenborn. “Our demand is up quite a bit this year, our sales are up 25 to 30 percent and we really haven’t had a whole lot of supply issues. We’ve created some forecasting tools and reports and our supplier portal so that our suppliers can see any spikes or additional demand coming.”
Going into 2012, the entire supply chain is leaner and working to enhance forecasting. These types of techniques, along with communication, will be necessary to maintain quality service.
“As the commodity market remains volatile, our customer demand will be volatile but on an amplified scale. A bull whip in demand will be felt frequently in the year ahead,” said a service center respondent.
The right people
Improvement in economic conditions requires an increase in staff. However, it’s a challenge for companies to find qualified workers
“Most people do not want to work in manufacturing,” commented one OEM respondent to Modern Metals’ 10th Annual Consuming Industries Survey. Another noted, “On-time delivery continues to be a problem. [We are] also finding that some vendors are not interpreting blueprints correctly, a possible indication of diminishing skills in our industry.”
Building business is difficult, and without good employees, it’s nearly impossible. The manufacturing industry is facing an uphill battle in the court of public opinion. First of all, there’s a shortage of properly trained employees. In addition, the next generation of workers largely is unaware of the opportunities within the industry.
“It sure seems like our media tends to give manufacturing a bad rap, when in turn, it’s actually very strong,” says Mark Schoenborn, purchasing agent at DeWys Mfg. Inc., a Marne, Mich.-based precision sheet metal fabricator. “A lot of people I’ve talked to are growing, expanding and have opportunities. It’s unfortunate that manufacturing does get that reputation; however, I think a lot of people are starting to push manufacturing as a long-term career.”
Schoenborn says despite these efforts, it will be hard to erase the stigma that manufacturing is a dying industry, “which is completely not true.”
Fifty-one percent of service center survey respondents are planning to increase hiring in the next six months, but 56 percent are finding it somewhat difficult to find qualified personnel. Forty-two percent of fabricator respondents expect to increase hiring, with 44 percent of them finding it somewhat difficult to find personnel and 39 percent finding it very difficult.
Fifty-five percent of OEMs plan to increase hiring in the next six months, and 52 percent of them are finding it very difficult to find qualified personnel, with one respondent commenting, “Getting skilled employees is a problem.”
“Our biggest concern is people—without question,” says Schoenborn. “Trying to find good people in the manufacturing industry has been one of our biggest challenges over the last several months. We have business, we’re trying to grow, but people are really what’s holding us back. Even though the unemployment rate is high, the people that we’re looking for, there aren’t many of them out there.”
Jerry Leary, president of Koike Aronson Inc., Arcade, N.Y., a supplier of cutting machines, welding positioning equipment, portable cutting/welding machines and gas apparatus, says for his company, the availability of skilled labor, specifically machinists, welders and electronic technicians, will be a challenge in 2012. “For the past five years, we have found it very difficult to fill electronic assembler and electronic engineering positions,” he notes.
Confront the problem—head-on
To ensure there’s an adequate pool of properly qualified employees in the future, companies are working with local schools to get in on the ground floor, educating students about the benefits of a manufacturing career.
“Unfortunately, one of the first programs that seem to be leaving the schools are their tech-type programs. The woodworking and technology-type classes are the first ones cut,” Schoenborn says. “We’ve partnered up with local schools and local colleges to promote manufacturing. We have kids come in and do internships, and we give them tours of our facilities and show them the welding side of our business. We’re putting on a 24,000-square-foot addition, and in that is a 1,000-square-foot training facility that’s going to be geared to training people with the skill set we’re looking for. We just want good people; we’re going to train them. We’ve found that there is just not the skill set we’re looking for out there, so we’re going to have to do the training.”
“Because what we do is specialized, we have to work very closely through our local community colleges. They will help us train people, and we do a lot of in-house training, as well,” says Antoinette Brahm, president of marketing for Clean Air America Inc., Rome, Ga., a manufacturer of industrial air cleaning and dust management systems. “Because we do turnkey installations, when we go into very large companies, in addition to being certified, our employees have to go to that company’s training program.”
To get the employees the company needs, Brahm says, “We have a very good apprenticeship program through our local schools and community colleges in the area. We have some great young employees. They will go to school in the morning and then come to us and spend the afternoons or holidays at our company. We can get them from the time they are about 16 or 17 years old, and they will stay with us through high school and college.”
Koike Aronson also works with local high schools, advanced technical schools, community colleges and colleges to educate students “about the opportunities, outside of data processing, in the electrical fields,” Leary says.
“We have noticed that our customers are relying more on us and our distributors for the installation, repair and upgrading of our equipment at their locations,” he continues. “This is an indication that they are facing the same hiring problems and are depending more on us to fulfill their internal requirements. Our Technical Service and Technical Assistance department has doubled in size since 2009 to handle these requirements. It just increases the burden on us to fill these positions in our company.”
Efforts to encourage education in subjects such as math, science and engineering will pay dividends in the future for companies and ensure the United States’ global manufacturing competitiveness.
“There is a shortage of qualified engineers in this country,” says Brahm. “Countries like China and India produce four or five times as many engineers as we do. We’re competing globally with countries that have immense talent in engineering, electronics, and unfortunately, we’re behind, especially in the rural areas. It’s really difficult. We have to recruit nationally, and sometimes employees even have to be brought in from other countries.” MM
2012 survey methodology
In October 2011, Modern Metals emailed 5,658 surveys to a group of service centers, fabricators and OEMs. Five percent or 290 of the respondents clicked-through to the survey, and we received a total response rate of 73 percent (211 usable returns). By industry sector, we received responses from 60 OEMs, 74 fabricators and 77 service centers.
Those surveyed were selected randomly on an nth-name basis from Modern Metals’ circulation, using the following business and industry classifications: metal service centers and offices; fabricated metal products (including metal cans and shipping containers; cutlery, hand tools and general hardware; heating equipment and plumbing fixtures; fabricated structural metal products; screw machine products (bolts, nuts, screws, rivets and washers); metal forgings and stampings; coating, engraving and allied services; ordnance and accessories; and miscellaneous fabricated metal products); machinery, except electrical (including engines and turbines; farm/garden machinery and equipment; construction, mining, materials handling machinery and equipment; metalworking machinery and equipment; special industry machinery; general industrial machinery and equipment; computer and office equipment; refrigeration and service industry machinery; and miscellaneous industrial and commercial machinery and equipment); electric and electronic equipment (including electric transmission and distribution equipment; electrical industrial apparatus; household appliances; electric lighting and wiring equipment; household audio and video and audio recordings; communications equipment; electronic components and accessories; and miscellaneous electrical machinery, equipment and supplies); transportation equipment (including motor vehicles and motor vehicle equipment; aircraft and parts; ship/boat building and repairing; railroad equipment; motorcycles, bicycles and parts; guided missiles and space vehicles and parts; and miscellaneous transportation equipment).
Job titles surveyed included corporate officials, president, owner, vice president, general manager, treasurer-secretary, controller, chief engineer, plant manager, production superintendent, department managers, chief metallurgist, chief chemist, engineers, metallurgists, designers, production men, chemists, supervisors, foremen, and buyers, salespersons and other sales titles.