Category: Manufacturing and Distribution

Posted on Feb 20, 2017

Peak production season can be a nightmare. It’s the time you need all employees to show up consistently and pull their weight. But reality is often far removed from the ideal.

If that’s the case in your plant, you need to consider some strategies to build resilience into your staffing. Here are six tips that can help ease the strain of production peaks:

Cross-train.

Teach employees to perform various jobs. Cross-training not only ensures coverage when it’s needed, it boosts job satisfaction because staff members feel challenged. Have higher-level employees mentor trainees until they get up to speed.

Offer incentives.

Motivate the performance you want, but don’t overuse incentives. They’re ideal for addressing short-term attendance issues. Offer something in return for perfect attendance — being at work on time every day, with no doctor’s appointments or sick days. One company that goes into mandatory overtime during peak production gives employees gift certificates for dinner and a movie for two month’s perfect attendance. And at the end of the time period, the names of all the people who had perfect attendance are entered into a drawing with the prize being a Saturday off with regular pay.

Hire temps.

You can find good temporary help through staffing agencies. This strategy can be especially powerful if combined with cross-training. For example, full-time pickers who have been cross-trained can run machines or work in receiving while temps do picking. Work with two or three agencies so that you’re not dependent on just one.

Shift into overtime if necessary.

Most employees welcome the extra income from overtime. On a limited basis, overtime may be no more costly than temporary labor when you factor in training expenses.

Seek referrals.

Ask employees to refer friends and relatives. Some companies avoid hiring employees’ friends and relatives, even for temporary positions, but they can be a source of reliable help.

Tap academia.

Technical colleges or universities are often a good source for supervisory help. If your peak production times are predictable, you can arrange to hire management or logistics students as interns to assist supervisors.

Any way you look at it, gearing up for peak production in advance saves your company money, time, hassles and missed deadlines. And those advantages go to your bottom line.

In Your Handbook

Stress the importance of good attendance and punctuality in your employee handbook. Spell out that unexcused absences can result in disciplinary action or even dismissal.

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Posted on Feb 13, 2017

Technology and automation has brought manufacturing a long way. One of the latest innovations, 3D printing, could make a significant mark of global proportions. Will your firm be at the forefront of this technology or be left in the dust?

The Basics

The process of 3D printing, sometimes known as “additive manufacturing,” involves producing three- dimensional solid objects from a digital file. The basic concept was invented by Chuck Hull in 1986. There are several 3D processes, but what they have in common is that they rely on layer-by-layer fabrication guided by computer code that’s directed to the printer.

The latest strides in 3D printing enable manufacturers to significantly cut production steps and the number of workers needed to complete a project. Rather than using several people at various stages of assembly, the division of work boils down to the designer, the suppliers of raw materials and the 3D printer, a.k.a. the “manufacturer.”

These streamlined manufacturing processes could have lasting ramifications for the global supply chain, possibly reducing capital, warehousing and logistical needs. Ultimately, the changes could affect the economies of countries that plan to create jobs and invest in logistics and warehousing.

But how far can the effects of 3D printing extend?

The Global Outlook

In some circles, the advent of 3D printing has been compared to the Industrial Revolution. Although that might be hyperbole, some people compare 3D technology to Henry Ford’s process innovations more than 100 years ago.

At its core, the Ford assembly line exemplified economy of scale. It was based on the premise that producing large quantities of a specific product provides a lower cost per unit. It didn’t need workers with specialized training, only those who could make repetitive steps in sequence on partially finished cars as the units moved from workstation to workstation. Standardizing parts and improving assembly line efficiency translated into bigger profits and more jobs.

As the concept evolved and took hold overseas, consumption grew and supply chain networks expanded. After World War II, growth spurted in Japan and Germany. This was followed by other economies, notably Southeast Asia, Korea, Taiwan, Singapore and Hong Kong. Eventually, China joined the trend.

That success prompted some countries to boost manufacturing output. In 2014, India launched its Make in India program, making it a top global destination for foreign direct investment. But 3D printing could throw a monkey wrench into the mix.

A 3D Revolution

3D printing improves on the assembly line by further simplifying the processes. It reduces the number of parts, components, steps and costs. Because 3D printing needs less space than traditional manufacturing, there are additional cost savings from reduced needs for warehousing and transportation, which in some cases aren’t required at all. In addition, 3D designs can be quickly revised, even at late stages.

In a nutshell, a product that would need a month to go through three or four design changes in the prototyping phase now takes a week when 3D printing is used. Products that use this technology get to market faster, and 3D manufacturers can save significant time and money.

Consider Ford: The automaker uses 3D printing to quickly produce prototype parts, shaving months off the development time for individual components, such as cylinder heads, intake manifolds and air vents, that are used in all of its vehicles.

With traditional methods, an engineer would create a computer model of an intake manifold — the most complicated engine part — and wait about four months for one prototype at an estimated cost of roughly $500,000. With 3D printing, Ford can print the same part in four days, including multiple iterations and with no tooling limits, at a cost of $3,000.

With 3D technology, engineers are no longer bound by the constraints of the old industrial process, allowing them to explore dozens of variations and rigorously test them to fine-tune engine performance.

This creates economies of scale and shortens the global supply chain. Producing and shipping goods across long distances is inefficient. So much so that UPS is investing heavily in 3D printing centers across the United States that can produce items ranging from robotic arms to custom figurines for local delivery.

Among the potential implications of this revolution are:

1. Widespread economies of scale. Reduced fixed costs affect per unit production costs, thereby transforming global supply chains.

2. Reassessment of zoning policies. Because 3D printing will reduce the need for large-area manufacturing plants, more small-scale facilities could be developed. As a result, the lines between industrial zones and non-industrial zones could become blurred and force governments to reconsider zoning laws and future plans for manufacturing plants.

3. Redistribution of domestic and foreign jobs. China and other countries known for using inexpensive labor may lose jobs to 3D printing.
The reach of 3D printing will likely extend well beyond the manufacturing sector. Consider the potential impact on:

  • City planning to show how projects would work and how new buildings might affect the city,
  • Surgeries using precise anatomical models based on CT scans or MRI,
  • Medical training using printed cadavers,
  • Custom orthopedic implants and prosthetics,
  • Custom toys, jewelry, games, home decorations and other products, as well as spare or replacement parts for automobiles or home repair,
  • The advent of complex geometry and shapes not possible with traditional manufacturing, and
  • The design of custom protective gear for better fit and safety.

In the coming years, economic and financial ripples will be felt around the world, all tracing back to the 3D printing revolution. Now’s the time to consider ways to position your business for these coming changes and challenges.

Challenges Faced in 3D Printing

Although the benefits of 3D printing are clearly evident, don’t think that the changes come without challenges. Some of the potential drawbacks are:

  • There’s a learning curve. So, entry-level 3D printers may produce goods that are subpar compared to those produced through traditional methods
  • Producing large quantities can take longer than traditional manufacturing methods, depending on the type of 3D printer.
  • 3D printers often can’t handle extremely large products, such as oil pipelines.
  • Producing large volumes of certain products through 3D printers can be cost prohibitive compared to traditional manufacturing methods.

It’s likely that these obstacles can be overcome in time, but a seamless transition can’t be assumed. Expect some bumps along the way.

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Posted on Dec 29, 2016

By law, all manufacturers, importers, distributors and retailers must notify the Consumer Product Safety Commission (CSPC) if they obtain information that reasonably supports the conclusion that a product:

  • Fails to meet mandatory consumer product safety standards.
  • Contains a defect that could create a substantial hazard to consumers.
  • Creates an unreasonable risk of serious injury or death.

Under the Consumer Product Safety Act, companies must immediately contact the CPSC if they have such information. How does the government define “immediately?” As a general rule, you file a report within 24 hours.

When hazards are discovered, the most common remedy involves a product recall. This can take the form of a repair, a refund or a replacement of the dangerous product. Regardless of the remedy, companies need to be aware of the four major steps involved in the recall process:

1. Investigating the potential risk.

Once a report is filed, the CSPC investigates to determine if the defect poses a substantial product hazard. However, the agency also has a “Fast Track Product Recall Program,” that can be used if a company implements a satisfactory consumer-level voluntary recall within 20 days. Consult with legal advisers about the best route to take.

2. Halting production and notifying retailers.

While each recall is different, manufacturers must generally identify defects, stop production of the defective items and isolate any existing inventory that needs to be recalled. Once this is accomplished, it is necessary to determine an appropriate remedy after consulting with CPSC staff. Manufacturers must also notify retailers and supply adequate information to make it easy for them to isolate the items in their inventories and stop sales in their stores.

3. Implementing the recall.

Retailers bear much of the burden of implementing the actual recall since they are generally the primary link between the manufacturer and the consumer. Manufacturers must provide support so that retailers can accurately and completely track the recalled items and ensure that no more sales are made. In addition, retailers are often called upon to help track down consumers of recalled products and provide refunds, repairs or replacements.

4. Getting the word out to the public.

This is perhaps the most important aspect of a recall. Depending on the circumstances, the CPSC may require a number of notification methods. For example, setting up toll-free phone numbers for customers, sending out press releases and video news releases, arranging in-store displays and posting website warnings. No matter how consumers are informed, the warnings must be clear and unambiguous.

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Posted on Dec 19, 2016

First, there were smartphones and smart TVs. Now, there’s the smart factory.

So when does a factory become smart, or brilliant, as they are called? When it merges lean manufacturing methods, sensors, 3D printing and powerful software analytics in a way that enhances productivity.

General Electric (GE), the world’s leading industrial company, is at the forefront of the movement. The company opened its first brilliant factory near Pune, India, in 2015 and another is in the works (see box below). The multimodal Pune factory will produce diverse products, from jet engine parts to locomotive components, for four different GE businesses all under one roof.

Although there are initial expenditures, the “brilliant” changes are expected to reduce costs and increase profit margins drastically over time. So it turns out that, as the television commercials say, GE can be digital and industrial “like peanut butter and jelly.” And when GE streamlines its factories and processes, other manufacturers sit up and take notice.

Smart Manufacturing Background Information

Of course, what’s new often turns out to be old. Henry Ford, you’ll recall, surmised that complex tasks always become easier when they’re broken down into smaller pieces. And that is the GE idea. It’s breaking down the manufacturing processes into basic steps and then designing computer code to define how each task is performed.

The concept integrates teams from engineering design and manufacturing to work toward realistic solutions on the plant floor. Machines equipped with sensors collect data that monitors every step of the manufacturing process, allowing a manufacturer to make adjustments in real time to maximize production efficiency.

The brilliant factory concept may have major implications both here and abroad. Currently, advanced manufacturing industries accounts for 24 million American jobs, which is roughly 13% of all jobs in the United States. Each of those jobs supports another 3.5 jobs throughout the supply chain. The impact is even more significant when you consider the global economy and the trickle-down effect that innovations tend to have.

Four Pillars

There are four main driving forces behind the brilliant smart manufacturing movement:

1. Lean production. The roots of the brilliant factory concept can be traced back to the advent of lean manufacturing, a philosophy derived mainly from the Toyota assembly lines. Companies both here and abroad have embraced this concept and it has spread to such sectors as oil and gas, retail clothing, computer chips and construction.

Lean manufacturing principles have resulted in faster assembly times, less material waste and greater volume. Changes focus on customer satisfaction and meeting evolving marketplace needs.

2. Technological advances. Just as technology has made huge inroads into virtually every aspect of society, so it has had a profound effect on manufacturing. Improvements range from automation to laser-based tools to robotics, cobotics (robots designed to collaborate with humans) and exoskeletons (wearable mobile machines that allow for increased strength). It’s not just humans doing the work these days. As a result, the brilliant factory may look more like the set of a sci-fi movie than your granddaddy’s plant.

Brilliant manufacturing integrates technology-based tools, such as lasers, that have been used for years by consumers. Use of these applications has expanded gradually to the manufacturing sector. In particular, investments in robotics and other automated “non-human” apparatus are improving internal controls within the workplace.

3. 3D printing. The growth of another key component, 3D printing — also known as additive manufacturing — has soared during the past decade. Essentially, the printer makes solid three-dimensional objects from a digital file by laying down (adding) successive layers of just the right amount of material. Each layer is a thinly sliced cross-section of the eventual object.

This process lets manufacturing firms operate precisely and efficiently. Notably, it can create parts that couldn’t be produced before, while reducing waste by using only the raw materials needed.

4. Digital thread. This is the name given to the communication framework that connects traditionally siloed elements in manufacturing processes. It provides an integrated view of the product throughout the manufacturing life cycle. Using a digital thread requires firms to weave data-driven decisions into the manufacturing culture.

Most manufacturers don’t have anywhere near the resources that GE has at its disposal. But that doesn’t mean your smaller firm can’t use brilliant manufacturing if it adopts and adapts some of these practices. Using available technology to help streamline processes and build on the foundation of the four pillars can help lead your company into a brilliant future.

GE Breaks Ground on New Facility

Following up quickly on the brilliant factory in India, GE recently announced the groundbreaking of a similar facility in Canada.

The new factory is being built in Welland, a Canadian transportation hub known for a canal linking Lake Ontario and Lake Erie with railways, just across the border from Buffalo, New York.

According to GE, the factory will produce massive gas engines and other components for GE businesses, employing about 220 skilled workers. GE says it expects the facility to go on stream in 2018. Others are on their drawing boards.

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Posted on Dec 14, 2016

The tide in the manufacturing sector may be turning — at least for larger companies. According to the third quarter Manufacturing Outlook Survey from the National Association of Manufacturing (NAM), large firms (those with 500 or more employees) are more upbeat about their outlook this quarter.

However, small manufacturers (those with fewer than 50 employees) and medium-sized ones (between 50 and 499 employees) experienced declines. Optimistic views are less common among the smallest firms, with just 48.7% having a positive outlook, down from 56.1% in the previous quarter.

Sentiments expressed by respondents have generally stabilized after several quarters of pessimism. What’s more, the data appears to back that assessment, albeit with some caveats, especially as to concerns over rising health care costs and modest growth rates expected in 2017. Overall, the current economic outlook of manufacturers could be characterized as “cautiously optimistic.”

Prime Considerations

In total, 338 manufacturers from all parts of the country participated in NAM’s third quarter study, including a wide variety of sectors and size classifications. Based on the latest data (collected during August), 61% of manufacturers are either “somewhat” or “very” positive about their company’s outlook, down slightly from 61.7% in the June report. Nevertheless, this outlook remains stronger than it was at the end of 2015 and the beginning of 2016.

At the same time, this is the fifth consecutive quarter when positive responses about the outlook have fallen below the historic average of 73%. The index has been below 50 over that timeframe, dipping from 42.3 in June to 41.8 in the recent survey.

Sales and Production

Size differences also are reflected in sales and production expectations. Small firms anticipate sales growth of 1.3% over the next 12 months, but medium and large firms expect an average increase of 2.1%. For production growth, the anticipated difference is 1.6% for small manufacturers as opposed to 2.2% for medium and large companies.

With all firms, sales and production are expected to grow by 1.9% (small) and 2.1% (medium and large) over the next 12 months, up from 1.6% and 1.5%, respectively, from the second quarter. Most importantly, the percentage of respondents expecting sales declines dropped from 23% in the previous report to 16.2% in the recent report.

In addition, plans for capital investments tend to vary according to size. Small manufacturers expect capital spending to decline 0.3% in the next year, while medium and large manufacturers expect capital investment to grow 0.8% and 1.5%, respectively.

Hiring Plans

The survey reports that many firms plan to hire additional workers to meet their cautiously optimistic growth expectations. Full-time employment levels are expected to grow 0.4% over the next year, an improvement of 0.2% from the previous survey.

Many manufacturers (28.5%) expect to hire new workers over the next 12 months, but 52.1% expect no growth in their workforce. Despite lackluster sales and production growth expectations, small and medium-sized manufacturers plan to be more proactive about hiring (anticipating a median increase of 0.6%) than their larger counterparts (who anticipate a median decrease of 0.1%).

The amount that manufacturers invest in stocking their warehouses with materials and finished goods can be an indicator of whether management is stockpiling for an anticipated increase in revenue — or it’s cutting back to conserve working capital during an expected slowdown.

The survey found that, overall, manufacturers plan to decrease inventories by 0.7% over the next 12 months, the sixth consecutive quarterly decline. A closer look at the responses show that about one-third of respondents (34.1%) plan to reduce their inventories, but 20% plan to invest more money in inventories.

Top Challenges

Nearly three-quarters of manufacturers surveyed cite rising health insurance costs as their top business challenge. They see costs increasing 8.5% over the next 12 months, up from 8.3% in the previous survey. Specifically, 75.2% expect an average increase in premiums of at least 5% next year, with 40.3% predicting average costs to jump by at least 10%. Small and medium firms anticipate greater increases (9.4%) than large manufacturers (6.3%).

Respondents also list an unfavorable business climate as a major concern: 73.6% placed it as the primary challenge behind health care costs. Furthermore, manufacturers continue to be frustrated with the lack of comprehensive tax reform and a perceived regulatory assault on business. (See “Cutting through the Red Tape” at right.) Just over three-quarters (76.6%) think the United States is on the wrong track, with only 6.8% saying they feel we’re heading in the right direction. The remaining respondents are uncertain about the industry’s current course.

Coming Soon

NAM publishes its Manufacturing Outlook Survey at the end of each quarter. The next survey, for the fourth quarter of 2016, is expected to be released on December 7.

Cutting Through the Red Tape

The Manufacturing Outlook Survey addresses the issue of regulatory challenges. Most respondents (88.8%) either somewhat or strongly disagree that the federal government carefully considers interests of small business owners when it imposes new regulations

Among other drawbacks, the manufacturers surveyed believe that government regulation:

  • Stifles economic growth (69%),
  • Disproportionately hurts small businesses (39.2%),
  • Creates bureaucratic red tape (34.3%),
  • Slows innovation (18.5%), and
  • Costs taxpayers money (15.2%).

Most manufacturers recognize that the government needs to implement rules to help protect the environment, provide a safe workplace and ensure fairness in competition. Yet, many believe that the cumulative costs of ever-increasing regulations outweigh the perceived benefits.

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Posted on Sep 27, 2016

Receiving Dock Audit, Manufacturing Audit

The receiving dock is an often-neglected cash leak for manufacturers. Shipment delays, poor labeling and confusing packaging can severely slow production and cut your profitability.

Take a hint from retailers: Set up a standardized vendor compliance program.

Start by talking with your receiving employees for suggestions on what can be done to speed up the process. Some of the steps retailers take that you can consider are:

  • Itemizing products and quantities before they arrive with advanced shipping notices.
  • Demanding that deliveries are made on the day and at the time specified on the order.
  • Sticking a packing slip on the lead carton.
  • Packing products in cartons and on pallets that fit storage racks.
  • Shrink-wrapping and packing on pallets of all cartons above a certain number or weight.

Retailers don’t stop there. They also impose fees for shipping violations on the grounds that they incur costs when a vendor fails to meet standards or deliver as promised. For example, one retailer charges $100 for shipping by the wrong carrier, plus the freight differential.

Improved labeling can also cut your costs. Ways to accomplish this include:

  • Standardizing the spot on cartons and pallets where labels are applied.
  • Conforming all the data on labels.

You may find room for improvement on your labels. General Motors, for example, developed the 1724a label, which uses a PDF-418 symbol to encode the part number, quantity, carton weight, distribution and handling data, and shipment information as well as a serialized container license number. The license number lets staff track contents back to the production line.

Once you’ve established your needs, present your program to your vendors. Some negotiation is inevitable, particularly if you’re asking them to make changes.

Then, set up a trial period to evaluate how well the program works and what adjustments might be needed. The trial period also gives vendors time to get up to speed.

By standardizing shipments, you can:

  • Unload trucks faster.
  • Clear the docking area quicker.
  • Maximize your use of storage space.
  • Cut the time it takes to get materials onto the production line.

Check with your accounting team at Cornwell Jackson. They may have additional suggestions for putting a program into place that can strengthen your bottom line.

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Posted on Sep 21, 2016

u-s-manufacturing

The manufacturing sector in the U.S. is in a strong position as it heads toward the close of 2016.

It has been one of the lone bright spots in a lengthy economic recovery, creating more economic value and supporting more new jobs than any other sector. And it attracts significant investment from overseas.

To highlight the current state of the sector, the National Association of Manufacturers (NAM) assembled data from a variety of sources. The following list of economic questions is adapted from the NAM’s Top 20 Facts About Manufacturing.

  1. How much does manufacturing contribute to our economy?

Quite a lot. According to the most recent data available, manufacturers contributed $2.17 trillion to the U.S. economy in 2015, up from $1.70 trillion in the second quarter of 2009, the end of the Great Recession. During that same time, value-added output from durable goods manufacturing grew from $0.87 trillion to $1.18 trillion; nondurable goods increased from $0.85 trillion to $0.99 trillion. In 2015, manufacturing accounted for 12.1% of U.S. gross domestic product (GDP). (Bureau of Economic Analysis.)

  1. How much does the sector add to the American economy?

For every $1 spent in manufacturing, $1.81 is added to the economy. That’s the greatest multiplier effect of any economic sector. In addition, for every worker in manufacturing, another four are hired elsewhere. (NAM calculations using economic impact modeling.)

  1. How large are most manufacturing companies?

Actually, they’re quite small. In the most recent data, there were 251,857 firms in the manufacturing sector in 2013, with all but 3,702 firms considered to have fewer than 500 employees. Three-quarters of those firms had fewer than 20 employees. (U.S. Census Bureau, Statistics of U.S. Businesses.)

  1. What’s the business structure of most manufacturers?

Nearly two-thirds (65.6%) of manufacturers are organized as either S corporations or partnerships. When self-employed manufacturers are added to the mix, the percentage rises to 83.4%. (Internal Revenue Service, Statistics of Income.)

  1. How many workers are employed in manufacturing?

Currently, there are 12.3 million manufacturing workers in the United States, accounting for 9% of the workforce. There are 7.7 million workers in durable goods manufacturing and 4.6 million workers in nondurable goods manufacturing. (Bureau of Labor Statistics.)

  1. How much do those workers earn?

In 2014, the average manufacturing worker earned $79,553 a year, including pay and benefits. In wages alone, they earned nearly $26 an hour. The average worker in all industries earned $64,204. (Bureau of Economic Analysis, Bureau of Labor Statistics.)

  1. Do most manufacturers provide health benefits?

Yes, 92% of manufacturing employees were eligible for health insurance benefits in 2015. This is significantly higher than the 79% average for all U.S. companies. Of those who are eligible, 84% participate in their employer’s plan (the take-up rate). There are only two other sectors with higher take-up rates: government (91%) and trade, communications and utilities (85%). (Kaiser Family Foundation.)

  1. How has manufacturing growth compared with other business sectors over the past few decades?

Manufacturers have experienced enormous growth, becoming more “lean” in the process and more competitive globally. Worker output per hour has increased more than 2.5 times since 1987. In contrast, productivity is roughly 1.7 times greater for all non-farm employers.

Durable goods manufacturers have seen even greater growth, almost tripling labor productivity over the same time frame. This growth has pushed down unit labor costs 8.4% since the end of the Great Recession, with even larger declines for durable goods makers. (Bureau of Labor Statistics.)

  1. What is the expected demand for manufacturing workers in the next decade?

It’s likely that almost 3.5 million manufacturing jobs will be needed. In fact, 2 million jobs likely won’t be filled due to a skills gap. According to a recent report, 80% of manufacturers see a moderate or serious shortage of qualified applicants for skilled and highly skilled production positions. (Manufacturing Institute.)

  1. How do exports affect manufacturing jobs?

Favorably. Jobs supported by exports pay, on average, 18% more than other jobs. Furthermore, employees in the most trade-intensive industries earn an average pay of nearly $94,000 — more than 56% higher than in firms less engaged in trade. (MAPI Foundation, using data from the Bureau of Economic Analysis.)

  1. How fast have U.S. exports grown?

They’ve quadrupled over the past 25 years. In 1990 exports totaled $329.5 billion in goods. That number doubled by 2000 to $708 billion and hit a record $1.403 trillion in 2014, despite slowing global growth.

That was the fifth record in a row. Since then, however, economic problems have damped demand, and exports are down 6.1% in 2015 to $1.317 trillion. (U.S. Commerce Department.)

  1. Where are U.S. goods shipped?

Since 1990, exports have grown substantially to the country’s largest trading partners, including Canada, Mexico and China. Also, free trade agreements (FTAs) have become an important factor in opening markets. The United States showed a $12.7 billion manufacturing trade surplus with its FTA partners in 2015. (U.S. Commerce Department.)

  1. How much in manufactured goods is exported to countries that have FTAs with the United States?

Almost half. In 2015, U.S. manufacturers exported $634.6 billion in goods to FTA countries – 48.2% of the total. (U.S. Commerce Department.)

  1. How much has global trade of manufactured goods expanded since 2000?

It more than doubled between 2000 and 2014 — from $4.8 trillion to $12.2 trillion. World trade in manufactured goods greatly exceeds that of the U.S. market for those goods. Domestic consumption of manufactured goods (domestic shipments and imports) equaled $4.1 trillion in 2014, about 34% of total global trade. (World Trade Organization.)

  1. How strong is the manufacturing economy in the United States?

Taken alone, U.S. manufacturing in the United States would be the ninth-largest economy in the world. With $2.1 trillion in value added from manufacturing in 2014, only seven other nations rank higher in terms of GDP. (Bureau of Economic Analysis, International Monetary Fund.)

  1. What about investments from foreign sources?

In 2014, foreign direct investment (FDI) in manufacturing exceeded $1 trillion for the first time. Between 2005 and 2014, FDI has more than doubled from $499.9 billion to $1.05 billion. That figure is expected to continue to grow, particularly as several announced ventures come online. (Bureau of Economic Analysis.)

  1. How many U.S. workers are employed by foreign manufacturers?

Affiliates of foreign multi-national enterprises employ more than 2 million workers in the United States — almost one-sixth of total manufacturing employment. In 2012, the most recent year with data, sectors with the largest employment from foreign multi-nationals included:

  • Motor vehicles and parts (322,600),
  • Chemicals (319,700),
  • Machinery (222,200),
  • Food (216,200),
  • Primary and fabricated metal products (176,800),
  • Computer and electronic products (154,300), and
  • Plastics and rubber products (151,200).

(Bureau of Economic Analysis.)

  1. What effect has manufacturing on innovation?

U.S. manufacturers drive innovation more than any other sector, performing more than three-quarters of all private-sector research and development (R&D) in the nation. R&D in manufacturing has increased from $126.2 billion in 2000 to $229.9 billion in 2014. In the most recent data, pharmaceuticals accounted for nearly one-third of all manufacturing R&D. That amounted to spending of $74.9 billion. Aerospace, chemicals, computers, electronics and motor vehicles and parts were also significant contributors. (Bureau of Economic Analysis.)

  1. How does manufacturing affect energy consumption?

Manufacturers consume more than 30% of the nation’s energy. Industrial users consumed 31.5 quadrillion BTU of energy in 2014, 32% of the total. (U.S. Energy Information Administration, Annual Energy Outlook 2015.)

  1. How has regulation affected manufacturing?

This has become a critical issue. The cost of federal regulations falls disproportionately on manufacturers, especially smaller firms. On average, manufacturers pay $19,564 per employee to comply with federal regulations, nearly double the $9,991 per employee cost for all firms. Small manufacturers with fewer than 50 employees spend 2.5 times the amount of large manufacturers. Environmental regulations account for 90% of the difference in compliance costs between manufacturers and the average firm. (Crain and Crain 2014.)

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Posted on Sep 7, 2016

If you’re like most manufacturers, you don’t track order-processing. Yet focusing on this performance metric can identify operational inefficiencies that are cost-cutting opportunities. And continued monitoring lets you keep those costs in check and predict future outlays.

Profiles and Histories

Consider using a system that manages data about customer buying behaviors along with tracking order-processing. Customer profiles and order histories enable you to develop sales strategies based on demand and forecast opportunities to cross-sell and up-sell.

Customer order management means different things to different people. It may be limited to account processing and the activities involved in the entry, maintenance and fulfillment of orders. Some of the tasks include pricing, managing customer credit, checking parts availability, inquiring about order status, invoicing and processing accounts receivable. In other words, customer order management includes every process from order to payment receipt.

Your company needs to develop a blueprint that delineates the tasks to be measured.

Tracking begins with a specialized enterprise resource planning (ERP) system or online workflow management program that can capture the workflow transactions involved in order processing. This is done in much the same way as you’d measure non-linear workflow in the production setting. As orders move from one person or terminal to another, they are automatically time-stamped and the number of times an order “changes hands” is recorded.

An analysis of the workflow metrics is handled by a business intelligence program that gives a non-IT person, such as a COO, the ability to “slice and dice” the data into a meaningful report. As the system gathers data over time, you’ll have a performance and cost record that can be used to analyze and fix inefficiencies. This on-going analysis becomes an important tool for continuous improvement and forecasting.

The visibility that tracking brings to order-processing reveals costly patterns that provide a basis for planning and scheduling. Furthermore, in discussions of order-processing, tracking offers objective data that puts everyone on the same page.

While computer programs are essential for gathering data, analyzing complex processes and providing routine monitoring, don’t overlook the human element. Make order-processing improvements a priority, and charge a team of stakeholders with streamlining the process.

You can learn a great deal about your operation when you know, for example, the steps involved in entering a new order. How many departments and individuals handle the order? How many pieces of paper change hands? What happens when an order changes? This lets you determine where bottlenecks exist and what transactions need to be changed, eliminated or added.

An Example

One award-winning manufacturer conducts weekly reviews of order management and other logistics of costs and performance.

Data is gathered and analyzed using the same parameters that companies typically use on the manufacturing floor — first-pass yield, cycle time and on-time delivery. Every Friday at 3 p.m., the results are reviewed and problems are discussed and worked out.

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Posted on Aug 1, 2016

Section 199

Despite its name, the Section 199 deduction — also referred to as the domestic manufacturing deduction — isn’t necessarily limited to traditional manufacturing activities within the United States.

The IRS has issued guidance addressing situations where this valuable tax break can — and can’t — be used. A recent Chief Counsel Advice (CCA) answers the question of whether a retailer could take the deduction for marketing materials that ostensibly are made in the United States and generate revenue for products that are manufactured abroad (CCA 201626024).

Background Information

During the past decade, the Sec. 199 deduction was gradually increased from 3% of “qualified production activities income” (QPAI) to 9% for 2010 and thereafter. That means that if your firm is in the 34% federal tax bracket for 2016, a 9% deduction effectively will amount to a tax cut of more than 3%.

Detailed calculations are required to arrive at your company’s QPAI. Basically, you take your domestic production gross receipts and subtract:

  • The cost of goods sold allocated to such gross receipts,
  • Direct expenses allocated to such receipts,
  • A ratable portion of other indirect expenses (such as certain overhead items)

For this purpose, DPGR includes gross receipts derived from the sale, exchange, lease, rental, licensing or other disposition of qualified production property. Significantly, the property also must be “manufactured, produced, grown or extracted” (MPGE) in whole or in significant part within the United States. In other words, this is a home-grown tax break.

Other limits may also come into play. For instance, if your firm’s taxable income is lower than its QPAI before the Sec. 199 deduction is calculated, the deduction is claimed as a percentage of taxable income. Furthermore, the annual deduction is limited to 50% of the W-2 wages paid by your company.

Overall, the IRS guidance for the deduction is favorable to taxpayers, often extending the tax break for DPGR in borderline situations. For example, gross receipts derived from a qualified disposition of Sec. 199 property generally don’t include advertising income and product placement income. However, they do if that income is included in gross receipts from the lease, rental, license, sale, exchange or other disposition of newspapers, magazines, telephone directories, periodicals or similar printed publications that are manufactured or produced in whole or significantly within the United States when the ads were placed in those media.

Important note: This special exception applies only if the gross receipts, if any, derived from the qualified disposition of the printed materials are or would be treated as DPGR.

The IRS provides the following example: Assume that a taxpayer produces and manufactures a newspaper in the United States. Gross receipts from the newspaper include receipts from newsstand sales, subscriptions and advertising placed in the paper. Gross receipts from the ads are then treated as “derived from” newspaper sales and qualify as DPGR.

Facts of the Recent Case

The taxpayer in the Chief Counsel Advice is a specialty retailer of clothing, intimates, accessories and non-clothing gift items distributed under various brand names. Its products are available to U.S. and international customers through the retailer’s website and telephone call centers for its catalogs.

Although manufacturing and producing its physical products happens outside the country, the retailer claimed to be the manufacturer of its catalogs, mailers and other similar printed publications. The materials are distributed for free to existing customers and no advertising space is sold. The advertising in the print materials is only for the retailer’s brands.

The price the retailer charges for its branded clothing includes a component to cover the cost of producing the printed materials, including a profit markup. The retailer claimed that it was entitled to a Sec. 199 deduction for the print materials because advertising is a key component of the clothing and accessories it sells.

It argued that the print media is responsible for generating the majority of the company’s sales. As a result, the retailer claims it qualifies for the Sec. 199 deduction because advertising was a component of the clothing and accessories sold.

IRS Advice

The IRS didn’t buy the argument. It published a CCA, concluding that the taxpayer can’t characterize any gross receipts derived from the sale of its products as DPGR from advertising income.

The retailer’s products are manufactured outside the United States. Accordingly, gross receipts from their sale aren’t DPGR.

The CCA points out that the exception in the regulations for tangible personal property is limited to certain printed publications and applies only to advertising income from ads placed in those media. The Sec. 199 deduction isn’t available just because the taxpayer derives gross receipts from the sale of a tangible product it advertises. In this case, the taxpayer wasn’t paid by a third party for advertisements in its printed media. The ads were solely for the retailer’s own brands.

The fact that advertising taxpayer’s products increases sales has no bearing on the result. Thus, the IRS rang up a no sale on the retailer’s deduction claim.

Key Takeaway

Although this ruling didn’t go the taxpayer’s way, don’t make any broad assumptions concerning eligibility for the Sec. 199 deduction. Notably, an activity that falls outside mainstream manufacturing may still qualify as MPGE in the United States under an exception. Review your company’s situation with a tax adviser who can provide the necessary guidance.

Section 199 Covers a Broad Range of Activities

The Section 199 deduction specifically allows a tax break for many activities that fall outside traditional manufacturing, including:

  • Construction of real property,
  • Services provided by architects and engineers,
  • Production of electricity, natural gas or water,
  • Production of computer software,
  • Production of qualified film and videotape, and
  • Processing agricultural products.

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Posted on Jul 30, 2016

When I work with small business owners, particularly family-owned businesses in manufacturing and distribution, succession planning is stalled because of a lack of communication. Owners don’t want to face the sometimes tough conversations around who will take over the business and what that will mean for family members, employees or customer relationships. Before beginning the final phase of building your succession plan, consider the following questions:

  • How will you communicate the plan to leaders, clients, employees, family?
  • What can reinforce buy-in and cooperation?
  • What contracts and documents must be in place?
  • What is the exact timetable and launch?

Usually, I try an objective process of elimination. If there are family members in the business, I ask if any are interested — and able — to operate the company. Based on the owner’s responses, we take a look at other scenarios such as a leveraged buy-out or ESOP arrangement. And finally, we look at the potential for selling to an outside buyer (e.g. private equity, competitor, affiliated vendor).

Based on the owner’s selection of a Plan A and Plan B succession scenario, we have to plan communication with family and management. The depth and detail of communication is directly related to how significant each family member’s or management leader’s role will be in Plan A or Plan B. The smaller the role, the less detailed you will be in communication. Key topics of discussion may or may not include:

  • How your buyout or retirement will be handled and impact on the business operationally and financially going forward
  • How the plan will affect each stakeholder in particular – who will be offered stock or ownership
  • How you are dealing with family members not involved in the business — helping them understand that the business is like any other stock in their portfolio
  • Your planned date of exit
  • Getting feedback on their concerns

There may be some hard conversations. This is where you can seek help from your advisory team to guide the conversation. For example, I’ve seen situations in which a child thinks the parent will bring him into the business, but the child doesn’t have any experience or education. You may also have one child already working in the business and another who isn’t. The parents want to be fair to both children, but it’s not necessarily the best decision to hand the reins of the company to both.

The same conversations must be discussed with management. Depending on the details of Plan A and Plan B, you want to avoid a mass exodus of skilled management. Therefore, discussions of transition should also include compensation of key employees to support retention and timely — rather than sudden — exits.

Set up the Timetable and Deliverables

The final timetable is of utmost importance so that you can address issues and gaps in your plan, properly structure your exit and leave the company in good hands.

Let’s say, for example, you have seven years to exit. In year three, you may arrange to step out of the CEO role and take on a support role of transitioning relationships and training management. Making such transitions over time is usually best to preserve customer relationships and value of the business.

Owners must also set up a timetable for addressing and solving issues and gaps in the plan. Perhaps you need to restructure entities for a better tax position upon sale. You may have outstanding debt and collections that need cleaning up. You will need to schedule a valuation to determine the true value (or estimation of value) of all company assets. You will also need to revisit your organizational chart to determine hiring of key management and/or transition of management.

The last 30 days of your succession planning involve reviewing your written Plan A and Plan B, establishing a timetable to address gaps and issues, and ensuring that many documents are updated and in place. Some of the key documents in a succession plan can include the following:

  • A one page executive summary succession Plan A and Plan B in writing
  • A management emergency plan
  • Shareholder agreements – buy /sell
  • Review of wills and estate plan documents
  • Purchase price formula or method with discounts and terms
  • Final proforma balance sheet, income statement and cash flow

Remember, you are not alone in this planning. Rely on your designated succession planning quarterback, such as your CPA, to keep everyone on your advisory team informed and involved. You will be amazed at the sense of relief after handling a critical piece in business ownership — that is, how to leave your business in good hands.

For more information on guiding your small business through succession planning, download the whitepaper: Do You Need a Succession Planning Starter Kit?

Gary Jackson, CPA, is the lead tax partner in Cornwell Jackson’s business succession practice as has led or assisted in hundreds of succession and sales transactions. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services such as succession planning to management teams and business leaders across North Texas. 

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