Manufacturers Impacted by Stolen Software

If you are like me then you assume that software piracy only affects software development companies and the software industry. You don't associate it with manufacturing, much less think about it negatively impacting the manufacturing industry as a whole. I was therefore surprised when I saw a recent study completed by Harvard Business School (HBS) and the National Association of Manufacturers (NAM) which discussed the impact that stolen software has on U.S. manufacturing. The study argues that between 2002 and 2012 a total estimated $240 billion of manufacturing revenue was lost due to software piracy. Note that it is not estimated at $240 million, but at $240 billion! Additionally, the study noted that approximately 42,220 U.S. manufacturing jobs have been lost due to software piracy.

NAM President and CEO Jay Timmons says:

The startling losses manufacturers have suffered in the last decade due to intellectual property (IP) theft should jumpstart action by our policymakers and law enforcement officials. It’s absolutely clear that the effects of IP theft overseas are significantly felt here at home, threatening jobs, investment and growth. The study released today paints a stark picture of what we’ve already lost due to software IP theft—and how much we stand to gain if manufacturers in the U.S. can compete on a level playing field. Until proper enforcement action is taken, our nation’s innovators will remain at a disadvantage.

So how does software piracy impact U.S. manufacturers? The main impact relates to increased costs for U.S. manufacturers compared to a manufacturer with pirated software. Many (hopefully all) U.S. manufacturing companies pay full price for the software that they purchase (and/or internally develop) to run their business. This naturally increases their cost of production. On the flip side, a company that is using pirated software has full use of and all the advantages of the software, but has not incurred any additional costs. This allows the pirated software user to sell its products at a lower rate, while still maintaining a similar margin.

Has your company ever been impacted by software piracy? Please, leave a comment below!

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

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Weather “Storms” the Bottom Line for Manufacturing

Let’s face it. Fifty-two inches into the snowiest winter in Indianapolis history, challenges extend beyond avoiding deep potholes or figuring out who can watch the kids on yet another snow day. These extreme conditions have thrown a kink into the first quarter of operations for U.S. manufacturers. In the January 2014 Manufacturing Institute for Supply Management (ISM) Report on Business, many cite adverse weather conditions as a factor impacting their businesses.

Respondents from the petroleum and coal products industries report, “Good finish to 2013, but slow start to 2014, mostly attributed to weather.” And respondents from the plastics and rubber products industries say, “We have experienced many late deliveries during the past week due to the weather shutting down truck lines."

Weather has been cited as a factor behind a series of economic reports, and it is expected to be a factor in the February 2014 ISM data that will be released in March. Economists say winter economic reports are seasonally adjusted to account for bad weather, so consideration exists for weather impact, but not to this magnitude.

Across Indiana, Old Man Winter has wreaked havoc for manufacturers, such as RV producers in Elkhart who have fallen behind in production due to the multiple snow emergencies. Ken Julian, vice president of human resources for RV manufacturer Thor Industries says, “When we lose a day of production, it can put us back two or three days." Thor is not alone. Hundreds of manufacturers across the state have been forced to find ways to try and make up for lost days and revenues.  Some manufacturers may extend the production week and have employees work Saturdays until they feel caught up (which lowers manufacturing profitability through increased costs). The weather has certainly shifted economic activity, but the spring should recoup any losses, and, hopefully, sunny vacations.

Tim Murphy is an accountant in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

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Onshoring or Nearshoring?

Over the past few years, bringing manufacturing back to the United States - or onshoring - has been a hot topic in the manufacturing industry. With increasing wages, currency costs and transportation costs, many companies that previously offshored their manufacturing processes to China (and other low-cost countries) have had to reevaluate that decision. Some estimates suggest that the cost of manufacturing in China will be as high as the cost of manufacturing in the U.S. by as early as 2015. 

Although onshoring has been discussed for quite some time, and many speculated that it would happen, manufacturers are also beginning to "nearshore.” Nearshoring moves the manufacturing process out of low-cost countries and into lower-cost options close to the U.S., namely Mexico.

Mexico continues to have a low-cost labor market. Additionally, the transportation costs involved in getting products back to the United States are much lower. In an interview with Entrada Group, Jason King, vice president of AlixPartners, points to several key benefits of producing in Mexico compared to China. These benefits include:

  • Lower transportation and warehousing costs
  • Improved ability to respond to customer demands
  • Better control of intellectual property
  • Ease of proximate time zones between management and production
  • Cultural similarities between the U.S. and Mexican markets

What does this mean for manufacturing in the United States? Paula Romas, marketing director at MFI International, says, “I strongly believe North American companies should take advantage of nearshoring labor-intensive operations by establishing production sharing between the U.S., Canada and Mexico, and boosting economic activity within the region.” She continues, “Forty percent of Mexico’s exports to the United States consist of components made in the United States, primarily for the automotive industry. In China, that number drops to less than eight percent. By that logic, increasing Mexico’s manufacturing industry directly stimulates manufacturing jobs in the U.S. In turn, creating jobs in Mexico stimulates the Mexican economy, which increases Mexican imports from the United States.”

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

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Manufacturing Leads the Way for Indiana

The Indiana Manufacturers Association's (IMA) Legislative Briefing, held January 15, 2014, highlighted the success of the manufacturing industry in Indiana. Currently, manufacturing is leading the state in several  categories including:

  • Direct employment
  • Gross state product
  • Wages
  • Benefits

Indiana manufacturing employment has continued to rise from an all-time low in mid-2009 to current payroll levels reported to be only 1.1% below the pre-recession peak. The future continues to look bright as forecasters expect the Indiana manufacturing sector to continue to rise above the other mid-western states, thanks largely in part to growth in automotive supply chains and the chemical industry. 

Indiana has continued to rank first in the Midwest and is in the top 5 nationally in several “business-friendly environment” surveys recently conducted. Indiana has attracted both national and global manufacturers with its numerous competitive advantages. 

According to the Indiana Economic Development Corporation (IEDC), “The state’s central location, the nation’s second-lowest workers compensation rates, one of the lowest electricity rates in the United States, and excellent transportation network – combined with a skilled and dedicated workforce – solidifies Indiana’s position as a worldwide manufacturing lead.” 

Furthermore, the Indiana Legislature continues to propose new bills that will play a major role in the future growth of manufacturing in the state of Indiana. Recent proposals include:

  • Personal property taxes: Indiana collected 29% of property tax revenue from residential property and 71% from non-residential property (mostly commercial and industrial). According to Katz, Sapper & Miller's 2013 Indiana Manufacturing Survey, property taxes are a top concern for manufacturers. The House Bill 1001 would allow the county income tax council to adopt an ordinance to exempt from property taxation any new business personal property (other than utility personal property) located in the county. The Senate Bill 1 is proposing a plan that would result in taxpayers with assessed value < $25,000 to not be required to file a return, thus exempt from taxation.
    Indiana Manufacturing Survey - Property Tax
  • Repeal of the 30% Floor Introduction: Regulation 50 I.A.C. 4.2-4-9(a) “Minimum Valuation” states “the total valuation of a taxpayer’s assessable depreciable personal property in a single taxing district cannot be less than thirty percent of the adjusted cost of all property of the taxpayer.”  Indiana is only 1 of 15 states with the adjusted cost approach and the only state with two floors.
  • C-Corporation Taxes: The corporate income tax rate has already been reduced from 8.5% and is set to decrease to 6.5% in 2015. The Senate Bill 1 would drop this rate even further to 4.9% by 2019, making Indiana corporate taxes one of the lowest in the nation.
  • Domestic Production Deduction: Indiana currently requires taxpayers add back to the state taxable income the amount claimed as a 9% federal deduction for qualified production activity income (QPAI) (House Bill 1038). Repeal of this “addback” would reduce state taxable income for both C corps and pass-through entities.
  • Hoosier Business Investment Tax Credits: Currently these credits are non-refundable, but the bill currently proposed (House Bill 1055) would make these credits refundable at IEDC discretion.

Key takeaways from the IMA briefing:

  1. Manufacturing is the leading industry in Indiana.
  2. Growth is expected in the near future for the manufacturing industry — both statewide and nationally.
  3. Several bills are being proposed that are taxpayer friendly, thus  helping to continue the momentum of manufacturing in Indiana.

These are just a few of the highlights Indiana has to be proud of and can build upon as it continues its efforts to entice manufacturing growth to the state. So far, so good — Indiana seems to be moving in the right direction.

Sarah Hammond is a manager in Katz, Sapper & Miller's Business Advisory Group. For more information, contact Sarah at 317.452.1070 or shammond@kscmcpa.com.

 

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Hubs: A Guide to the Future of U.S. Manufacturing

Washington’s newly touted “Hub” initiative seeks to rejuvenate American manufacturing and restore lost jobs to an industry which has experienced significant losses in recent years. President Obama first called on Congress in his 2013 State of the Union to create a network of manufacturing hubs across the nation. And he once again called for them in yesterday's address.

Manufacturing hubs will bring industry leaders, universitie, and federal research together under one roof to help develop the next generation of American manufacturing. The idea is that the regional level is the best place to work on technology-based development. Each region then needs to be anchored by hubs to solve our toughest problems.

The first hub was launched in Ohio last year to develop and train workers in 3-D printing technology. Just last week, a new hub in Raleigh, North Carolina, is slated to develop what are known as wide bandgap semiconductors. Simply put, semiconductors are at the heart of every piece of electronics we use daily and wide bandgap semiconductors use up to 90 percent less power and can operate at higher temperatures than normal semiconductors. The result is manufacturers being able to make products smaller, faster, and cheaper. 

The program is currently being funded with $200 million in existing federal money, and two new hubs are expected to be announced in the coming weeks. It is unknown if these hubs will actually spur job creation or drive the American manufacturing renaissance forward. Proponents to the program believe that there are other economic alternatives the government could be doing, such as lowering the corporate tax rate or speeding up the permitting for shale and oil production, which would bring down the cost of energy and attract energy-intensive manufacturing. 

No matter what the solution is, harnessing American innovation through a program of collective experts is the right step forward.

Tim Murphy is an accountant in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

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Workforce Challenges for Indiana Manufacturers

The following is the first in a series of articles on various issues discussed in the 2013 Indiana Manufacturing Survey, conducted by Katz, Sapper & Miller and Indiana University’s Kelly School of Business, in partnership with the Indiana Manufacturers Association and Conexus Indiana. To read subsequent articles, visit Katz, Sapper & Miller’s manufacturing blog.

Concerns over a skilled workforce and related skills gaps in today’s manufacturing industry are all over the national news. But does this impact manufacturing in Indiana, a state with an abundance of workers with manufacturing backgrounds? As a manufacturer in Indiana, do you need to worry?

The results of the 2013 Indiana Manufacturing Survey  would suggest that you do. In fact, the survey found that long-term workforce planning was the second-highest concern for manufacturing companies when setting the corporate strategy (second only to labor costs). The majority of this concern is over the middle management and skilled labor market. There seems to be little concern over the ability to fill senior management positions, which reinforces the need for skilled laborers in manufacturing.

What is the real impact of this shortage of skilled workers? 

First, the cost to produce a company’s product increases. When a company doesn’t have enough skilled workers they tend to rely heavily on the skilled workers that are available. This will likely lead to a significant amount of overtime for these workers as the company attempts to fill its orders. This overtime can lead to burnout since the skilled workers must put in extra hours to make up for the shortage. The skilled workers are then likely to leave the company due to burnout. Now the company is not only shorthanded, it also has to cover the costs of training a new employee … if they are able to find one.

In addition to increased production costs, the survey found that an insufficiently skilled workforce directly impacted a company’s ability to implement new technologies. As a company has to focus solely on getting its product made with a constrained workforce, it does not have the time or ability to focus on new technologies that could actually improve the production process. This creates a downward efficiency spiral. In the same vein, the survey found that achieving productivity targets and implementing quality improvement processes are also being impacted by the lack of skilled workers.

The survey also found an interesting correlation between the Indiana manufacturing workforce and onshoring, another topic widely discussed in current manufacturing news. When asked how important various factors where in making a decision to onshore production (for production that was currently offshored), the U.S. labor market (skilled workforce) did not receive any votes for “very important.” Yet when respondents were asked what their reasons were for offshoring, an overseas skilled labor force was noted as very important. This shows that if Indiana manufacturers are bringing production back to the United States, it is not because of a skilled workforce. If it is returning to the U.S., it is due to other factors  such as reduced total “landed” costs –  i.e., customs/duties, transportation and warehousing.

In all the doom and gloom related to the skilled workforce shortage, there are efforts being made across the country to improve the labor market. Many companies are now providing their own training programs, versus relying on the traditional vocational programs that are state-funded. And Indiana is now looking abroad to see how other countries are filling the skills gap. These efforts should yield positive results, but the true burden will lay on the manufacturers themselves to support these efforts.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

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Manufacturers Wait as Talk of Key Tax Law Changes Prolong

Chairman of the Senate Finance Committee, Max Baucus (D), and head of the House Committee on Ways and Means, Representative Dave Camp (R), recently concluded a summer-long tour of America discussing tax law changes with individuals and businesses. Included in the discussions were several tax items vital to the manufacturing industry, such as LIFO inventory accounting, the domestic activities production deduction, and accelerated depreciation methods, among others. The consensus of many politicians is that in order to offset proposed cuts in corporate tax laws, a number of the aforementioned tax deductions will be cut or limited.

While details regarding specific changes have yet to be proposed, several clean energy-related tax perks are scheduled to expire by the end of 2013. The list includes:

  • The production tax credit for renewable energy (including wind power)
  • Credits for two- or three-wheeled plug in electric vehicles
  • Iincome tax credits for biodiesel, renewable diesel, and other qualified fuel mixtures; and
  • Credits for personal construction of energy-efficient residences and appliances. 

If history is any indication, Congress may extend several of these benefits at the last minute.

Baucus and Camp aim to enact tax reform legislation by the end of 2014. For more information regarding potential tax changes, and taking advantage of current benefits, please consult your KSM tax advisor.

Trent Gerbers is a staff accountant in Katz, Sapper & Miller’s Business Advisory Group. For more information, contact Trent at tgerbers@ksmcpa.com.

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Survey Sees Hoosier Manufacturers Investing in Growth, Despite Workforce, Regulatory Concerns

The results from Katz, Sapper & Miller's 2013 Indiana Manufacturing Survey: Manufacturing's Renaissance, reveal an often unnoticed but growing renaissance is underway in Hoosier (and American) manufacturing. Nearly 80% of respondents over the last two annual surveys describe their businesses as 'healthy' or 'stable' – a strong rebound from the dismal days of 2009-2010, when nearly half used the term 'challenged' to characterize their operations.
 

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Key findings of the survey reveal:

  • More than 70% of Hoosier manufacturers are actively investing in capital and labor again, while less than 5% are continuing to cut costs across the board. These results suggest that even in today's still turbulent economic times, companies are stepping up investment in their own employees and facilities, along with products and services, out of a recognition that failure to do so will hinder their ability to compete in the future.
      
  • The pro-investment attitude of Indiana manufacturers comes in the face of worries about the federal regulatory climate (notably the implementation of healthcare reform), concerns over global competition and a pragmatic outlook about the potential for market growth.
      
  • Despite these headwinds, manufacturers realize that cost containment alone is not a sustainable business strategy, and are willing to spend on superior product design, logistics and customer service to compete even in an uncertain economy.
     
  • Human capital continues to be a major obstacle confronting Indiana manufacturers. Survey respondents identified skilled production workers as the most significant labor shortage facing their companies. Fortunately, there is significant momentum among industry leaders, policymakers and academic institutions to focus on the middle-skill challenge, align curricula with employer needs and re-energize vocational and technical education.

This seventh annual statewide study of employers in Indiana's largest industry was commissioned by Katz, Sapper & Miller and developed in partnership with the IU Kelley School of Business - Indianapolis, Conexus Indiana and the Indiana Manufacturers Association.

To view the complete results of the 2013 Indiana Manufacturing Survey: Manufacturing’s Renaissance, visit ksmcpa.com/2013-indiana-manufacturing-survey.

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Seven Percent Off Your Next Purchase: Indiana’s Sales Tax Exemption for Restaurants

Seven Percent Off Your Next Purchase: Indiana’s Sales Tax Exemption for RestaurantsAre you paying more sales tax than you need to be paying? Unlike a majority of states, Indiana treats restaurants as manufacturers for purposes of the sales tax exemption for production. This can mean real savings of seven percent on purchases of equipment and utilities. In the competitive world of restaurant management, it is crucial to recognize where savings can be realized and how to go about claiming those savings.

The purchase of equipment that is “directly used in the direct production” of food is exempted under Indiana law. In order to qualify for the exemption, the equipment should act directly on the production of food (think fryers and ovens, not refrigerators or exhaust fans). This exemption can most easily be claimed by presenting your vendor with a completed exemption certificate (Form ST-105), although a refund claim can be submitted if you have previously paid sales tax on exempt equipment in error.

The utilities used in the direct production of food are also exempt. Using the above examples, the portion of the electricity used to power the fryers and ovens would be exempt but the portion used for the refrigerators and exhaust fans would be taxable. Typically a utility study is performed to determine what percentage of utilities are consumed in exempt production activities. This exemption is claimed by completing a special exemption application for utilities (Form ST-200). Generally, you should expect to receive an exemption equal to the pro rata percentage of exempt usage. However, if your exempt usage exceeds 50%, the utilities are deemed to be “predominantly used” in production and the exemption will extend to your entire utility bill.

Restaurants that are not currently benefiting from this exemption should consider performing a utility study. Filing a refund claim can result in an audit. Therefore, taxpayers need to be mindful of the actions they take in initiating a refund claim and ensure that adequate records are kept.

Tim Conrad is a member of Katz, Sapper & Miller’s State and Local Tax Practice.  For more information, contact Tim at 317.452.1388 or tconrad@ksmcpa.com.

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Manufacturing Jobs Move Back Home: Are You Part of the Trend?

More and more jobs are moving back to the U.S. as the margin of cost benefit of outsourcing those jobs continues to minimize. A CNN article summarizing the results from a survey published this week by the Boston Consulting Group showed the number of firms that have moved production back to the U.S. or plan to do so in the next two years has doubled over the past 18 months. Most large, U.S. companies have already moved some manufacturing back to America or are actively considering it. Companies such as General Electric Co., Whirlpool Corp., Caterpillar Inc., and Apple have helped this trend gain momentum.

 The key factors attributable to the shift from “Made in China” to “Made in America” are as follows:

• Declining labor costs in America
• Rising labor rates in China
• Lower energy costs: natural gas and electricity
• Proximity to customers
• Availability of skilled laborers
• Shipping costs

According to a recent article by CNN, companies choosing to move production back home are expected to create 2.5 million to five million factory and service jobs in the U.S. over the next seven years. Manufacturing jobs account for only 8.8% of the total American jobs compared to 22% “back in the day” when manufacturing was at its peak. 

While large companies are bringing jobs back to America, wages have dropped in the past few years. Factory workers being able to find a job is obviously good news; however, they will not have the same spending power that they once did. The Boston Consulting Group reports that by 2015, the average labor costs in the U.S. will be approximately 16% lower than in the U.K., 18% lower than in Japan, 34% lower than in Germany, and 35% lower than in France and Italy. Those projections seem hard to believe when you consider the history of manufacturing in the U.S.

Regardless of wages, I believe most Americans would agree that the trend towards “Made in America” is good news for the U.S. manufacturing sector.

Sarah Hammond is a manager in Katz, Sapper & Miller's Business Advisory Group. For more information, contact Sarah at 317.452.1070 or shammond@kscmcpa.com.

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Indiana Manufacturers are Exporting at Record Levels

Indiana Manufacturers are Exporting at Record LevelsIn a recent study by Indiana University’s Kelley School of Business, it was determined that Indiana manufacturers are exporting at record levels. Indiana exports reached $34.4 billion during 2012, which is a record level for the state. Exports grew by 6.6% in 2012, which exceeds the level of growth for both the Midwest and the nation. However, this is not the fastest percentage of growth that the state has previously experienced (25.6% growth in 2010 and 12.3% growth 2011). The decrease in growth rates was determined in the study to be due to economic concerns in the Eurozone countries. The study also determined that Canada was the largest importer of Indiana manufactured goods. The state’s top exported items were vehicles and auto parts ($7.9 billion), followed by pharmaceutical products ($6 billion).

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

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LIFO: Will It Stay or Go?

Among the top revenue raising topics included in the current budget proposal is the repeal of the LIFO method. Though this is not the first time the LIFO repeal has been included in a proposed budget, some are worrying that it may just pass this time. This could be a nightmare for some manufacturing companies. If repealed, taxpayers would have to write-up their beginning inventory as of Dec. 31, 2013 to its FIFO (first-in, first-out) value. In an attempt to alleviate some of the pain that would stem from having to recognize all of the income associated with eliminating the taxpayer’s LIFO reserve, the proposal states that the taxpayer would have the ability to recognize the Section 481(a) adjustment ratably over a period of 10 years. 

The LIFO (last-in, first-out) method enables companies to expense their priciest inventory (last purchased) in a time of rising prices, in order to drive-up their cost of goods sold. This in turn offsets the gross sales, thus resulting in a lower tax liability in the current year. On the other hand, when prices are falling, just the opposite is true in that cost of goods sold would be lower and the tax liability would be increased. The LIFO method has been considered a permissible method by the IRS for years. The only stipulation to electing this method for tax purposes is that the taxpayer must also use LIFO for financial accounting purposes in conformity with generally accepted accounting principles (GAAP).

The government has a few reasons for its push to repeal LIFO. Among the most obvious is the mere fact that this would raise revenue and eliminate the ability of taxpayers to defer their tax liabilities. Another important reason the government wants to repeal LIFO is that it is not permissible under International Financial Reporting Standards (IFRS).  As long as the U.S. allows LIFO to be used, it stands as one more obstacle in the way of implementing IFRS into the U.S. Many large companies that are under a foreign parent company have already had to adopt and adhere to IFRS. Repealing LIFO would also simplify the Internal Revenue Code. The accounting method associated with LIFO is complex and has often been scrutinized by the IRS. The General Explanations of the Administration’s Fiscal Year 2014 Revenue Proposal outlines these reasons for the proposed repeal.

The Indiana Manufacturers Association (IMA) is opposed to repealing the LIFO method. The LIFO method has become such a commonly used method and outside of the reasons stated above, the government has not provided any true tax policy justification for the change. IMA Policy Guide states, “Rather it is an attempt at a tax reporting uniformity that will increase the taxes of many smaller Indiana manufacturers. These companies are the central driver in job creation as economic recovery takes hold. The proposed tax increase is not only unwarranted but could be economically counter-productive if implemented at this time.”

If you are a company that utilizes the LIFO method, there is no need to panic, but you do need to be aware of the issues. If in fact LIFO gets repealed, keep in mind that there are ways to mitigate the tax consequences; it just requires some thought and planning. Two of the key tax planning factors to consider are (1) the favorable Section 481(a) adjustment spread period, and (2) choosing an advantageous inventory valuation method. Then again, LIFO could stick around for a while.

Click here to read more from KSM on the current news surrounding the LIFO Method.

Sarah Hammond is a manager in Katz, Sapper & Miller's Business Advisory Group.  For more information, contact Sarah at 317.452.1070 or shammond@kscmcpa.com.

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Indiana Manufacturing - Retrenching for the Future

The preliminary results of the 2013 edition of the annual Indiana Manufacturing Survey finds many companies indicating they are tightening their financial belts in an effort to retrench for the future.

In the 2012 survey results, Hoosier manufacturers were more optimistic, with 44 percent considering their financial performance as "healthy." But when asked the same question in 2013, just 33 percent considered themselves as such. So while some manufacturers are still cautiously investing in the future, many have reverted to cost-cutting, a theme more prevalent in the 2011 edition of the survey, when companies were just beginning to recover from the "Great Recession."

Also echoing themes from the "Great Recession," cash flows and working capital management have once again returned to the top of the list of most important priorities for Indiana manufacturers. These financial concerns are fueled by a host of reasons, ranging from rising healthcare costs to increasing government regulations. Indeed, Indiana's tax policies, along with pending healthcare laws and regulations, were rated as more important to the cost and viability of manufacturing than our renowned transportation infrastructure and logistic networks. As one manufacturer commented concerning regulations, the biggest issue is "just keeping up with them all!" Another respondent even more bluntly framed the matter: "Get out of our way so we can make a living. Too much paperwork for the simplest common sense stuff."

Another part of this retrenching is a renewed focus on existing products versus the development of new ones. For the first time in years, innovation has declined in terms of the introduction of new products. There is also discouraging news in terms of the percentage of respondents planning to open a new manufacturing facility in Indiana in the next several years, which dropped from 11 percent in 2012 to 8 percent in 2013. Likewise, those planning on "onshoring" manufacturing back to the U.S. declined from 9 percent in 2012 to 6 percent in 2013.

As with previous years, human resource development and investment in facilities, machinery and information technologies continued to be the preferred means of modernizing manufacturing. By far, the most popular improvement program remains "lean" methods, which over 80 percent of companies now feature (up from 70 percent in 2012) as part of their manufacturing strategy.

This year's survey also studies in detail the often-reported manufacturing "skills gap" in qualified workers. The two biggest shortages are in skilled production (e.g., machinists, operators, technicians, etc.) and production support (e.g., industrial engineers and planners). Not surprisingly, these shortages most adversely affected the abilities of manufacturers to achieve productivity targets and implement new technologies. Areas where the existing workforce has room for improvement include problem-solving and employability skills (e.g., attendance, timeliness, work ethic, etc.), and communication. In response to these needs, employee training and development programs, as well as overtime, were the two most common strategies to compensate for these skill gaps.

While the preliminary findings from 2013 may seem alarming, especially in contrast to the more optimistic results of 2012, we remain upbeat about Indiana manufacturing. It is important to note that this year's numbers do not even remotely compare to the bleaker days of 2008 through 2010. Nonetheless, Hoosier manufacturers are now clearly at a crossroads in history, with continued prosperity on one side and decline on the other. The results from this year’s survey suggest that Indiana's manufacturers are presently following the right strategies – managing their cash, retrenching their operations and focusing on employees. With so much at risk, Hoosier manufacturers appear determined to navigate their way through these relatively uncertain times. As one manager resolutely put it, we will "keep the doors open no matter what," while another added that they intend to continue "holding on to the path that got us here."

This annual Indiana Manufacturing Survey is a joint collaboration between Katz, Sapper & Miller, LLP, Conexus Indiana, the Indiana Manufacturers Association, and Indiana University’s Kelley School of Business.

 

 

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Healthcare Costs Top Concern for CFOs

Manufacturing companies have a wide variety of costs that they must face in the production of their products. Direct costs (such as raw materials) are easy to understand and easy to apply. Overhead costs (i.e., electricity) can be a little more of a challenge at times, but are still managable. However, what do you do about costs that you know you are going to incur, but have no idea how to determine their value? Healthcare Costs Top Concern for CFOs

This is the case with healthcare costs and a big reason why they are the top concerns for many CFOs. A recent survey by Bank of America Merrill Lynch found that seven out of 10 CFOs ranked healthcare costs as their top concern for 2013 and beyond. Healthcare costs easily topped other concerns noted, such as revenue growth (the next closest with approximately four out of every 10 CFOs), energy costs, taxes and availability of skilled workers, all of which are big concerns for manufacturing companies.  

The biggest challenge is determining how to budget for the upcoming year. Manufacturers need to be able to operate off of accurate budgets, so that they can determine what to bid their work at to ensure profitability on their jobs. The problem is that there are too many variables that are impacted by the Affordable Care Act (ACA) and most companies feel overwhelmed in determining where to start. (The Affordable Care Act: What Should You Be Doing Now?)

Companies need to make sure that they understand the basic provisions of the ACA before they begin their budgeting process. They should determine what costs could be incurred and the likelihood of those costs being incurred, so that accurate budgets can be established. KSM's healthcare reform web page is a good starting point, providing access to an array of healthcare reform resources, such as articles, blog postings and presentations.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

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“Onshoring” Is a Reality in Indiana Manufacturing

A lot of discussion has happened around the concept of “onshoring” in manufacturing recently. (Check out my recent post on the top reasons for moving production back to the United States.) Now, Indiana is seeing the effects. 

As reported by Inside Indiana Business, Genesis Plastics Welding, based in Fortville, Indiana, has been approached by multiple customers that want the company to bring production of th"Onshoring" Is a Reality in Indiana Manufacturingeir product back to the U.S. The concerns expressed by these customers are related to the quality of the product they are currently receiving and the increase in costs. (Labor and logistics costs have increased dramatically over the past few years for products made in China, which has a direct impact on manufacturing profitability.) Additionally, Genesis Plastics noted that many of its customers have people asking if their products are made in the U.S.                                                                                                   

It will be interesting to see how this trend evolves as more companies like Genesis Plastics consider moving production back to the U.S.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

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U.S. Manufacturing Jobs on the Rise: Indiana Among States Leading the Charge

U.S. Manufacturing Jobs on the Rise: Indiana Among States Leading the ChargeJobs in the manufacturing sector over the last decade have declined at a higher rate than those lost during the Great Depression, according to a report from the Information Technology & Innovation Foundation (ITIF), Worse Than the Great Depression: What the Experts Are Missing About American Manufacturing Decline

Though I hesitate to say that U.S. manufacturing jobs have made a “comeback,” I would say that we are starting to see the light at the end of the tunnel in the manufacturing world. Numerous American companies such as Caterpillar, GE and Ford have started sending jobs back to the United States. It is no secret that the United States has struggled to compete in the global markets. However, due to increasing production, lower energy costs, and a rise in labor prices overseas, we are starting to reclaim some of the 5.7 million jobs that were lost over the past 12 years.

This isn’t the only good news. In CNBC's Top U.S. states for new manufacturing jobs, Indiana was named the third-highest state for job creationg in the manufacturing sector, behind Michigan and Texas, and ranks as the top manufacturing state in shares at 16.4% in .

Experts are optimistic that manufacturing will rise again, just maybe not to the extent that it once was. We are going to see a shift from a manual factory line to a much more technologically savvy production line. Rodney Brooks, founder, chairman and CTO of Rethink Robotics believes the manufacturing future will flourish because of more intelligent automation. He points out that PCs did not take away office jobs. In fact, they enabled employees to work on more complex tasks and think at a higher level. In the same way, robots will not replace manufacturing workers; they will merely do the repetitive tasks and allow the factory worker to focus on more difficult responsibilities. (View CNBC's Industrial Revolutions: 3C Printing and Robotics for more on the story.) 

Sarah Conwell is a manager in Katz, Sapper & Miller's Business Advisory Group. For more information, contact Sarah at 317.452.1070 or sconwell@kscmcpa.com.

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Indiana Expands R&D Sales Tax Exemptions

Indiana Expands R&D Sales Tax ExemptionsOn May 11, 2013, Indiana Governor Mike Pence signed into law House Enrolled Act 1545, which expands sales tax exemptions for research and development (R&D) equipment.

The new provision clarifies that the purchase of tangible personal property used for R&D is tax-exempt for both the manufacturer and the seller of the product that is the subject of the R&D. The language spells out that prototypes, expensed R&D equipment, hand tools, and beakers and test tubes used in research and development qualify for the exemption.  The law also exempts contract R&D companies, even though they typically are not involved in the selling or manufacturing of the final products for which the R&D occurred.

Indiana businesses also receive a percentage of qualified research expenses as a credit against their state income tax liability. For more information regarding the expanded sales tax exemptions, or R&D tax credits, please consult your KSM tax advisor.

Trent Gerbers is a staff accountant in Katz, Sapper & Miller’s Business Advisory Group. For more information, contact Trent at tgerbers@ksmcpa.com.

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Indiana Enacts Manufacturing and Business-Friendly Legislation

Indiana Enacts Manufacturing and Business-Friendly LegislationAs the United States economy continues to rebound following the Great Recession, Indiana has established itself as a leading state in the manufacturing renaissance that has been a main factor behind the economic recovery. In the past legislative session, several acts were passed by the State Senate and House that will help to further Indiana’s reputation as a manufacturing-friendly state. Tim Rushenberg of the Indiana Manufacturers Association highlighted the key acts passed in April 2013 as part of the General Assembly’s 2013 session in his article Pro-Manufacturing Legislation Adopted: Workforce Development and Tax Relief. Several of the key provisions passed by the General Assembly include:

SEA 465: Indiana Works Council – SEA 465 authorizes Governor Mike Pence to designate Indiana Works Council for regions throughout Indiana that are responsible for evaluating career, technical and vocational education opportunities for high school students throughout the state. Each region’s council has the ability to develop alternative career, technical or vocational educational curriculums for high school students in an attempt to provide them with the chance to:

  • Earn industry certifications
  • Earn credit towards an associate degree
  • Establish viable career paths

HEA 1002: Indiana Careers CouncilsHEA 1002 institutes the Indiana Career Council as a means to:

  • Match job-seekers with the appropriate skills development and career training programs
  • Manage the Indiana Workforce Intelligence System
  • Provide the General Assembly with an evaluation of the State’s job training programs and suggestions for improving the state’s education, job skills and career training systems

HEA 1545: Investment Tax Credit – HEA 1545 provides several tax incentives for manufacturing and logistics companies in the state. The provision includes the following tax matters:

  • Sales Tax Exemption for R&D Property – Provides expansion of sales tax exemption for R&D equipment to include any tangible personal property used for R&D purposes whether or not the acquirer of the equipment is the manufacturer or seller of the product that is subject of research and development.
  • Hoosier Business Investment Tax Credit – Offers tax credits under the Hoosier Business Investment (HBI) tax credit program for qualified investments in logistics equipment in addition to non-logistics investments. The tax credit is limited to 25% of the qualified investment for logistics investments and 10% for non-logistics investments.

Brent Lee is a staff accountant in the Audit and Assurance Services Department at Katz, Sapper & Miller. For more information, contact Brent at blee@ksmcpa.com or 317.452.1386.

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Shortage in Manufacturing Training Programs?

There has been a significant increase in on-shore manufacturing productivity over the past few years (New On-Shoring Trend in the Manufacturing Industry), but will the U.S. labor market be able to continue to support that growth? 

One of the keys to maintaining a strong labor force for the manufacturing and distribution industry is industry-specific training (Strong Manufacturing Labor Force is Key to U.S. Economic Success). Training programs that were geared toward sending individuals into the manufacturing sector have seen a dramatic decrease in many states according to Manufacturing.net (full article here). 

Upon graduating from high school, many individuals are pushed to go to college by parents, guidance counselors and society in general, even when it is not the best option for them. The result is a shortage of people entering into the vocational programs that have helped fuel the labor market for manufacturing in the past. Less demand for classes, has led to a decrease in the supply of classes (Economics 101). Additionally, many vocational type programs have seen a cut in budgets through reductions in state funding.  This also reduces the amount of individuals that are being prepared for the manufacturing sector. 

 

 

 

 

 

 

Some institutions are fighting to keep vocational programs alive, such as Lyndon State College in Vermont, which recently started a new NEK Manufacturing Training Program. However, the classes currently being lost far exceed those that are starting.

As the current generation of manual skilled works starts to look at retirement there is a significant amount of opportunity and job openings coming online for individuals that are trained and ready. One has to wonder if there will be a generation to replace these much needed workers as the training programs disappear. Only time will tell what the ultimate impact on the manufacturing sector will be, but most likely, individual companies will have to start providing training (that they fund) versus the traditional vocational programs (state funded).

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

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Small Manufacturers Need to Reevaluate "Made in the USA"

Much has changed in the manufacturing industry over the past 10 years when it comes to offshoring decisions. Ten years ago, it was assumed by most manufacturers that outsourcing and buying parts from overseas would be a cheaper and more profitable approach. However, the current environment is not so easy to read. 

Manufacturing.net recently published a call to reevaluate the concept of “Made in the USA" for the following reasons, among others:

Increased shipping costs have led many manufacturing business owners to reevaluate whether the overseas parts are really less expensive than making them stateside. And manufacturers are tired of having to deal with the lag time involved when shipping parts from overseas, which typically occurs on slow-moving container ships. This can cause problems when getting products to customers on a timely basis, which impacts customer satisfaction. Not to mention a weaker U.S. dollar has made foreign-made goods more expensive.   

Read Made In The USA Back In Style For Small Businesses for more information.

Justin Hayes is a manager in Katz, Sapper & Miller's Audit and Assurance Services Department, which is comprised of individuals skilled at evaluating business and control risks for clients.

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