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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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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Survey Finds Indiana’s Manufacturers Ready to Compete

The certified public accounting firm of Katz, Sapper & Miller LLP today released the results of their annual Indiana manufacturing survey. This study of small- to medium-size manufacturing companies was commissioned by Katz, Sapper & Miller and developed in partnership with Indiana University's Kelley School of Business – Indianapolis, Conexus Indiana, and the Indiana Manufacturers Association.

The results from this year’s survey, 2012 Indiana Manufacturing Survey: “Halftime” for Indiana Manufacturing, indicate that Hoosier manufacturers are stronger this year than at any point since the Great Recession, and are well positioned to compete in the coming years.

“Fundamental changes are continuing to take place across manufacturing in all kinds of capabilities,” said Scott Brown, partner-in-charge of Katz, Sapper & Miller’s Manufacturing and Distribution Services Group. “Businesses are starting to invest for growth, including facilities and automation, with an eye toward providing customers increasing quality at lower prices. While many Hoosier manufacturers have managed to survive the effects of the recession, challenges remain. Of course, not all manufacturers have found the perfect winning strategy, but many are heading in the right direction and some are excelling during these challenging times."

Other key findings reveal:

  • Hoosier manufacturers have largely shaken off the effects of the Great Recession and have stabilized their businesses. A significant majority of Indiana's manufacturers now report that their business is either "healthy" or "stable” with tougher times behind them.
  • Survey results indicate that the past's relentless rounds of downsizing are over, and while that approach worked well when mere survival was paramount, it is hardly a winning strategy for the future.
  • Many Hoosier manufacturers now recognize that the winning strategy is targeted investment aimed at growth. Over 70% of respondents reported that their goals were increasing investment in areas either essential for revenue growth, or across the entire business.
  • Indiana remains well positioned to lead American manufacturing. Hoosier manufacturers are highly competitive in a broad variety of industries and products, and, in fact, one in 10 of the companies in this survey are planning to open a new facility in Indiana in the near future.
  • A significant number of respondents report that they are onshoring manufacturing back to the United States. Indiana’s competitive advantage remains the fact that nowhere else in America allows manufacturers to position themselves closer to their customers and markets, or offers greater advantages in terms of suppliers and workforce quality.
  • Successful manufacturers are continuing to rely on process improvement programs such as "Lean" and "Six Sigma" for implementing change, as well as increasingly taking advantage of advanced automation or smart manufacturing technologies to remain competitive.

Download the complete results of the 2012 Indiana Manufacturing Survey: “Halftime” for Indiana Manufacturing.

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Clean Energy Incentives Manufacturers Should Consider

In a move to accelerate investments in industrial energy efficiency, and to reward states and business that engage in such investments, President Obama signed an executive order August 30, 2012: Accelerating Investment in Industrial Energy Efficiency. The order builds on prior efforts of the administration to reduce overall energy consumption and harmful emissions in the United States, and aims to “put more people back to work and build an economy that lasts." The order claims that the industrial sector, which accounts for 30 percent of all energy consumed in the United States, may save a combined $100 billion in energy costs over the next 10 years via the proposed reduction in energy use. 

One goal specifically relates to the use of combined heat and power (CHP). In fact, the order seeks to deploy 40 gigiwatts of cost effective CHP within the United States by 2020, which the administration argues would save energy users a combined $10 billion per year. CHP systems are used by manufacturers in place of conventional electrical power to save energy and costs through means of heating water to create turbine-spinning steam. To learn more about CHP technologies, visit the U.S. Environmental Protection Agency's CHP Partnership page, or the United States Clean Heat & Power Association's site.

As evidenced by this order, the current administration plans to support states that encourage building CHP and offer tax incentives to companies that install CHP. Clean energy incentives already in place include the Production Tax Credit and the Advanced Energy Manufacturing Credit. Under the Production Tax Credit, companies using eligible energy systems can receive a credit of up to 2.2 cents per kilowatt-hour of power (kWh) used in operations through specific clean energy sources. The Advanced Energy Manufacturing Credit provides a tax credit of up to 30 percent of investments made in qualifying advanced energy projects, such as properties using wind, sun, geothermal, and fuel cell technologies.

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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Skills Gap in Manufacturing Industry

As the U.S. economy strives to remain on the edge of the technical revolution, many high schools across the country have eliminated traditional shop classes for more high-tech information technology related classes. Could this elimination of shop class have created the large skills gap that the manufacturing industry is beginning to experience? Yes, according to Emily DeRocco, president of the Manufacturing Institute, the educational arm of the National Association of Manufacturers. "One reason for the experienced Baby Boom works will be so difficult to replace is that high school shop classes where many of them [Baby Boomers] learned their skills were eliminated decades ago." (Teens learn robotics as factories lack skilled workers, Reuters)

Modern manufacturing companies do not resemble the production lines that most people think of when talking about manufacturing production. Manufacturing business plans have eliminated the traditional production line and have looked at increased efficiencies through technology. Most manufacturing production plans fall into one of two categories:

  1. A high-speed automated plant with very specialized machinery that can produce a high volume of identical items. The workers at these plants tend to be more focused on making sure that the machines are working properly and running smoothly.
  2. A plant that makes highly customized large products (i.e. airplanes, cruise ships), where each unit is different and workers need to the skills and knowledge to adapt.

A recent survey conducted by Deloitte and the Manufacturing Institute found that there were roughly 600,000 skilled manufacturing positions/jobs that were currently unfilled. Employers cannot find capable people that have the capacity and understanding to work in a high-tech manufacturing position.

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 in the New Age

In June, 2011, President Obama announced the launch of the Advanced Manufacturing Partnership (AMP). The AMP is an effort by the federal government to partner with manufacturers in industry and academic experts to invest in ways it improve or "advance" the U.S. manufacturing industry. The plan calls for more than $500 million to help start the efforts. President Obama announced the following key steps are being taken by the government to ensure the success of the AMP:

  • Building domestic manufacturing capabilities in critical national security industries
  • Reducing the time to develop and deploy advanced materials
  • Investing in next-generation robotics
  • Developing innovative energy-efficient manufacturing processes

Over the past few years, many Americans have lost jobs with strong manufacturing companies. Professors at Massachusetts Institute of Technology (MIT) are hoping that the efforts of the AMP program are able to restore many of these jobs. The goal is to create an environment through partnerships with government, academia and private industry to create new means of manufacturing more for less, therfore increasing manufacturing profitability.

MIT political scientist Suzanne Berger says, “This isn’t just about ways of moving widgets around. What we’re talking about is a whole new set of technologies.’’

The work at MIT and other universities is already beginning to impact the current manufacturing environment. MIT labs sparked the idea that created the lithium-based batteries that are now beginning to truly impact the auto manufacturing sector. MIT has created a strong working relationship with five other universities with the hope that the more academia involved, the more impact there will be.  Only time will tell how successful the AMP initiative will truly be, but as Jason Miller, assistant to President Obama, states in  a recent speech at MIT, it's not about the past. It's about the future.

"It's not about some desire to return to a romantic notion of the past, of what manufacturing was," Miller said. "It is about a fundamental recognition that without a robust and vibrant manufacturing sector, it's going to be difficult for us to sustain a robust and innovative economy."

Justin Hayes 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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How the New Small Business Jobs Act Will Help Your Business

The 2010 Small Business Act contains many provisions that will aid businesses of all sizes and in all industries, including manufacturing and distribution, life sciences, technology, and healthcare. The new rules may incent businesses to consider new equipment purchases, may help guide 2011 budgeting and forecasting and could serve to assist strategic planning. Rules benefiting business include:
  • Increased IRC Section 179 Expensing - Retroactively effective to January 1, 2010 and through December 31, 2011 the Act increases the maximum Sec. 179 expense from $250,000 to $500,000.  The phaseout threshold of the expensing deduction is raised to begin at $2,000,000.
  • Expansion of Property Types Eligible for Sec. 179 Expensing - In a significant change from Sec. 179 rules allowing only personal property to be eligible for expensing, the Act will allow up to $250,000 of qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property to be expensed.  This rule will be available effective January 1, 2010 through December 31, 2011.
  • Bonus Depreciation is Back - The Act extends 50% bonus depreciation for one year through December 31, 2010.
  • New 5-year Carryback Period for Unused General Business Credits - Under prior law, the general business credit ("GBC") used to offset income tax could not exceed the excess of a taxpayer's net income tax over the taxpayer's tentative minimum tax (AMT) or 25% of the taxpayer's net regular tax in excess of $25,000.  Unused GBCs could be carried back one year and carried forward 20 years.  Under the Act, credits generated by eligible small businesses in 2010 may be carried back 5 years, potentially creating opportunities to recover taxes paid in prior years.  Additionally, GBCs eligible for the 5-year carryback will be allowed to offset alternative minimum tax.
For additional information related to the Act, see summaries here, here and here.
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