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Why Aren’t You Planning?

Only a third of you have a formal strategic plan based upon Plante & Moran studies.1 Meanwhile, the number of manufacturing establishments in the Midwest has declined from 92,577 in 2001 to a preliminary estimate of 85,225 in 2006, with Michigan being the hardest hit.2 I’m sure each of you know of companies in your market going through acquisition, filing for bankruptcy, or even liquidation. The challenges to date for manufacturing and distribution companies have been substantial. The trends suggest that these challenges will persist and new challenges will emerge for U.S. manufacturers and distributors. Despite the challenges, we believe there is great promise of strong financial performance in the post-capacity-adjusted markets for those companies that can plan and execute a path to better market positioning over the next five years.

The following are some of the market forces that present reasons for you to proactively plan for your future:

  • The new reality of domestic automotive OEMs. After years of perhaps denial and false hope, the domestic automotive manufacturers are adjusting to their new market share reality. The production forecast for 2007 for the “Detroit 3” will be approximately 9.5 million units, which is below where they finished in 2006 (9.9 million units, down from 11.5 million units in 2003).3 Reduction in supply-base capacity will continue to lag the decline in Detroit 3 market share. The Detroit 3 and their first-tier system integrators will need fewer suppliers and, therefore, will seriously evaluate who should remain on the bid list. This process has already begun.
  • Continued price decrease pressures. As the Detroit 3 struggle to adjust to their new production levels and return to profitability, they will continue the intense focus on low price. Tactics will become more creative, interactions more intense. Suppliers will have to continue to spend resources and attention to manage their commercial relationships carefully, both with customers in desperate need of cost savings and suppliers in desperate need of cash flow.
  • Dwindling best-in-class profitability. Comparing the results of the Precision Metalforming Association benchmarking study we administer, fewer and fewer stampers are among the top earnings category each year.4 Craig Fitzgerald has had to adjust his statement of “18 percent of stampers are making adequate money” to “15 percent or less are.” The Plante & Moran North American Plastics Industry Study reports successful plastic molding companies as earning only 9.1 percent EBITOC (earnings before interest, taxes, and owner’s compensation). Fewer companies have been able to make adequate returns over the last five years, and the adequate returns are not as high as they were just five years ago.

  • Changing ownership of competitors. Middle market manufacturing has historically been run by entrepreneurs, children or grandchildren of founders, and/or family boards. This category of owners typically had a long-term focus and loyalty to the company and to the employees. While that long-term focus and loyalty often led to aggressive pricing practices at times of low demand, it was predictable because as a group they understood each other. The entrepreneur owner is beginning to compete with companies held by short-term, financially minded owners with deeper pockets who may not truly understand the core processes and true cost drivers. These new competitors might bring to the market long-term financial discipline, short-term pricing chaos, or dramatic structural changes.
  • Greener pastures for non-automotive OEMs. The consumer booms of China and India are very promising. Non-automotive manufacturers are cautious to zealously pursue a portion of that growth by establishing product manufacturing capabilities in those regions. Representative companies include Black & Decker, Briggs & Stratton, and Caterpillar. The ease of information transfer may not make international product development and manufacturing painless, but definitely more possible. The market dynamics from global competition are even more severe in nonautomotive than automotive markets.
  • Michigan’s (and all of the Midwest’s) challenged near-term economy. Even those who are insulated from globalization due to the nature of their product or service still face local challenges. The adjustment in income levels for approximately 85,0005 of Michigan’s blue-collar workforce slated for buy-outs from the average “transportation equipment manufacturing” wage of $24.12/hour to the national average “private service industry production worker” wage of $15.71/hour6 will have a substantial effect on local demand for goods and services.
With these change drivers and others in play, what are you going to do to respond, weather, or better yet, thrive over the next five years? Whether you have an answer to that question or not, what good could a strategic plan do for you?

  • Focus on threats, not monsters in the closet. At the very least, it’s important to take the time as a management team to identify the many horror stories in the press that could be the real threats facing the company. An outside resource that is knowledgeable about the market can help dismiss the monsters in the closet and bring attention to real threats that otherwise may have caught you by surprise. This can add significantly to management focus.
  • Seriously evaluate the ability to compete going forward. With predictions by industry watchers of a 33 to 50 percent smaller supply base,7 the odds are strongly against all suppliers for surviving as they are today. As competitive forces and rising operating costs take their toll on a company, its enterprise value is likely to diminish over time, as will the owner’s options. Objectively evaluating a company’s ability to compete in its market as it is today and understanding what it would take to become competitive in five years would be a rational first step in evaluating the company’s strategic options.
  • Identify and explore non-conventional options. Many manufacturing companies with a formal strategy are actually employing business plans that reflect execution of the status quo. Strategic planning gives a company permission to identify and explore more radical directions. Even if the radial options are discarded, by doing so the management team has greater confidence in executing their chosen direction.
  • Focus on what will provide the most success. Companies are pulled in many different directions, some reactive to customer requests, some driven by internal beliefs, some just due to tradition. Many choices in structure, resources, and activities have little or no consequences on creating and capturing value. Usually to the contrary, resources are consumed at the expense of value creation and capture. Clear focus through a strategic plan on what drives sales and profitability the most will aid in aligning and optimizing resources to maximize results.
  • Have a clear direction and tasks for management. Manufacturing has no shortage of urgent problems to solve. A good strategic plan will define what is important for management to accomplish in addition to what is urgent in order to move the company toward greater success.
  • Prepared for opportunities. Manufacturing in America is changing and consolidating. From the consolidation and changes will emerge different opportunities, some to win new work, some to take over for those who fail. Having a clear plan will accelerate a company’s ability to evaluate and execute opportunities that fit the plan and not be distracted and consumed by opportunities that do not.
  • Survival, even profitability. Gone are the days when a manufacturing company could make OK money just by being in business. Under these pressures, just surviving, let alone making a positive return, will take proactive and directed effort with the scarce resources presently available.
1Such as the “2005 North American Plastics Industry Study” where 37% of respondents report having a formal strategic plan.

2“Quarterly Census of Employment and Wages,” Bureau of Labor Statistics, U.S. Department of Labor, Third Quarter 2006.

3J.D. Power and Associates, North American Automotive Production Forecast, January 2007; excludes DCX brands Mercedes-Benz and Freightliner.

42006 Precision Metalforming Industry Benchmark study

5Detroit News reported the number of UAW employees accepting the buyouts as 47,000 from GM and Delphi, and 38,000 from Ford.

6“Quarterly Census of Employment and Wages,” Bureau of Labor Statistics, U.S. Department of Labor, Third Quarter 2006.

7Sherefkin, R., “Hey Suppliers:” Automotive News, 1/23/2006. Fitzgerald, C., “Growing Pains,” Automotive Industries, 11/2004. Benson, M., “Tip of the Iceberg,” Make It Metal, Fall 2004.

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