Tell Us Something We Don't Know: Employment is Down because Productivity is Up

In his July 4th New York Times OpEd piece, David Brooks wrote an otherwise interesting opinion on the G.O.P. tactics during this latest budget debate. One point he referenced as an economic concern, however, troubled me:

“Manufacturing employment is cratering even as output rises…”

What does that mean? Is it bad? Well, it would only be bad if both employment and productivity went down.

In the June 14 posting of the blog Carpe Diem, Mark Perry provided a great analysis on the reality of domestic production. Mr. Perry wrote: 

“We are constantly hammered with bad news about the decline in the number of manufacturing jobs in the U.S., but we never hear the good news about why that is happening: Manufacturing workers in America keep getting more and more productive, which then allows us to produce more and more output over time, with fewer and fewer workers. That’s a great story about an American industry that is healthy, successful and thriving, and not an industry in decline.”

He also provided the graph I have shared below to illustrate the enormous productivity gains the US worker has been part of over the last number of decades.

Though domestic manufacturing is doing quite a bit better than in the past, by no means do I believe it is “thriving” as Mr. Perry asserts. It is just better positioned to meet the opportunities of a vastly different global economic landscape. 

Manufacturing more than most industries has changed for the better because it had to. Through a combination of lean manufacturing and the adoption of high tech machinery and software, domestic manufacturing has been able to sustain itself during the dark “outsourcing” movement of the last 20 plus years.

As production flowed overseas, domestic manufacturers had to face the reality of lowering their operating costs or die. Re-engineering and lean manufacturing became the business process initiatives necessary to drive productivity in otherwise cash starved enterprises. When the change process used to become especially challenging I remember saying to the companies we worked with:

“One day the cost of labor in China will become too costly and work will start flowing back to the US. Those that become lean and survive will be positioned to meet this opportunity head on. Work to be one of those companies.”

This is the power of the free market. Industries left tethered to some counter productive incentive often become bloated because there is no reason to change. Manufacturing on the large part were left un-tethered and had no choice but to change. Those that survived are now in a better place.

So back to Mr. Brooks comment. Manufacturing employment has catered because it had to in order to meet the real competitive pressures of off shoring. In order to survive they had to become more productive and productivity either meant producing more with the same or producing the same with less. This is a good thing!

Unfortunately, from a macro-economic stand point, this does not help the greater than 9% of unemployed workers left hanging. This is the employment challenge in the United States to which I have a few thoughts I would like to share in my next post.

We won’t take this lying down!

The International Monetary Fund (IMF) has been in the news over the last couple of days. Unfortunately, for reasons that have nothing to do with the IMF. This post has nothing to do with that but more importantly for a forecast they released back in April. On April 25^th the IMF released the first meaningful forecast or prediction of when the United States would fall from being the leading economic power in the world.  The prediction which came from this was a bit of surprise in how soon they believed this might happen.

It does not take any sophisticated prognostication to reveal that China would be the country most likely to take this number one position from the United States.  First off, they are the most populous country in the world.  They have 1.4 billion people.  India is second with 1.2 billion and the United States is number three with 310 million.  The population of China is 4.5 greater than that of the United States.  If the consumption and productivity per capital in China were to be 25% of their American counterparts, China would be ahead of the US in these categories.  

Secondly, we have been hearing the “giant sucking sound” that H. Ross Perot talked about when he was speaking out against NAFTA in his 1992 run for President.  Perot was wrong in stating all industry jobs would be going to Mexico.  Instead they all went to China in a relatively short order.  This “giant sucking sound” was not just heard in the US, it was heard in Europe and Japan as well.  

The figure to the right, from the IMF, shows the ranking of GDPs of the top ten countries in the world in millions of USDs in 2010.  China is number two, having edged out Japan for that position recently.  China is only poised to grow.  The US having lost so much of our manufacturing base will wane in our opinion. We see it already in the shrinking middle class and changes in the distribution of wealth here.  

The surprising part of the IMF prediction is how soon they see China taking over the number one position.  They are predicting that this could happen as early as 2016!  When we read this story, we expected a much bigger reaction from the government and citizens.  There did not seem to be much furor over this at all.  The lack of reaction concerns us even more than the IMF prediction.  

Sure, the US economy will continue to be strong and there have been some movement of manufacturing coming back to the United States (on-shoring). But, as we have commented in other blog pieces, change happens faster and faster in our times.  Change occurs faster than we can react to.  If the 2016 prognosis is correct, it is practically an inevitability given we are mid-year 2011.

This does not mean, we should take this lying down.  Not at all.  Not one little bit.  Cadent Resources, Inc. is a small company but we believe in and are committed to US manufacturing and distribution.  We want to see a strong and vibrant industrial base in the US not simply because it would be good for our business.  We believe it would be good for the entire country.   

We call on all segments of our society to take advantage of our excellent universities to encourage our young people to major in and become the best in world in:  

• Engineering & Sciences


• Mathematics & Computer Sciences

We encourage our government, universities, and corporations to not only encourage such educational initiatives but to develop real workable programs geared to grow manufacturing and manufacturing jobs in this country.

It will not be easy, but we believe strongly that we need to do this.  This forecast from the IMF should be the rallying cry for our nation.

Economic Curveballs and Sinkers

Even though the baseball season started a couple of weeks ago, we wish the world did not join in the fun by throwing curve-balls and sinkers at this recovery! $4 plus gallon of gasoline, supply chain disruptions in Japan, and the talk of holding the the Fed’s debt ceiling in check are a couple of massive curves that potentially place our economic growth in peril.

In the April 19th issue of APICS eNews, APICS reported:

• According to the Federal Reserve, manufacturing in the United States grew for the ninth consecutive month this March


• NPR reports that factory production—including consumer goods, business equipment, and raw materials—increased 0.7 percent over February’s figures, despite supply chain disruptions related to the ongoing crisis in Japan.


• Industrial production as a whole is up about 12 percent from its June 2009 low, but it trails the September 2007 peak by about 7 percent.


• Of all major market groups, output of construction-related goods increased the most, with 1.5 percent growth. Consumer goods also increased, with 0.9 percent growth following two months of little change. Long-lasting consumer items such as appliances, home electronics, and automotive products increased, while output of products with shorter shelf lives decreased.


• While economic recovery depended on business spending in the early stages, the March figures suggest consumers now are fueling economic growth. Consumer spending rose in March, and the unemployment rate reached its lowest point in two years.

This is all great news, but we are still concerned that the aforementioned challenges are very real land mines that we must watch and manage carefully.

Any opportunity that was recently afforded via the ever improving economy for slightly heavier inventories may be ending. Keep your demand plans as short term as possible, continue to drive down lead times, drive S&OP, and collaborate with your suppliers and partners in earnest. Those continue to be the keys to navigating this on-going period of uncertainty.

Four Strategies to Help You Meet the New Normal, Head-On

Back in January we posted our Supply Chain Resolutions for 2011. In our March newsletter, we shared our four improvement strategies for the remainder of 2011. We are posting them here for those readers that do not receive our monthly newsletter. Our four strategies are:

1. Collaborate! Now more than ever is the time to actively communicate with your customers and suppliers. Where possible use technology to share data and demand plans. Extend your planning process to include your suppliers. Imagine if you and your suppliers were tied together with a taught string. You pulling on supply prompts your vendors to react immediately to your needs. Collaboration via data sharing and active communication eliminates the natural slack in manual processes that introduce delays and demand and supply volatility and inaccuracies.


2. Become faster. Implement lean manufacturing methods to reduce waste and become more nimble. You want to be in a position to respond quickly. Reducing lead times both internally and externally is critical.


3. Measure. We are big proponents of data based decision making. As the economy is slowly picking up, you need to evaluate the following to get peak performance from your ERP.
   
   
   
   1. Are your lead times and run times all up to date?
   
   
   2. When was the last time you did an ABC reclassification your finished goods and materials?
   
   
   3. Take a hard look at your customer service performance. Are there holes in your performance. Often if there are issues inventory is to blame which in turn could mean you have capacity issues or do not have appropriate inventory policies. The new normal dictates a continual review and adjustment of these levels.
   
   


4. Refocus. It is a great time to revitalize your continuous improvement efforts.
   
   
   
   1. Asses your top issues, concerns, priorities? What improvement in these areas would provide the biggest P&L dividend to your business?
   
   
   2. Regarding collaboration, put a joint continuous improvement team in place with your major customer or supplier to improve or implement a Collaborative Planning Process.
   
   

The ongoing uncertainty and the new normal of the economy is rife with challenges. The winners are those companies that challenge their own reality and challenge the very basis they go to market.

Supply Chain Resolution 2011

As we did last year, we would like to share our business perspective for the coming year and what it means from a supply chain standpoint.

From a macro-economic standpoint, we see the slow steady growth experienced in 2010 to continue. Our demand plans should not be overly risky or overly conservative.  It is a good time to be moderate. We are keeping an eye on the following potential issues that could minimally dampen the pace of recovery or, in the worst case, cause another recession:

Unemployment in the US is still high at around 9%.  There are indications that it has flattened out. Reports from month to month show decreases and increases.  Things are slowly getting better. Unemployment seems chronic for older workers and it is also tough for recent college graduates. Business is still tough for search firms.

Foreclosures are quite high.  This is the second shoe of the recession that many have been expecting to fall for the past three years.  It just has not happened.  These high rate are due to a combination of the mortgage crisis and the subsequent high unemployment levels.  There are too many properties where owners have negative equity and payments they cannot afford.  They default on their mortgages or their taxes.  The inventory of foreclosed properties is so high they are depressing the entire housing market and related industries.  If your business is housing related, your already depressed business could become even more dismal.  You need to pay special attention to developments in this arena.

Governmental problems may be the nastiest of the lot.  The problems of countries in the EU like Greece and Ireland have been prominent in the news.  The problem of states and municipalities in the US is less well publicized but equally risky.  There are serious concerns about large states like Illinois and California.  Will they be able to pay their bills?  Will they be able to honor the pensions of their employees and retirees?  There are municipalities that are in equally dire straits. 

Oil Prices have been creeping up in the past year.  The growth has been slow and steady unlike the bubble experienced in 2008.  We believe this trend will continue through 2011 and needs to be factored into budgets and budget revisions. 

All of the above lead us to believe that we have recovered but at a new level that is somewhat lesser economically from the go-go years of earlier this century.   This has become to be known as the New Normal.   There can be all kinds of debates if this is really true and whether the US will return to 2006 levels or if have become more like a European country like the UK or France.  No matter how this matter is debated, businesses have already adapted to the New Normal whether they admit to it explicitly or not.  This is precisely why business results and stock prices have returned.  Businesses have adapted to the New Normal and not staffed back to the pre-recession levels.

Businesses will only add jobs are they need too.  Employees, while perhaps weary of added tasks and longer hours, are still happy to be employed and will continue to work hard especially as there is nowhere else to go.

We also believe in this New Normal.  We have exported too many manufacturing jobs.  Our economy is now adjusting to that reality.  We most likely will not return to the levels of consumption and low prices that we had pre-recession.

So, what is the prognosis for 2011.  Our call, much the same as last year, is for cautious optimism.  In January of 2010, we had claimed stabilization and looked for modest growth.   The economy did modestly grow.  This year, we expect that modest growth to continue.   The aforementioned issues will, at best, continue to hamper growth and recovery… at worst, these issues could bring about another recession.

A few questions for consideration:

• How do you see 2011 from the perspective of your business?  Is the glass half-full or half-empty?


• What is your greatest hope?


• What is your biggest fear?


• Do you agree with the four issues (Unemployment, Foreclosures, Insolvent Governments, and Oil Prices)?  Is there anything we missed?

Your input will be appreciated.