Machine Tool & Manufacturing Insight (Fall 2022)

Machine Tool & Manufacturing Insight (Fall 2022)

This insight focuses on a number of topics that pertain to the machine tool/manufacturing industry as a whole, including current issues and trends, continuing efforts to find more workers, actions being taken to deal with the supply chain crisis, Apple’s efforts to bring manufacturing back to the U.S., and Honda’s plans to expand operations in Ohio. It also includes a brief commentary on the outlook for the manufacturing industry.

Hot Topics

Top U.S. Manufacturing Issues and Trends: The manufacturing industry continues to grow despite labor and supply chain challenges. However, to maintain this growth momentum, the industry must navigate these issues and related trends while advancing technology and process priorities.

Employment. Workforce shortage continues to be an issue for the manufacturing industry, with most companies looking to hire additional employees and experiencing high turnover rates in those they can employ. According to recent surveys, employment levels remain the top issue affecting further growth for the industry. Due to the small pool of applicants and the significant turnover of employees, many companies are focusing more on ways to attract and retain talent. They must find ways to balance internal goals for retention, culture, and innovation with the flexible work environment many industries are providing in the post-pandemic world. Looking to a broader talent pool to reach diverse, skilled individuals may help offset recent turnover. Those manufacturers that can navigate workforce shortages and changes are positioned to come out ahead.

Supply Chain Instability. Supply chain issues also remain at the top of the manufacturing industry’s list of challenges. Prices for raw materials have been on the rise, driven by price increases for oil and fuel, packaging supplies, commodity materials and petroleum-based products. In addition, delays in supplier deliveries are expected to continue to remain a major headache for the industry. Due to transportation issues in China, many companies in the industry are beginning to move their supply chain back within the U.S. provided they can find their materials at competitive prices compared to what they would pay overseas suppliers. Manufacturers have also begun to rely upon multiple vendors, so if one is unable to meet a deadline, hopefully the other will. Finally, companies have started to place orders earlier to allow for longer lead times before the product is needed.

Industry Demand. Although much of the talk around the manufacturing industry is typically around the issues related to the supply chain and employment, the demand for manufacturing is strong and continues to grow. Backlogs continue to expand as new orders are brought in and output remains constrained. In order to deal with this increase in demand, companies can increase pricing if the number of orders being placed is unfeasible for the company to meet. By increasing prices, a few of the customers may go elsewhere, allowing for the company to see increases in revenue while not overloading their backlog at the same time. For a number of years now, company’s inventories have been too low to meet demand. On the positive side, this situation has allowed room for growth in production as employment and supply chain issues begin to be resolved.

Integrating Software. One thing companies can do to assist their employees and managers in the current environment is to invest in new software or update existing software. Software updates can help improve efficiencies and organization and make managers’ jobs easier. This could include updates to payroll software, project management software, and inventory management systems, just to name a few. Improving the software employees are using to complete their daily tasks may make their jobs run smoother with less stress placed on them, which could lead to improved retention rates. New software may also include improved capabilities that help with the current supply chain constraints. For example, new software may have features to help managers better understand the status of their supply chain and help them get ahead of future shortages and/or delays.

U.S. Factories Scrambling to Find Workers: U.S. manufacturers are scrambling to find workers as the pace of hiring hits levels not seen in decades. The September jobs report showed U.S. manufacturers added 22,000 workers in September, increasing employment in the sector by nearly 500,000 over the last 12 months. Since April, manufacturing employment has been growing at about a 4% annual rate, the fastest sustained pace of growth since 1984. However, despite the hiring binge, the sector has had about 800,000 openings for most of the last year.

“Hiring has been a problem since 2020,” said Hayden Jennison, production manager for Jennison Corporation, a Carnegie, Pennsylvania, company that makes everything from firefighting equipment to construction machinery. “Hiring experienced candidates that understand the industry, and understand what they’re doing, has been very difficult.” Although factory jobs and output typically take a hit during economic downturns, as they did during the Great Recession, industry experts don’t expect the same result this time. “I think we’re in uncharted territory,” said Jay Timmons, CEO of the National Association of Manufacturers. “For every 100 job openings in the sector we only have 60 people who are looking. I think it’ll take quite a while to fill that pipeline.” Timmons said that pay in the sector is up 5% over the course of the last year, and he expects it to keep rising as manufacturers scramble for skilled labor. To fill the hiring gap, employers are looking to women for more help. Manufacturing is still a male-dominated industry, with only 30% of hourly factory jobs held by women, but that’s up from 27% only two years ago,

Experts say one of the biggest problems manufacturers face in attracting workers is their perception of the nature of the job. Hiring prospects often take a look at the images of manufacturing and see the sparks flying and a welding environment that appears to be dark and dingy. That is a misconception that needs to be corrected since by and large manufacturing jobs today are high tech.

Navigating the Supply Chain Crisis: The days of cheap overseas production may be over. Manufacturers are now returning to the U.S. in droves, hoping to reduce their reliance on international suppliers. Most U.S. companies with production operations in China have either moved back to the U.S. or plan to do so in the next three years. However, no factory is immune to global supply chain disruptions. As such, manufacturers must be adaptable and agile in responding to raw material variability, an ongoing challenge for factory owners. However, with frequent supply chain disruptions, the industry is seeing the persistent trend of raw materials becoming scarcer. As a result, prices are rising at staggering rates, forcing manufacturers to choose between reducing profits, making them less competitive, or substituting lower-cost alternatives that may affect product quality.

With recent supply chain disruptions having changed the manufacturing sector forever, agility and adaptability have become crucial attributes for any manufacturer hoping to remain competitive in today’s global markets. In a recent survey taken by ABB, a leading global technology company, more than 40% of business leaders said that they anticipated using automation and robotics to make their supply chain more resilient. With rising energy prices, this has never been more important. Running plants more optimally leads to drastically lower operating costs, vital for enterprises that want to stay competitive.

To address production threats, manufacturers are also relying more heavily upon technology powered by machine learning algorithms that monitor quality across production processes. Such technology can detect unforeseen variability that might affect quality and instruct plant engineers and operators on how to adjust manufacturing processes to bring goods back to the “normal” level. As a result, manufacturers are able to maintain product consistency and quality, even with different ingredients constantly being added.

Apple CEO – A Trailblazer for American Manufacturing: In 1998, Tim Cook joined Apple as Senior Vice President for worldwide operations and, in 2007, was promoted to lead operations. When Apple co-founder Steve Jobs stood down from his role due to pancreatic cancer, Cook took over on August 24, 2011, at the age of 59 and is now the world’s second highest paid CEO. Under his leadership, AirPods, the Apple Watch and Apple Music have become a part of everyday life for millions of people and Apple’s market cap is approximately $2.2 trillion.

Over the past two years, the global manufacturing sector has been rocked and many CEOs are determined not to be caught by supply chain disruption again. Due to growing tensions between China and the U.S., some businesses are moving their manufacturing hubs out of China – a sector that accounted for 27% of the country’s GDP in 2021. Under Cook’s direction, Apple is moving its production to China’s neighbor, Vietnam, and rival, India, in order to prepare for any future supply chain disruptions. Currently, Apple is manufacturing AirPods Pro, iPads and other small devices in Vietnam. Cook praised the emerging market in May, when the Prime Minister of Vietnam, Pham Minh Chinh, met with Cook at Apple Park to discuss trade.

At the same time, Cook is also bringing American manufacturing back home. Apple has invested $45 million into a factory in Kentucky that makes scratch-resistant glass for the iPhone. With a desire to forge new relationships with American manufacturers, Cook established the company’s Advanced Manufacturing Fund. The $1 billion fund is designed to support over two million manufacturing jobs in the U.S.

Ohio Pledges Over $150 Million in Taxpayer Money for Honda Factories: Honda, one of the world’s largest automakers, recently announced it will spend $4 billion building and upgrading factories in Ohio. In early October, Ohio Governor Mike DeWine announced that Honda , as part of its pledge to sell only electric vehicles by 2040, will spend over $4 billion building up its electric manufacturing capacity in the Buckeye State. That includes $3.5 billion to build a new battery plant in partnership with LG Energy Solution, plus $700 million to retool three existing Ohio Honda plants for vehicle production. It is anticipated that the investment will create over 2,500 jobs.

Shortly after the governor’s announcement, the Ohio Department of Development stated that it will be seeking more than $150 million in state incentives: $71.3 million for a 30-year tax credit and $85 million in local infrastructure improvements to support the project. That money will come from state taxpayers and may be just the start; it may not be the final price tag. However, considering that Honda already pledged more than $4 billion to the project and that the company’s market cap is nearly 10 times that amount, $150 million in incentives seems trivial.

Manufacturing Industry Outlook

The near-term outlook for the sector remains optimistic as many manufacturers continue to report significant order backlogs that will drive their business activity into early 2023, particularly among firms supplying building materials. However, the sector faces some notable risks. International shipping costs remain significantly elevated, and the shortage of key components such as semiconductors continues to disrupt domestic production, resulting in elevated inventories. Also, slowing global growth and the appreciation of the dollar could reduce demand for U.S. exports while increasing foreign competition. Nonetheless, a stronger dollar could help offset the higher costs the manufacturing industry has recently experienced. Finally, U.S. consumers are expected to shift consumption back toward many services they postponed or canceled due to the pandemic, like travel and health care. This shift back to services, along with higher prices eroding real household incomes, will likely slow demand for household goods.

Despite the above risks, manufacturers believe that labor shortages remain the greatest long-term obstacle to growth. With heightened global trade tensions and intensified international shipping bottlenecks, many are looking to move production back to the U.S. However, growth of the U.S. labor force is constrained by an aging population. As a result, some firms are taking steps to build the pipeline of future workers. For example, in western Tennessee, Ford is focusing its outreach efforts on eighth grade students who in four years will be graduating from high school when its plant there begins producing batteries for electric vehicles. Additionally, manufacturers are facing increased competition for entry-level workers from sectors like retail and hospitality that raised wages significantly in recent years to attract workers and/or keep up with rising minimum wages. The wage premium for manufacturing jobs is gone. In 2010, the average manufacturing worker earned $0.50 more per hour than the average private sector worker; in 2022, the average manufacturing worker earns $1.12 less than the average private sector worker.

Manufacturers have also taken a number of other steps in response to the competition for workers and the higher cost of doing business. Some are investing more heavily in automation. In 2021 and the first quarter of 2022, orders for industrial robots jumped significantly. Faced with higher material and labor costs, manufacturers have also become more comfortable passing on higher prices to customers on a more frequent basis. In addition, firms are investing in new technologies to improve labor productivity. Although supply-chain disruptions and higher costs have made much of this equipment less beneficial in the near term, it remains a viable long-term solution.

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