TBM OpEx Review Journal | 2015 Manufacturing Economic Outlook | December 2014

OpEx

A TBM Consulting Group Publication

Review

December 2014 | Issue 2

2015

Manufacturing Economic Outlook

By John Augustine, Chief Investment Officer, Huntington Trust

The United States, United Kingdom and China will lead global manufacturing growth in 2015. Economic crosscurrents will contribute to uneven performance in different sectors.

The uneven global economic recovery is likely to continue in 2015. While worldwide growth prospects are weak and susceptible to a number of downside risks, a stronger growth forecast for the United States should create some new opportunities for manufacturers. As we head into next year, executive teams need to evaluate the impact of market

trends on their customers, input costs and margins.

In October, the International Monetary Fund revised its global growth outlook* for 2014 downward to 3.3%, and lowered its projection for 2015 to 3.8%. Global economic growth in 2015 will be led by the United States (with projected GDP growth of 3.1%) and the

United Kingdom (GDP growth of 2.7%). China will move forward at what’s widely regarded as a more sustainable long-term GDP growth rate of around 7.1%.

Overall, through the first half of 2015, we are cautious about the outlook for the global economy and optimistic about the U.S. and U.K. (continued on page 3)

* World Economic Outlook, International Monetary Fund, Oct. 2014.

Also in this issue 2| Are Your Productivity Targets High Enough?

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6| Management System: Transforming a Startup 9| Get Employee Recognition Right 12| Execution Excellence

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Leading Thoughts

A Business Journal for Leaders Who Embrace Operational Excellence

Productivity Growth: Are You Aiming High Enough?

December 2014 | Issue 2

This issue’s cover story highlights some of the important economic trends business leaders need to watch in 2015. No matter how next year plays out, productivity improvements will always help manufacturers capitalize on both the opportunities and the threats to their success.

Publisher Angela Scenna: ascenna@tbmcg.com Executive Editor David Drickhamer Contributors Bruce Andersen John Augustine Bill Remy Dan Sullivan Art Direction and Design Crossbow Group crossbowgroup.com Printing Carter Printing & Graphics, Inc. carterprintingnc.com

For strong growth buoyed by market circumstances or new products, productivity gains will free up capital that can be used to boost capacity while protecting margins. In moderate to low growth environments, productivity improvements will enhance asset utilization and reduce operating costs.

Productivity growth can also help offset the impact of raw material price increases, as well as the rising value of the U.S. dollar.

The bigger question is: How much of a productivity gain should you expect next year? Most business leaders, in my experience, set their targets too low.

The long-term, macroeconomic productivity improvement rate of 2.1% per year in the United States is less than a bare minimum. It allows zero room to respond to whatever challenges rise up and threaten your profits in the coming months. With some allowances for production practices, your minimum improvement target should be at least 4%, or twice (2X) the overall industry average.

I would argue, however, if you really want to release creativity and build a competitive advantage, that business leaders should set their annual improvement goal between 6-8%, or 3X to 4X the industry average. If your forward progress has slowed, as it has for many manufacturers, an order of magnitude productivity improvement target could provide the jumpstart your company needs in 2015. Continuing to apply LeanSigma methodologies—and developing the problem-solving mindset of all employees—can drive significant and sustainable productivity gains year after year.

Best wishes from everyone at TBM for an enjoyable holiday season and prosperous New Year!

Bill Remy President & CEO TBM Consulting Group, Inc. bremy@tbmcg.com

2 | OpEx Review | December 2014 | www.tbmcg.com

(continued from page 1)

The U.S. inflation rate remains below average, and the unemployment rate has fallen below 6%. But some crosscurrents need to be watched. For manufacturers, particularly those headquartered and doing the majority of their business in the United States, the good news is that the positives on the economic balance sheet outnumber the negatives.

GDP Leaders, Trillions

U.S.

China

$2,734 $2,522 $2,245 $2,096 $2,071 $1,876

Japan Germany France

U.K.

Brazil

Russia

Italy

Source: Bloomberg

$9,240

$3,634

India

7.1% 6.4%

U.S.

China

1.4%

1.0%

Japan Germany France

0.5% U.K.

Brazil

Russia

0.8% Italy

U.S. GDP Forecasts 3.0%

2.7% 2.2%

2.1%

2014

2015

Huntington

2014

2015

3.1%

2.8% 2.2%

2.1%

Private U.S. Economists

India

2014

2015

Federal Reserve

2014

2015 IMF

Source: IHuntington, Bloomberg, IMF, Federal Reserve

1.5%

Source: IMF

2.7%

0.8%

• Housing starts are at around one million units on an annual basis. We think they will improve slightly next year.

• The automotive industry is moving around 16.7 million units per year. That total sales number could get back up to the 17 million units per year average that the industry sold from 1998-2006.

• Aerospace is reporting annual sales of about $70 billion per quarter. That figure has been expanding steadily since we exited the 2008-2009 recession.

That trajectory should continue.

2015 GDP Growth Projections

3.1%

On the positive side, U.S. exports have held up surprisingly well given the slowdown in Europe and Japan. They are now approaching $200 billion per month and are up 4.6% over last year.

The three market sectors—housing, automotive and aerospace—responsible for much of the manufacturing activity in the United States continue to grow. None of them appear to have peaked yet.

$16,800

$4,901

Manufacturing Tailwinds

Consumer confidence (reflected in part by sales of durable goods) is at the highest level we’ve seen since 2007, which is a pleasant surprise. Fuel station signs with numbers below $3 per gallon and steady month-to-month employment growth are clearly having an impact.

This past year, consumers were primarily focused on increasing their savings and paying down debt. With a little extra money in their pockets, people could start spending more and replacing the high proportion of cars 10 years and older on the road. Indeed, truck sales have surged in recent months. When the final retail tally is complete, we could see solid consumer spending growth and a very good holiday season.

Healthy corporate balance sheets are another positive growth driver for manufacturers. Many companies slashed capital spending in the immediate wake of the recession. Today, five years later, after several years of solid profits and decent growth prospects, they continue to make investments that had been put off. (continued on page 4)

OpEx Review | December 2014 | www.tbmcg.com | 3

(continued from page 3)

Signs of Potential Trouble

Another threat to manufacturing sales and profits is the value of the U.S. dollar, which has been rising since July of this year.

Based on the futures market, it will keep climbing next year.

That means, from a competitiveness and pricing standpoint, U.S. manufacturers will have to pay more attention to the value of the dollar than they have been recently, especially since there’s nothing that manufacturers in Europe and Japan would like more than to see the value of their currencies fall, improving their export positions.

In addition to low commodity prices reducing spending and hurting prospects for manufacturers selling into those sectors, a number of other factors could be a drag on growth in 2015.

The first is Europe. At $12 trillion, the annual GDP of the region accounts for a significant chunk of the $75 trillion total worldwide GDP. The euro area is expected to grow by just 0.8% in 2014. We believe it should be growing at least twice that pace, which means there’s still a lot of work to be done by policymakers there.

Reductions in government spending, so-called austerity measures, could also dampen performance in 2015. These reductions may be forced by economics, as is happening in Europe, or by changes in leadership priorities. In the United States, austerity is being forced by political gridlock, which means lower spending on big projects that would require equipment and materials supplied by manufacturers. The construction industry has already had to manage slowing infrastructure investments in China.

Investment plans vary by sector, however. While low commodity and energy prices reduce the cost of raw material and other inputs for many manufacturers, they also reduce capital spending in those sectors. For example, energy production in the United States is nearing record levels, but low crude oil prices are reducing capital expense budgets for next year.

Global Economic Trends to Watch Out For in 2015 Some of the economic crosscurrents that manufacturing executives will have to monitor in 2015 include: Uneven country-by-country growth, diverging fiscal austerity and monetary policy, the double-edged impact of low commodity prices, and currency competition among exporting nations. When planning for next year, consider the impact of the following five trends on your customers’ budgets, input costs and profit margins.

1.

Productivity Growth

Is your company exceeding the 2% average annual increase? If not, what do you need to do to accelerate your improvement pace?

2.

3.

4.

5.

4 | OpEx Review | December 2014 | www.tbmcg.com

Europe

Watch forward orders for cancellations or any other signs of weakness.

Rising U.S. Dollar

Hedge to protect profits on overseas sales.

Commodity Costs

What impact will lower input costs or falling capital equipment orders have on your business?

Capital Expense Plans

What do your customers' 2015 budgets look like? Energy-related capital expenses are already slowing down.

Looking at durable goods, manufacturers in this sector will continue to deal with price deflation, which is being driven by overcapacity everywhere, including China, Japan, Europe and the United States. Getting price increases to stick will be difficult in this environment, especially with a rising dollar.

It’s the type of situation that could drive further industry consolidation.

The final negative trend that manufacturing leaders need to watch is sluggish productivity growth. For the past 25 years, non-farm productivity has gained 2.1% per year on average. It has trailed that benchmark since the recession, and remains slightly below average this year. The productivity stall is being caused by reductions in technology investments,

underutilization of capacity and difficulty finding quality workers.

The worker shortage is worth exploring further. Retirements are a concern for manufacturers in all sectors, as well as their suppliers and service providers, like trucking companies. One unique attribute of the American economy today is that we have a surplus of white-collar labor and a shortage of skilled, blue-collar workers. This could slow economic growth and create new capital-over-labor innovations at the same time.

That means, in the long term, the skilled worker shortage could increase corporate capital spending. 

About the Author

A regular guest and presenter at TBM’s Executive Exchange, John Augustine has spent the last 20-plus years as an investment manager, investment strategist and economic strategist for various financial institutions. He is currently the Chief Investment Officer for Huntington Trust, a unit of Huntington National Bank, based in Columbus, Ohio.

TBM’s Perspective Operational Priorities for 2015 With the mixed global economic outlook for 2015, the year could play out very differently for manufacturers depending on their market sector and regional business activity.

Slow Growth in Europe

$ $$

$

$

Anemic market growth and uncertainty in Europe mean that manufacturers there must continue to push hard for productivity improvements and better asset utilization to protect margins. For companies exporting to Europe, enhanced responsiveness and upping the pace of innovation could counteract diminishing price flexibility caused by a rising U.S. dollar.

Sluggish Productivity Growth For most manufacturers, the 2.1% average macroeconomic productivity growth should be regarded as a low annual target. Depending on the type of operation, we believe that a robust operational improvement program should yield productivity gains of at least 5% year after year without taking new equipment and technology investments into account.

Manufacturing Retirements and the Skilled Worker Shortage Diminishing total employment and the U.S. education system have reduced the attractiveness of manufacturing jobs for millennials and younger generations. To find and develop people who can fill the growing number of skilled job vacancies, manufacturers need to keep up their efforts to change prevailing perceptions and rebuild industry’s reputation as a secure and lucrative career choice.

Price Deflation Any market situation where overcapacity is contributing to hyper-competition and price deflation, like the durable goods sector, will expose operational and financial weaknesses. Those manufacturers that can protect and maximize their cash flow will be in the best position to make strategic acquisitions that will drive profitable growth. Efficient acquisition integration starts with thorough operational due diligence.

Capital Investment Plans Enhanced production flexibility can free up space and capacity to accommodate growth and delay the need to make new capital investments. When new investments are necessary to keep up with sales or stay at the forefront of innovation, take full advantage of the opportunity to examine and realign labor requirements on the line and in support roles.

OpEx Review | December 2014 | www.tbmcg.com | 5

TBM Management System

Daily Discipline How a daily management system optimized a startup operation in all of the right ways, in just six months.

Several years ago, we were asked to assess the factory of a booming startup company where sales had exploded. U.S. market share had climbed from nothing to almost 9% in just three years, and was still climbing.

The plant was shipping a quality product, but it was a huge effort. They weren’t meeting production schedules and waste was everywhere. The stress was palpable, not to mention

By Bruce Andersen, Senior Management Consultant, TBM Consulting Group, Inc.

6 | OpEx Review | December 2014 | www.tbmcg.com

the inefficiencies and high costs. Each day was like a game of Whac-A-Mole, with everyone reacting to problems that popped up, then moving on to the next one. When it came to taking responsibility, managers were constantly pointing fingers at each other.

On a day-to-day basis, startup operations like this one can be difficult and unrewarding places to work. Implementing a disciplined daily management system, as we’ve helped this and many other clients do, can transform the management processes and culture of such an operation in a short period of time.

Employees need to know what the key performance indicators (KPIs) are and how they are doing. Everyone needs to understand what a successful shift, day, week and month look like.

Standard Work for Management There are two primary reasons why startup operations struggle. First, everything is in a state of flux, which means job responsibilities aren’t well defined. Poor accountability can cripple efforts to efficiently manufacture and ship quality products on schedule as volumes ramp up.

One of the biggest challenges, if you’ve never implemented a daily management system, is understanding how to change employee behavior. People naturally want to react to and find quick fixes. They don’t naturally take the time to get at root causes that will prevent problems from recurring.

The second reason is because no one has been with the company for very long, so there isn’t a cohesive culture or management system. Every manager brings his or her management style and ideas for how the company should or should not be run from their prior jobs. When day-to-day reality fails to match those expectations, it creates a lot of friction, disagreement and turnover.

By changing expectations, asking questions and providing the necessary support, site leaders can teach managers and supervisors to look for root causes in a relatively short period of time. What you’re trying to create is a team environment where everyone is pushing in the same direction and trying to make tomorrow better than today.

I’ve seen it happen at a fundamental and cultural level in as quickly as three months.

The site leader of a struggling startup operation has two priorities: 1) Establish discipline around what managers do, and 2) Set an example for how they should do it.

Establishing discipline starts with defining and reinforcing lines of accountability. At the same time, plant leaders need to build a team culture and instill a problem-solving mentality among employees.

Of course, those somewhat nebulous goals are easy to lose sight of in the day-to-day push to hit production and shipping targets. That’s why they must be incorporated into a daily management system that pervades the organization and guides what managers do and how they do it. The box on page 8 lists the key elements of a daily management system.

Getting Into a New Groove At the factory noted above, we started the transformation process at the end of the production line where they packed product for shipment. The first thing we did was set up hour-by-hour charts to track performance. Employees need to know what the key performance indicators (KPIs) are and how they are doing. Everyone needs to understand what a successful shift, week and month looks like.

Once a rudimentary visual reporting system was in place, then we began to address the issues that were hurting performance during daily management reviews. These plantfloor discussions are when the management team defines roles and responsibilities. Production, engineering, quality and maintenance managers take responsibility for issues in their areas. Reviewing progress every day reinforces accountability.

OpEx Review | December 2014 | www.tbmcg.com | 7

TBM Management System

It takes time to learn this management approach and develop new habits, especially if no one on the management team has experienced it before. First, you have to convince people to try it by making it mandatory.

It takes time to learn this management approach and develop new habits, especially if no one on the management team has experienced it before. First, you have to convince people to try it by making it mandatory. When I was introduced to it at Nissan, I didn’t buy it. I had to walk around every day at a designated time, look at the performance boards, and talk to everyone about what was going on. Why? It seemed like a colossal waste of time.

But after three months of attacking abnormalities every day, the performance improvements were obvious. You could even feel a different kind of energy as everyone came into alignment around the KPIs. It was the first time in my career when I could tell instantly if we were having a good day or a bad day. As a result, we were able to take a plant that was

already very good in terms of productivity and quality, and make it better than world-class.

Implementing a daily management system at our client’s factory improved productivity and efficiency by 20 to 30%. That was a huge improvement for a process operation. They reduced product loss by a similar percentage. Both of which contributed to significant cost savings. Not only does a daily management system enable such one-time gains at a struggling startup, it lays the groundwork for ongoing improvements that can quickly take the operation to world-class performance levels. 

A 29-year veteran of the automotive industry, Bruce Andersen joined TBM in 1997. At Nissan Motors, Bruce led the Supplier Development Team and was a shop-floor manager, supervising technicians, engineers and area managers.

CORE ELEMENTS OF AN EFFECTIVE DAILY MANAGEMENT SYSTEM evelop meaningful objectives.

D Align business goals with clearly defined metrics and cascade them down to the department and work cell level.

Intervene and take countermeasures.

During the plant floor reviews, managers take responsibility for removing barriers and addressing pervasive issues.

Record and report performance.

At the factory level we focus on: 1) safety, 2) quality, 3) delivery, and 4) cost (SQDC).

Employees also use hour-by-hour charts to report output and track issues.

evelop a problem-solving culture.

D Employees at all levels learn how to address problems quickly when and where they appear.

Review performance daily.

Brief meetings on the plant floor with senior members of the management team.

8 | OpEx Review | December 2014 | www.tbmcg.com

elebrate success.

C Everyone celebrates when performance targets are achieved (before setting new targets).

CULTURE CHANGE

HOW TO GET

Employee Recognition RIGHT

By David Drickhamer

Because it’s de-motivating, a poorly executed employee recognition program is worse than having no recognition program at all. Adam Tartt, COO of MyEmployees, offers some advice for effectively recognizing employees, motivating people in general, and building a positive company culture.

MyEmployees offers expertise and products that help businesses engage and recognize front-line employees. Based near Wilmington, N.C., the company’s 45 employees serve 12,000 active customers, including most of the country’s large retail and restaurant chains.

Because their customers tend to manage and renew their employee-of-the-month programs with the calendar year, sales of plaques and related products can jump 5X in the fourth quarter. TBM’s Dan Sullivan has been working with MyEmployees to help them manage the surge by improving manufacturing flexibility. By making each workstation flexible enough to handle a variety of products, the factory

is better equipped to handle both annual and monthly demand fluctuations.

Effective recognition programs keep employees motivated, reduce turnover and improve customer service, which drives repeat business. MyEmployees provides the knowledge, support and coaching for recognizing stellar performance—doing it well and making it easy—so that it continues from month to month. In the following conversation with TBM, COO Adam Tartt offers advice for setting up and running an effective employee recognition program. He also reveals how his company nurtures an enthusiastic and highly engaged workforce. Hint: They read a lot of books. (continued on page 10)

Adam Tartt, COO of MyEmployees, reviews performance with employees.

OpEx Review | December 2014 | www.tbmcg.com | 9

CULTURE CHANGE

PRACTICING WHAT YOU PREACH “ There’s an amazing level of enthusiasm and energy at MyEmployees that you don’t see at many companies, large or small. It starts with hiring. They look for ‘active learners’ who will fit in with and support their highly engaged and positive culture. Of course, because they’re in the employee recognition business, they’re also great at recognizing and rewarding top performers."

— Dan Sullivan, TBM Executive Vice President

What are some of the common pitfalls with employee recognition programs?

Adam Tartt: If you don’t do it correctly, it's better to not do one at all because it will demotivate people more than it motivates them. It’s very easy to get it wrong.

Statistically speaking, when a new manager launches a recognition program, it will last three months. After three months it’s no longer new. It's cumbersome. It's difficult to select the winner. If employees vote, it turns into a popularity contest and the true top performers aren’t recognized.

Other times the manager just forgets and stops recognizing people. You've got to recognize your best people or they'll go where they will be recognized. That’s the bottom line.

10 | OpEx Review | December 2014 | www.tbmcg.com

Adam Tartt leads a team discussion at MyEmployees.

The plaques are just a tool to be used as part of a larger strategy.

That’s why we provide every client with a dedicated recognition consultant, someone on staff who is well-trained on how to engage employees, how to set up award criteria, and how to properly recognize people.

What’s the first thing managers in any type of business should understand when setting up a recognition program?

Tartt: They have to start with objective metrics based on specific criteria that all employees understand. You need to recognize the people who perform well in the areas that matter most to the business. They also have to be consistent from month to month. Of course, you can do all of those things and still get it wrong.

What else do managers need to do?

Tartt: Handing an employee a plaque and saying, "Congratulations," doesn’t cut it. You have to make a huge deal out of the presentation.

Gather as many employees together as you can, bring the winning employee up front, and talk about why that person won. Then you hand them the plaque and take a picture. It's about the experience of being recognized, being called out, and being appreciated in front of your peers. That’s what matters.

The employees at MyEmployees are very engaged and energetic, presumably because you practice what you preach when it comes to recognition. What else do you do to develop your culture?

Tartt: Employees want to feel that their company cares about them and that they're more than just a number. So first, we genuinely do care about our employees. We genuinely want them to be better, for themselves, for tomorrow, than they are today.

From an on-boarding standpoint, every new employee at our company is required to read two books: The 12 Essential Laws for Becoming Indispensable by Tony Zeiss, and The No Complaining Rule by Jon Gordon.

Complaining can ruin an organization. It can absolutely become a cancer, and it's not something that we tolerate. If there are negative people, it will infect your whole organization and people won’t enjoy coming to work. 

We use book clubs to develop the thinking of our team members. We read and watch videos about topics around personal finance, attitude, relationships and managing anxiety.

We pay our people to do that. We pay for the books. It's an hour a week. It's mandatory for everyone. Over time, people really grow from it.

Built To Lead

David Long, the founder and CEO of MyEmployees, recently published Built to Lead. The book highlights his leadership principles and practices and offers advice for business leaders who want to improve the performance of their companies by building a highly engaged workforce.

It doesn’t seem like that type of engagement and discussion would click with everyone.

Tartt: Well, we make it very clear when we hire people that we want employees who are lifelong learners. We don't want people who aren't going to invest in themselves. The book club is one way of helping people do that.

Three Tips for Getting Employee Recognition Right

1

2

Use objective metrics

3

Be consistent from month to month

Make a big deal out of the award presentation

OpEx Review | December 2014 | www.tbmcg.com | 11

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