State Manufacturing Rebound Strengthens

Lee Swindall reflected for a moment on what the Wisconsin manufacturing industry had morphed into during the aftermath of the Great Recession, and he described a class system.

Swindall, director of consulting services for Wisconsin Manufacturing Extension Partnership (WMEP), said the first class of manufacturer is not hiring because these manufacturers, despite mounting evidence of a broad-based recovery in their industry sector, are still waiting to see whether there is sustainability to the overall recovery.

The second class of manufacturer now is hiring very selectively and at a very measured pace, but they still are able to manage their production demands with the staff they have in place, relying on increased shifts and increased duration of shifts.

The third class of manufacturer has a very specialized demand or requires a very specific group of skill sets that there is a very shallow pipeline for. They would like to hire more but they are challenged to recruit the necessary workers, and that is particularly worrisome in a period of high unemployment where needed skills don't exist in a fairly large group of unemployed workers.

 

Makin' stuff

Despite these hiccups, manufacturing is in the second year of a recovery that is picking up steam. That recovery began at the end of 2009, accelerated sharply in the third quarter of 2010, and is fueled by both rising domestic demand and rising export demand. As a result, Wisconsin manufacturers created 8,500 new jobs in January and February, and nationally 33,000 manufacturing jobs were created in February.

Manufacturing orders are on the rise, as demonstrated by the Institute of Supply Chain Manufacturers' New Order Index, which increased to 61.4 in February, the highest level since May of 2004. "It appears that we're beginning to see some genuine capacity restraints appear in the manufacturing sector," Swindall said. "We saw order backlogs in February increase to 61.8% nationally, which means 61.8% of companies reported order backlogs, which is the highest since July of 1994. That only illustrates to me the necessity for continued business investment, new plant equipment, and the ability to hire the qualified workers to support increased production."

Wisconsin also has experienced strong gains in exports, which rose 18.3%, to $19.8 billion, in 2010. State exports tend to be dominated by industry and agricultural exports, and 2010 was no exception, especially for the top three export product categories. Exports of industrial machinery grew by 13.3%, to $6.34 billion; exports of electrical machinery rose 17%, to $2.26 billion; and medical and scientific exports grew by 18.5%, to $2.17 billion.

Scott Fawcett, president and CEO of Springs Window Fashions in Middleton, a maker of custom window treatments, acknowledged the growing optimism, but he was more reserved in his assessment of the industry. "I don't think there is any real sustainable, specific news or changes that will have a quick fix from our current state," he said. "In our business, we have not been investing in our manufacturing operations in Wisconsin in any significant way."

That's been true of most manufacturers, but Swindall sees investment picking up. The improving financial performance of manufacturers is beginning to reverse a pattern in which they have had cash on the sidelines from increasing profits, but have not been investing much in new plant and equipment, or in increased capacity and employment. Swindall said he is personally aware of a significant number of mid-sized and small Wisconsin manufacturers that will actively recruit employees in numbers between 20 and 150, and are actively seeking the needed skills and talent.

However, finding those skills has proven to be difficult in filling positions like advanced machine tool operators (with strong backgrounds in math and science), fully qualified project managers, and even middle-rank and senior management positions.

"I've seen that across the board," Swindall said. "Of the two things most frequently discussed by manufacturers we work with, one is managing changing patterns of demand from customers, and the second is finding and keeping a skilled workforce."

In manufacturing, firms can do everything else well and yet have profitability undermined by deficiencies in their human assets. Addressing this need requires a willingness to provide custom solutions for manufacturers, which precludes a standardized technical school curriculum. "It can't be a supply-push kind of training, in effect saying, 'This is what we train for, you should buy it,'" Swindall said. "It has to be more of a demand-pull kind of customized training that is adapted to the unique requirements of different classes of manufacturers."

WMEP is working to develop public-private partnerships with state technical colleges, the new Wisconsin Economic Development Corp. (formerly the Department of Commerce), and the state Department of Workforce Development to craft more effective strategies for manufacturers encountering constricted hiring pipelines.

Manny Perez, secretary of the DWD, said there has been a lack of strategic workforce development planning, and that has caused a lack of ability to anticipate and meet private sector labor needs, particularly in the manufacturing sector. Perez said that lack of coordination between technical schools, workforce development boards, and local economic development regions has prevented people from graduating from high school with the skills needed by manufacturers.

The DWD is bringing those entities together to plan for anticipated labor needs over the next five years so the state can properly align workforce training and resources. "Our primary goal is to help the manufacturing sector get out of reactive mode in relation to workforce development," Perez said. "That means we need to stay ahead of the curve. When a CEO indicates in the newspaper that he cannot find the workers, it's already eight months to a year too late because it takes eight months to a year to train a person."

With internal conflicts raging in the Middle East, rising energy costs are another concern, but manufacturers also are seeing steadily rising input costs for things like industrial ore, and soaring costs for

metals. They also are seeing the first hints that inflationary pressures might be brewing in the industrial parts, machinery, and materials markets. Being able to pass along price increases will be "extraordinarily difficult," Swindall noted, given the highly competitive global economy that manufacturers operate in.

Springs forward

Of the three manufacturing classifications identified by Swindall, Springs Window Fashions best fits the first. It is a manufacturer of window treatments for the home, and these products, made under brand names like Bali and Graber, are very labor intensive to produce.

While headquartered in Middleton, the company has customer service facilities and a distribution center elsewhere in the United States and assembly plants in Mexico. Several years ago, it began moving production of those assembled products to lower labor rate markets. Most of the product components are built in its U.S. facilities, and then shipped to its lower labor rate Mexican operations for assembly. "We are concentrating the higher labor intensive operations in lower labor rate markets, and we are continuing to rely on our U.S. and Wisconsin facilities for operations that are more technical and that do not have a high labor component," Fawcett explained.

The process has become increasingly automated and more precise. A customer orders custom blinds from a retailer like JC Penney, and the order comes to Springs Window Fashions electronically. The product is made to within one-eighth of an inch in both width and height, cords can be put on either side (or the blind can be made cordless), and the product is made so that the bottom can come up and the top can come down. The company makes each product one at a time, and all options are available in different colors and styles so that every single window has the potential to become a unique item.

In terms of capital investment, Springs Window Fashions has invested in systems to assist its assembly production processes in Mexico. The required product measurements are done with computerized systems and equipment, minimizing the potential for error and enhancing speed and quality of production.

"In the past, you had to use a tape measure to measure 48 inches and make the cut," Fawcett explained. "Now, what happens is that a machine will actually dimensionalize that 48 inches, and an associate doesn't even have to know what 48 inches is."

With much of its manufacturing function automated and out of state, the company's primary challenge isn't so much finding specific talent, but managing health care costs. Like many employers, Springs Window Fashions has launched wellness programs to promote healthier employee lifestyles and manage cost exposure, and passed on some of its health insurance costs to employees.

During the recession, layoffs were unavoidable, but the company avoided heavy layoffs through hiring freezes and employee furloughs. There is no question in Fawcett's mind that Springs Window Fashions has emerged from the recession as a leaner organization. He feels that much of the waste that is covered up in better economic times has been eliminated, and company processes have been improved. "The downturn in the economy has been stressful on our associates and on the company," Fawcett acknowledged, "but we are a better and stronger company as we come out of this."

Wake-up call

Statewide, Perez sees the continuation of improving manufacturing employment numbers due to Wisconsin's changing regulatory and tax frameworks, and because of its increasingly optimistic business sentiment. "Many CEOs are indicating to me, 'Manny, before we would be holding on job orders that have to be filled in a week. Now we have two or three months of job orders in manufacturing.' In other words, these are orders that have to be filled three months from now."

Citing 26,000 open job positions posted on a DWD website (www.JobCenterofWisconsin.com), Perez said people collecting unemployment will get some extra encouragement to re-enter the workforce, especially since the month of March marked the start of the private sector's most intense hiring cycle. He also said the state will begin a crack- down on unemployment insurance fraud and abuse. "We want to motivate people who are on the fence, or who have given up looking for jobs, to come back so they don't become obsolete," he said.

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