01.24.23

Rapid Innovation in the Face of Challenge — How the Manufacturing Industry is Thriving

RAPID INNOVATION IN THE FACE OF CHALLENGE

Despite predictions of impending recession, many manufacturers with an eye on long-term growth are firming up plans to expand closer to home.

It wasn’t just the pandemic that drew attention to the need for closer manufacturing sites. Advances in technology now offer a clearer picture of the many costs that factor into the bottom line — and those figures have shown that domestic production is more realistic than previously thought. In addition, turbulent geopolitical conditions globally make offshoring riskier.

Yet many challenges remain for manufacturers as they pursue their growth plans, not the least of which are a dearth of workers and tight inventories of raw materials.

Still, despite such a swirl of economic crosscurrents, domestic manufacturing is poised for rapid growth, and Kansas City is poised to capture a fair portion of it.

At a December 14, 2022, discussion hosted by McCownGordon, a panel of local experts discussed current conditions, challenges, and expectations for the future of manufacturing in Kansas City and beyond.

A weather eye on the economy

Predicting where the economy will head is particularly difficult these days.

“I’ve been doing this business now for about 25 years, and this is probably the first time in my career when I’ve seen so many crosscurrents in the economy,” said Keith Prather, global economist and managing director of Armada Corporate Intelligence.

That means a crosscurrent could push the economy onto a different course at any moment — and helps explain why a straw poll of business owners probably would show about half planning for the best year ever and half buckling down for a recession, he said.

To illustrate the point, when CEOs sense a recession, they typically begin pulling back on capital expenditures. Yet despite predictions of a recession in 2023, corporate investment — which dove in 2020 — has rebounded and hovers near all-time highs, Prather said.

The latest surveys of small businesses indicate some pullback, but that tightening has yet to appear in the national data.

Andy Rieger is president of J. Rieger & Co., which has a distillery plus retail space in 110,000 square feet in Kansas City’s East Bottoms. His company plans a seven-figure investment in a new production line, so it’s laying the groundwork but waiting to pull the trigger until the prime moment.

An investment decision that may have required less scrutiny three years ago now demands a bit more certainty, he said.

“It’s really just trying to be careful and cautious with everything that you’re doing, but still trying to be aggressive and trying to grow, knowing that if you’re a contrarian, you usually win in the long run,” Rieger said.

Shifting calculations

There are several long-term considerations that make short-term economic headwinds less of a deterrent for business leaders, Prather said.

CEOs have recognized more benefits of domestic production, particularly lower risks and less of a cost difference than previously thought. The pandemic, geopolitical tensions and ongoing trade wars have highlighted the need for more stability in supply chains.

All this has generated a push toward reshoring, which means pulling overseas sourcing back to the United States, or at least to places nearby or in allied nations, despite recessions, interest rates or inflation.

“They’ve got to make these changes, because out of stock is out of business,” Prather said.

Some studies had indicated that about $1 trillion was earmarked for reshoring during the next seven to 10 years, but during the past six months, just two companies have announced plans that would surpass that mark, Prather said.

“So that trillion-dollar mark … we’re going to blow that out of the water,” he said. “We’ve even gotten to the point now where we won’t even tell you exactly how much we think it’s going to be, because it’s going to be significant.”

Bolstering the push for reshoring: Ongoing construction projects need equipment, and quickly, said Amanda Tran, a packaging manager with McCownGordon.

“There’s such a long lead time, so we’re constantly waiting for equipment,” she said. “That’s driving us to bring some stuff more from the U.S. as opposed to Europe.”

Charlie Ensminger, manager of Conveyor Solutions, said lead times of two to four weeks have turned into 16 to 18 weeks because of the wait for components from overseas. That makes clients more willing to shop around and try new brands, standards or solutions.

Inflationary pressures do create a volatility that’s difficult in the construction industry, said panel moderator Jamie Bailey, McCownGordon’s director of client strategy for the manufacturing market. While McCownGordon works with economists to predict pricing, it has become prudent practice to advise clients to build into their budgets a certain percentage of inflation cost.

Yet construction continues at a torrid pace. Real monthly data show manufacturing construction spending in October was up 33.5 percent year over year — on about $112 billion in total spending.

A prime position for Kansas City

There’s reason to believe the Interstate 35 corridor — and Kansas City in particular — could nab a good chunk of that construction spending.

“We are seeing a lot of manufacturing deals right now looking at this Kansas City region that are both expansion projects because of the reshoring … as well as foreign direct investment coming into the U.S., and they’re in plastics, they’re in food, they’re in automotive, they’re in what we’ll call advanced manufacturing,” said Chris Gutierrez, president of regional economic development group Kansas City SmartPort.

Beyond its central location, Kansas City has access to four modes of transportation — barge, air, truck and rail; space for development; educational institutions to help solve the labor shortage; competitive costs; and plentiful resources and energy.

In addition, some Texas markets that had attracted a lot of construction along the I-35 corridor now have rising costs and more hurdles.

“The door is open for Kansas City to jump through … and take advantage of these opportunities,” Prather said.

Potential wrenches in the plans

While the risk of a recession may not hinder strategic growth plans, the availability of labor and of raw materials could. And low supply coupled with high demand means high costs.

Global inventories of some key raw materials — copper, nickel, aluminum, lead — are sitting near multi-decade lows, Prather said. While costs for them have come down a bit, a construction wave could send them up again. And costs for raw materials such as plywood and PVC pipe are very high.

“We see a lot of projects in a holding pattern, waiting on some of those costs to come down,” Prather said, predicting a significant wave of projects in 2023, 2024 and 2025.

Ensminger has a distinctive view into challenges for local manufacturers. His company does system integration, helping customers maintain their workforces, as well as replace or add equipment to automate product lines and better use their warehouses.

Three key concerns for manufacturers today are finding and keeping employees, automating jobs for which they can’t find labor, and more efficiently using existing brick-and-mortar space as inventories recover, Ensminger said.

The workforce gap remains troublesome.

Various statistics indicate that a significant portion of adults approximately 30 and younger have lived at home, at least part of the time — particularly since the pandemic — and may not be seeking employment. That widens the dearth of potential workers.

But that could change soon, Prather said. Entering 2023, economists have seen a big change in consumer household wealth, with about 60 percent of households living from paycheck to paycheck, plus their credit usage nearing its limit.

“Something in their household has to change, because they’re one set of tires away from the household not making it,” Prather said. “Coming into 2023, there’s going to be a wave of folks coming back into the workforce.”

The next challenge, then, is correcting what panelists pegged as a misunderstanding of manufacturing jobs.

The traditional model of high school, then college, then a promising career has shifted, validating the potential of other tracks, panelists said. Many manufacturing jobs offer bright career trajectories but don’t require college degrees — or the accompanying debt.

In addition, they’re not “dirty” jobs — they can be sophisticated and fulfilling, and many manufacturers offer training and certifications to students so they can hit the ground running. It’s just hard to broadcast that message.

In the meantime, the media, educators and other adults in kids’ lives should communicate the tremendous potential of manufacturing careers, Gutierrez said. But the onus also lies with manufacturers.

“That experience inside your facility has to be top-notch — the first day, the first week of onboarding, so they have no interest in taking another job,” Gutierrez said. “They love what they’re doing, not only from a pay standpoint, but from the culture standpoint, the opportunity to grow. It’s got to be top of mind for every person that’s hiring people, that that first week has got to just hook them.”

Rieger said he’s found that employees stay more because of the community and the feeling of being appreciated than because of a cold money calculus.

“We’re discovering that people who are in manufacturing, they’re willing to accept less money in order to know that they’re working with a group of people that they want to work with on a daily basis, and they’re being managed by people that are appreciating them and are good teachers and educators, and they’re doing something where they feel like they’re making a difference,” he said.

Part of that involves giving employees a big-picture vision, so they know their role is a vital contribution to something larger and meaningful, Rieger said.

“Just educating people and teaching them so they understand what the vision is, as to why they’re actually producing that product, is something that can be just as powerful as paying them more money,” he said.

A flame fanned by technology

Technology not only has influenced the overarching push toward reshoring; it is helping manufacturers function in the face of today’s challenges, panelists said.

For starters, companies now get a much more comprehensive picture of true costs, Prather said.

In the past, when manufacturers tried to optimize the total landed cost of their supply chains, they basically could look at the cost of the product itself and transportation costs — a rudimentary calculation, he said. But today’s sophisticated technology can incorporate much more, accounting for currency exchange, the Treasury function of money, and other real-time costs. Such tools make it much simpler to compare actual costs of sourcing a product in a particular place.

“We’re discovering that when we do things like automation and robotics, we can produce cost-competitively in the United States,” Prather said.

Within the plants themselves, technology not only helps solve a gap in the workforce — it can help manufacturers hang onto the employees they have.

Simple solutions such as ergonomic upgrades and an added layer of automation help manufacturers keep existing employees both happier and healthier, Ensminger said. For companies struggling to find workers for basic jobs, such as moving pallets around a warehouse floor, Conveyor Solutions has been providing autonomous mobile robots that can do the job, responding to calls and avoiding any obstacles.

And to help companies better use their warehouse space as inventories recover, Conveyor Solutions analyzes the best way to store items; it has found that it can cut floor space by about 20 percent through equipment upgrades.

Other tools now provide alerts about specific needs for maintenance or upgrades, helping manufacturers avoid downtime, Tran said.

There’s traditionally been a stigma that automation will be more expensive, but it doesn’t have to be.

“The return on investment is so much greater, and it kind of offsets that additional upfront cost,” Tran said.

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