Chicago — April 28, 2011 — Rising confidence among executives at small and midsized North American manufacturers is prompting increased capital spending and hiring, but concerns over rising costs threaten to stymie new investments, according to a new survey.
The seventh Prime Advantage Group Outlook (GO) Survey from Prime Advantage, a buying consortium for midsized manufacturers, highlights the top economic concerns of small and midsized North American manufacturers for 2011.
The survey results show companies are even more confident compared to six months ago about economic growth for U.S. manufacturing in 2011. Moreover, these results support the latest findings in the Prime Advantage Group CFO Survey, which showed optimistic expectations for revenue growth, hiring and capital spending despite growing concerns over rising costs.
"Our members, who represent a diverse cross-section of manufacturing industries, are experiencing stronger growth and plan to invest back in their businesses, whether through capital expenditures or hiring more employees," said Louise O'Sullivan, founder and CEO of Prime Advantage. "What's unique and challenging about this rebound is the rate at which firms must address pricing inflation in both raw materials and components. As a buying group, with leveraged programs based on group volume, our members are positioned a little ahead of the curve, and our job is to make sure we help them maintain that advantage."
In February, Prime Advantage surveyed executives and purchasing professionals that represent durable goods manufacturing firms, with annual revenues ranging between $10 million and $10 billion, of which the majority ranges between $20 million and $500 million. The survey received a 14 percent response rate from 528 top professionals representing U.S.-based manufacturers in more than 25 different industries, including commercial foodservice, packaging, truck and trailer, material handling, food processing and construction.
In the survey 72 percent of the responding small and midsized manufacturing professionals reported that their companies expect revenue increases in 2011, with 24 percent expecting increases of more than 10 percent.
The top three cost pressures for the next six months were cited as the cost of raw materials (with 96 percent including it in the top three concerns), followed by inflation (52 percent) and healthcare (37 percent).
Sixty-five percent said they are planning capital expenditures for manufacturing equipment and tools in 2011, greatly triggered by available federal tax credits. More than 80 percent said their companies were making changes toward developing more sustainable products, largely driven by customer requirements and compliance regulations.
Meanwhile, 40 percent of respondents that source products from offshore vendors are planning to bring sourcing back to North America in the near future, indicating a rebalancing in sourcing strategy; another 60 percent are planning to add more offshore vendors.
Revenue Expectations Are Bright
The percentage of respondents who anticipate revenue increases in 2011 has doubled compared to just six months ago (72 percent in February 2011 compared to 36 percent in August 2010), a clear indication that small and midsize U.S. manufacturers have a strong sense of optimism about the economy.
In addition, only a trivial 3 percent said they expected a decrease in revenues compared to 2010, a great decline from last year, when 18 percent predicted decreasing revenues for the last six months of 2010.
Not only did 41 percent report that they expect an increase in capital spending from 2010 levels, but 65 percent said they planned to invest in manufacturing equipment this year. More than 80 percent of these respondents also said that federal business investment tax credits were responsible for their planned capital improvement purchases.
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Employment, Education and Technology
Almost half of surveyed companies believe there will be an increase in hiring over the next six months, and 49 percent expect employment to remain at 2010 levels. Only three percent predict a reduction in current workforce levels.
This finding reveals more optimism among Prime Advantage members than in respondents to the spring 2011 KPMG survey of U.S. manufacturing executives, in which only 37 percent expected rising employment in their companies in the next year.
The most important supply chain-related educational needs for these manufacturers over the next 12-18 months include sourcing and procurement education (45 percent), strategy and leadership (41 percent), risk management (41 percent) and demand management (34 percent).
When asked about the status of supply chain technology adoption in key areas such as sales and operation planning, business intelligence, inventory optimization, spend visibility, spend analysis and supply chain visibility, on average about half are fully deployed, partially deployed or launching, with most falling in the later stages of deployment.
Of those fully or partially deployed, most are ERP-based and very few to none are solely Cloud-based. Around 23 percent are in the process of investigating solutions. Still, only 27 percent of manufacturers are not on any track to investigate or deploy such solutions.
Near-shoring Does Not Dominate Sourcing Strategy
While 40 percent of respondents who source products from offshore vendors are planning to bring sourcing back to North America in the near future, the majority of respondents (60 percent) plan to add more offshore vendors. These results reflect a slight rebalancing or correction in sourcing strategy from the last decade's massive offshore sourcing trend rather than a full pendulum swing back to buying domestic products.
The top three cost pressures that most concern mid-sized manufacturing companies over the next six months include the cost of raw materials — with 96 percent including it in top three concerns and 76 percent citing as the top concern — followed by inflation (52 percent selected as the second strongest cost pressure) and healthcare (37 percent selected as the third strongest cost pressure).
In every Group Outlook survey conducted since June 2008, the cost of raw materials (such as metals and plastics) has appeared as the top cost pressure, but the number of respondents citing this as the top concern has grown steadily as the economy has improved (from 36 percent just a year ago, to 51 percent six months ago).
Interestingly, costs related to consolidating vendors was cited as the lowest concern, by 66 percent. Prime Advantage suggested that this was an indicator of the respondents' confidence in the GPO's ability to provide a network of qualified suppliers.
Biggest Obstacle in Purchasing: Forecast Accuracy
When asked about potential obstacles that would prevent their companies from achieving their purchasing goals, survey respondents overwhelmingly cited the ability to maintain forecast accuracy and demand variability (76 percent), followed by the ability of suppliers to keep pace on predictable demand (41 percent) and to manage understaffed purchasing departments (39 percent). The 2010 Gartner Supply Chain Survey echoed this, as 59 percent of respondents ranked forecast accuracy/demand variability as the biggest obstacle to achieving supply chain goals.
Elsewhere, the survey suggests that the ability to offer products that are more sustainable or energy efficient has become a huge focus for small and midsized manufacturers, with 81 percent of respondents acknowledging this change in focus in product development processes.
The biggest driving factors behind these changes are customer requirements (80 percent), followed by compliance regulations (53 percent) and shareholder directives (12 percent). In addition, 57 percent of respondents have also started buying more sustainable indirect products for internal consumption.
Prime Advantage said that in the past 10 years it has returned more than $110 million in rebates and discounts to its members. "These real savings are helping U.S. companies gain a powerful competitive advantage," the company said.
To request a copy of the Prime Advantage 2011 Group Outlook Survey, go here (registration required).
