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"Made in the USA": It's a tagline that's seen more often these days - and with good reason.

Proximity to the customer – which allows small to midsized American manufacturers to provide customized products, value-added inventory management and quick delivery – is helping fuel a manufacturing revival.

Despite the relatively high costs associated with U.S. production, economic indicators demonstrate that the manufacturing sector is showing healthy growth. Seven years after the financial crisis, U.S. manufacturers have more than made up for ground lost during the crisis and are now out-performing the economy overall.

Many factors have contributed to the resurgence of U.S. manufacturing, including rising labor costs overseas and productivity improvements here at home, which have allowed manufacturing output per employee hour to more than double over the past two decades. Another indicator of the strong long-term outlook is a shrinking manufacturing cost advantage between China and the U.S., which Boston Consulting Group estimates at less than 5 percent.

Recent interviews with Bank of the West small- and medium-size manufacturing clients show that being close to the customer is a powerful advantage. It helps brands consistently provide faster and more responsive service and better products than overseas competitors. As U.S. consumers and businesses demand more customization and faster delivery, these advantages are likely to intensify:

  • Service: One way U.S. manufacturers use proximity to make products better is by competing on service. A case in point is Feral Productions, a manufacturer of custom parts for the defense and biomedical industries. “If a customer has an eight week job that they want in two weeks, you find a way,” says owner Robert Potts. “It’s all about service. If you do that, customers will always come back.”
  • Speed and Inventory Management: One way businesses leverage proximity is by helping customers manage inventory and speed-to-market. Jerry Kwok, owner of Spectrum Label Corporation, which manufactures labels for food, pharmaceutical and nutritional products, says Spectrum helps clients minimize their inventory level, which can significantly reduce the cost of doing business. Being close to the customer allows Kwok to “design a program to make sure they have exactly what they need when they need it.” Teams work in close collaboration with customers to plan production, allowing him to “turn on a dime,” meeting customers’ urgent needs.
  • Raw Materials Management: Equally important as proximity to the customer is closeness to suppliers and raw materials, as Rebecca Fleenor, CEO of Fleenor Paper Company, knows well. “Though our overall payroll is huge, our raw materials are probably 85 percent-90 percent of the cost of our finished goods,” says Fleenor. Proximity to suppliers is part of Fleenor’s growth strategy. By forging close relationships with materials providers, Fleenor and other growing manufacturers are able to provide flexible delivery schedules, environmentally friendly products and superb customer service.
  • Quality: Linked to raw materials management is product quality. Doug White has been making bicycle parts since the late 1970s as owner of White Industries, which sells directly to cycling shops across North America and to distributors in Europe, Asia, Australia and New Zealand. Key to White’s market success is product quality. “We compete because we have a name and reputation that goes beyond price,” he says. “We have to charge more than the large Asian companies or the other companies in the United States that have their products made in Asia. That’s how we do it, by reputation and good people.”
  • Reputation Management: Over the next few years, quality and reliability are likely to play an even bigger role in market success, as customers are paying more attention to reputational issues such as factory safety, HR policies, environmentalism, and job creation. “We cannot compete with low costs and countries that don’t manage their environment and don’t care about the people who work for them,” says White. The upside is a reputation for responsibility, reliability and quality. A good reputation opens doors, both domestically and internationally.
  • New Product Development: Continuous access to customer feedback additionally drives innovation and successful product development. As Darren Bianchi, CEO of fluorescent pigments manufacturer Brilliant Group Inc., explains, “With the products we make in the U.S., we’re able to be much more flexible and innovative. When you manufacture here there’s a feedback loop that makes the product development cycle much shorter. When you manufacture overseas, you lose time and ideas in translation. You lose the iterative process that’s core to good product development.”
  • Product Customization: As customers demand more customized products and services, having short, nimble supply chains that can adjust to changes in specifications quickly (e.g., color, materials, features) is a big advantage. Darin Strickler, CEO of Tactical Solutions, a maker of firearms and firearms components, believes close proximity and flexibility are keys to his company’s success. “Our products are very high quality, a lot of hard labor,” notes Strickler. “They are 100 percent made and sourced in the U.S., so we don’t wait for any overseas subcontracting. And because we’re close to the customer, we can do any color on many of our products. We are essentially a custom shop.”

CHALLENGES
Of course, the economic outlook for U.S. manufacturers isn’t without obstacles. In the near term, there are signs of weakness. Production of non-defense capital goods, excluding aircraft, recently dropped for the seventh consecutive month. But a modest manufacturing slowdown doesn’t necessarily indicate an extended downturn.

Bank of the West sees three factors driving the recent downturn in manufacturing orders: (1) the rapid strengthening of the U.S. dollar; (2) the plunge in crude oil price and (3) the hard winter. The strong dollar is likely the most powerful factor – especially for larger, global manufacturers with multiple geographic operations and large exporting operations.

U.S. manufacturers face longer-term challenges, as well. The U.S. has more safety and environmental regulations than most countries and corporate tax rates are often higher here than abroad. Wages are also relatively high, while workers with technical skills are in short supply. These factors, combined with rising health care costs and the strong dollar, are a concern for U.S. manufacturers as they look to expand (or at least maintain) their customer base and profits.

KEYS TO SUCCESS
U.S. small and midsize manufacturers may better meet business goals by leveraging the powerful advantage at their disposal: They are close enough to the market to forge deep customer and supply chain relationships, which in-turn improve service, speed-to-market, raw material management, quality, and, ultimately, new product development. For U.S. manufacturers that achieve these goals and provide products designed around customer needs, the outlook for “made here” is promising.

As the decade unfolds, the climate for U.S. production is likely to remain positive but somewhat volatile. Well-run U.S. small and midsize manufacturers have location and strong business models on their side. They compete on quality, speed and customization. They listen and learn from their customers. And they buy materials from trusted suppliers who hold themselves to high quality and delivery standards.

It’s a good moment and business climate for products “Made in the USA.”

Read the full whitepaper here.

Scott Anderson, Ph.D., Senior Vice President and Chief Economist, Bank of the West
Scott A. Anderson is the Chief Economist for Bank of the West. In this role, he analyzes international, national, and regional economic trends and provides forecasts for the bank management, business lines, and clients. He was recently named one of the top economic forecasters in the country by Bloomberg and USA Today.

Volume:
5
Issue:
6
Year:
2015


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