Broken China

Things can be made more cheaply in China.

That’s a perception that U.S. manufacturers are dealing with and will continue to deal with it in the years to come.

Luckily, that’s not that whole story.

There is much more to a good product than the cheap labor that creates it, and that’s what smart manufacturers have taken advantage in their ongoing attempts to keep customers.

“The cost savings are so great that the other issues are inconsequential,” says Owen Kelly, president of Alcon Tool Co., an industrial knife manufacturer, on why so many of his customers have gone to vendors overseas or moved plants out of the country.

Even before the great migration to places like South America and China, larger companies were consolidating their suppliers.

“They had a ton of vendors and they were trying to whittle them down,” says Kelly. “One of our biggest customers, 3M, created supplier programs in order to weed out inefficient vendors.”

Companies like 3M didn’t want to continue taking all the risk. They didn’t want a lot of inventory. And they wanted their suppliers to comply with expensive new infrastructure, Kelly says.

“We have taken on a much bigger responsibility for production,” he says. “What has happened now is that we’ve taken the pressure off manufacturers.”

Kelly knew he had to bend to meet the needs of his customers; that’s what his customers could expect and get from his company that they couldn’t get overseas.

“When business was good, everyone got fat,” says Kelly.

Just-in-time and lean manufacturing have changed all that while putting much of the onus on the smaller guy.

“I had inventory, and my customer did, too,” he says. “There was even some in transit. But all that has changed.”

To further complicate matters, even as his competitors went out of business, Kelly still had to compete with them.

“What is happening is that as these companies lose market share, they become sales agents for offshore interests … because they know everything,” he says.

All of this meant that he and other manufacturers had to change their strategy.

“(Before) we were focused on Fortune 500 companies, the low-hanging fruit,” says Kelly.

But as he watched more and more of his customers leave the country, he reacted. Kelly and Alcon worked with the company’s remaining customer base and offered them a host of new services they hadn’t thought of previously, all the while working on increasing efficiency and driving down costs.

Alcon specifically worked with 3M to conform with its systems, and even came up with plans for reducing costs. “We knew we had to do something new and something fresh or we would get hammered,” says Kelly, “They challenged us to come up with some suggestions.”

To stay in business, Alcon didn’t just accommodate its big customers, it made aggressive moves to increase their customer bases and offered smaller companies services similar to what it was offering the likes of 3M.

“You have to stay with who you’ve got … you have to stay with them and do whatever they want,” says Kelly. “We give them the service that the big boys got but they couldn’t afford before.”

Flexibility and quality has allowed Alcon to stay in business and grow during one of the most difficult consolidation periods in U.S. manufacturing history.

“Seventeen percent of growth is new business,” and Kelly says most of his new business comes from smaller players. “We’ve had tons of new accounts. They are not huge but they add up.” How to reach: Alcon Tool Co., (330) 773-9171

Credit where it’s due

Finally, some good news for manufacturers. Not great news, but good is better than bad.

It seems that lenders may be loosening their hold on capital and extending some to manufacturers.

According to the National Association of Credit Management (NACM), manufacturing experienced an improvement in three of the four factors regarding credit availability, sales and dollars collected.

The NACM publishes the Credit Manager’s Index, which showed a modest improvement in favorable factors and less of a decline in unfavorable factors in the manufacturing sector in August relative to July’s numbers.

One favorable factor that declined was the amount of credit extended to companies in the manufacturing sector, although the decline was much slower than the previous month. In addition, increases in rejections of credit applications and filings for bankruptcies were minor.

On the other hand, the service sector, after seven months of improvement, had declining numbers in August. September’s numbers suggest a slowing of growth in the service sector.

The CMI data has been collected and tabulated monthly since February 2002. The index is based on a survey of approximately 500 trade credit managers. Source: National Association of Credit Management