MFGWatch Q3 2011

Quarterly Survey of North American Manufacturers

MFGWatch Executive Summary: Job Shop and Contract Manufacturers (Suppliers) Continue To Not Consider Exporting As A Strategy. Overall Manufacturing Business Conditions Improve For Product Manufacturers (Buyers); Supply-Side Manufacturers Cautious. Supply Chain Disruptions Continue To Plague Product Manufacturers. Top Supply Chain Concerns Among North American Manufacturers: Operating Costs.

Most Recent Data: Direct media inquiries and interview requests to Mitch Free mfree@mfg.com

Business Growth

In Q3 2011, did your company’s sales:

  • Grow: 50% (43%)
  • Decline: 9% (16%)
  • No Change: 41% (40%)
  • Don't Know: < 1% (1%)

Percentages in parentheses represent expectations stated in the previous quarter.

Analysis

North American buy-side product manufacturing companies have shown a surprising resilience through the 3rd quarter of 2011, with a full 7% more companies indicating growth of their businesses.

Supplier Management

In Q3 2011, how did the number of suppliers in your supply base change?

  • Increase: 43% (45%)
  • Same: 47% (36%)
  • Decrease: 5% (5%)
  • Don't Know: 5% (14%)

Percentages in parentheses represent expectations stated in the previous quarter.

Analysis

North American buy-side product manufacturing companies continue to seek out new suppliers and expand their stables of supply-side resources. In the Q3 2011 MFGWatch results, these buyers expressed a need for new suppliers at the same levels as they’ve expressed historically. The consistency in these responses since the inception of the MFGWatch survey suggests an instability in the supplier markets due to fewer options, logistics costs and shifts in supply chain strategies. Still, the recurring theme of seeking out new sources – along with more manufacturers maintaining their supplier sources (up 11%) bodes well for the North American Supply-side manufacturing base.

Staff Adjustment

In Q3 2011, how did your company adjust staff?

  • Increase: 34% (33%)
  • Decrease: 12% (17%)
  • Same: 53% (50%)
  • Don't Know: 1%

Percentages in parentheses represent expectations stated in the previous quarter.

Analysis

Buy-side product manufacturers saw a rise in employment in Q3'11, beating last quarter by 1%. There was also a decline (5%) in product manufacturers reporting staff reductions. However, more manufacturers in Q3 expressed no change in staff indicating a level of uncertainty in the national and global economies, especially when compared to the number of manufacturers that report growth in their businesses.

Supply Chain Disruption

In Q3 2011, did your company experienced a significant supply chain disruption that caused you to investigate or select new suppliers?

  • Yes: 44% (48%)
  • No: 54% (49%)
  • Don't Know: 2% (3%)

Percentages in parentheses represent expectations stated in the previous quarter.

Analysis
The number of buy-side product manufacturing companies reporting significant supply chain disruptions fell slightly from Q2’11 (to 44% from 48%), while those reporting no disruptions jumped 5%. Supply chains seem to have stabilized somewhat from last quarter’s record. However, 44% indicates a remarkable level of companies mitigating significant risk or disruptions as part of their ‘normal’ supply chain management activities (In 6 of the past 9 MFGWatch surveys, significant supply chain disruptions have been reported by over 40% of product manufacturers).

Returned Production to North America or to North America

In Q3 2011, did your company return any portion of its production into North America from a low-cost country?

  • Yes: 19% (15%)
  • No: 74% (78%)
  • Don't Know: 7% (7%)

Percentages in parentheses represent expectations stated in the previous quarter.

Analysis

More North American product manufacturing companies report reshoring or nearshoring production closer than they did in Q2’11 (19%, up 4%). This uptick brings the percentage of reshoring or nearshoring companies back to just above MFGWatch averages (an average of 18% have reported reshoring activity over the past 7 quarters). In Q2'11 we asked product manufacturers if they were planning to investigate reshoring or nearshoring initiatives in the 3rd quarter. 31% said they would but in Q3 only 19% actually did. Reshoring or repatriation of production is clearly noticeable, but hardly a trend to offset offshored production.

Future Returned Production to North America or closer to North America

In Q4 2011, for your North American consumers, will your company be researching bringing any portion of its production into or closer to North America from a low-cost country?

  • Yes: 26% (31%)
  • No: 55% (47%)
  • Don't Know: 19% (30%)

Percentages in parentheses represent expectations stated in the previous quarter.

Analysis

The number of North American product manufacturing companies that expect to repatriate production for their North American consumers from low-cost countries fell to the lowest levels since Q1’10, and well below the historical average of 31% over the past 7 quarters. While a quarter of companies represents a potentially large volume of activity, those companies that actually institute near- or reshoring policies or strategies have not manifested themselves to the levels projected in previous quarters since the inception of MFGWatch.

Closer Market Production

In Q3 2011, did your company adopt or consider a strategy to establish production of your products closer to their markets of consumption?

  • Yes: 32% (35%)
  • No: 55% (56%)
  • Don't Know: 13% (9%)

Percentages in parentheses represent expectations stated in the previous quarter.

Analysis

A substantial number of North American product manufacturers are adopting strategies to produce within the markets in which they sell. With nearly a third of manufacturers pursuing this strategy (32%), this represents an important acceptance of a shifting global manufacturing environment. And when combined with the responses for reshoring activity, it is clear that North American product manufacturers are investigating supply chain alternatives – albeit at lower volume heading into the end of 2011.

Factors Threatening Sourcing/Supply Chain Strategies

In Q3 2011, what were the most important factors threatening your sourcing or supply chain strategies? (Choose 3)

  • Fuel/Oil Prices: 31% (32%)
  • Logistics & Shipping Costs: 45% (47%)
  • Intellectual Property Protection: 16% (14%)
  • Separation of Production from Design or R&D: 9% (9%)
  • Product Quality Compliance: 40% (37%)
  • Unstable Labor Costs: 11% (16%)
  • Civil Instability: 3% (5%)
  • Supplier Financial Health/Stability: 17% (18%)
  • Availability of Competent Suppliers: 46% (45%)

Percentages in parentheses represent expectations stated in the previous quarter.



Analysis

Indirect costs continue to consistently dominate the concerns of North American buy-side product manufacturing companies, with logistics and fuel costs of most concern. But supplier health and product quality continue as major risks to supply chain stability as well. While residual supply chain risk from the Japanese disaster remains, the consistency across these topics makes us believe that they represent intrinsic concerns in managing any extended supply chain vs. effects from a single event.

Intentions for hiring, investment and expansion

In Q3 2011, which of the following best describe your company’s intentions for hiring, investment & expansion in Q4 2011?

  • We are aggressively investing in new technology & expanding our workforce: 23% (20%)
  • We are aggressively investing in new technology but not expanding our workforce: 35% (32%)
  • We are hiring, but not investing in new technology: 14% (13%)
  • We are neither hiring, nor investing in new technology: 28% (35%)

Percentages in parentheses represent expectations stated in the previous quarter.

Analysis

North American product manufacturers have increased their investment intentions for the coming months, as fewer state they’re taking a ‘wait and see’ approach to expansion. Technology seems to be a clearer winner for their investments over employment, echoing similar sentiments expressed in Q2’11.

SUPPLIERS (Job Shops & Contract Manufacturers)

Business Conditions/Capacity

In Q3 2011, did your company's sales:

  • Grown: 46% (43%)
  • Contracted: 14% (16%)
  • Same: 39% (41%)
  • Don't Know: 1%

Percentages in parentheses represent expectations stated in the previous quarter

Analysis

North American supply-side job shops and contract manufacturers continue to gain steam, but that progress is tempered slightly by some contraction in sales. Growth was reported by 3% more manufacturers in Q3’11 than in Q2, reporting positive business improvements at levels over 40% for the sixth straight quarter.

Employment Conditions - Supply-Side

In Q3 2011, how did your company adjust staff?

  • Increased Staff: 31% (36%)
  • Decreased Staff: 10% (11%)
  • Same: 58% (53%)
  • Don't Know: 1%

Percentages in parentheses represent expectations stated in the previous quarter

Analysis

While less hiring occurred among North American job shop and contract manufacturers in Q3’11, the 31% that reported adding staff is higher than the MFGWatch historical average of 28%, and significantly higher than the low of 10% in Q4’09. This indicates a level of stability and momentum in the businesses and relationships of job shops and contract manufacturers.

Supply Chain Disruptions - Supply-Side

In Q3 2011, did your company receive queries or actual work from companies suffering from supply chain disruptions and in need of immediate assistance?

  • Yes: 40% (33%)
  • No: 46% (53%)
  • Don't Know: 13% (14%)

Percentages in parentheses represent expectations stated in the previous quarter

Analysis

The significant supply chain disruptions reported consistently by North American buy-side product manufacturers continue to manifest themselves in the business queries reported by suppliers. The 40% indicating they’ve been contacted by buyers in distress represents the second highest percentage reported over 9 quarters (and since Q2’10), and well above the MFGWatch historical average for this category (37%). Also of note, the 46% of suppliers that report no activity from buyers under duress is the lowest since the inception of MFGWatch.

Inquiries and Prospects - Supply-Side

In Q3 2011, did you see inquiries from customers or prospects?

  • Increase: 43% (43%)
  • Decrease: 17% (20%)
  • Same: 38% (35%)
  • Don't Know: 2% (1%)

Percentages in parentheses represent expectations stated in the previous quarter

Analysis

North American job shop and contract manufacturers report a similar increase in overall quoting inquiry activities in Q3'11 as the previous quarter. In contrast, there was a decline in the number of manufacturers reporting a decrease in inquiries by 3%. However, the 43% reporting heightened prospective business is well below the 52% with similar observations in Q1'11. Nevertheless, combined with the increase in activity from buyers under duress, business potential remains strong for suppliers heading into the end of 2011.

Future Export Strategies - Supply-Side

Describe your company’s export strategies for Q4 2011.

  • We will be exporting to foreign markets for the first time: 3% (7%)
  • We will be increasing our exports to foreign markets: 9% (8%)
  • We will be decreasing our exports to foreign markets: 1% (1%)
  • We are maintaining our current exports level to foreign markets: 32% (32%)
  • We are not considering exporting at this time: 55% (52%)

Percentages in parentheses represent expectations stated in the previous quarter

Analysis

By large margins, job shop and contract manufacturers continue to show a reluctance to export or enter the global manufacturing ecosystem. For the second quarter, well over half (55%, up 3% from last quarter) say they are not considering exporting products to other markets. This lack of motivation indicates a significant comfort level in remaining in continental rather than international markets, and underscores the level of support or encouragement they will need to enter those other markets.

Economic and Competitive Future - Supply-Side

Which of the following issues will have the most impact on the economic & competitive future of manufacturing for your region in Q4 2011?

  • Extensive Government Regulations: 16% (10%)
  • Logistics, Shipping & Energy Costs: 11% (15%)
  • Operating Costs: 31% (28%)
  • Rising Taxes: 6% (7%)
  • Trade Policy Reform & Deficit: 7% (8%)
  • Budget Deficit: 4% (5%)
  • Availability of Qualified Labor: 14% (13%)
  • Access to Capital: 11% (14%)

Percentages in parentheses represent expectations stated in the previous quarter

Analysis

Operating costs continue to dominate job shop and contract manufacturing business’ concerns going into the final stretch of 2011. But government regulations and qualified talent to feed their shop floors have risen in Q3’11 to significant levels (16% & 14%, respectively). Interestingly, for the second consecutive quarter, the impact of the US budget deficit registers very low on the list of concerns to supply-side manufacturers.

Future Hiring, Investment and Expansion - Supply-Side

Which best describes your company’s intentions for hiring, investment & expansion for Q4 2011?

  • We are aggressively investing in new technology & expanding our workforce: 16% (18%)
  • We are aggressively investing in new technology buy not expanding our workforce: 28% (24%)
  • We are hiring, but not investing in new technology: 15% (17%)
  • We are neither hiring, nor investing in new technology: 41% (41%)

Percentages in parentheses represent expectations stated in the previous quarter

Analysis

While their buy-side counterparts and customers are showing increased intentions to invest, job shops and contract manufacturers in North America remain in a ‘holding pattern’ toward investment, particularly where employment is concerned. This inactivity is likely due to uncertainty around the economy and rising operating costs.

MFGWatch is an annual, recurring survey conducted by MFG.com of North American OEMs/Sourcing Professionals of manufacturing goods and services. The survey is conducted via e-mail from a sampling of MFG.com member companies, and is intended to reflect projected and reported behaviors of companies in the North American manufacturing sector. MFGWatch data and its analysis are provided to share openly – however, MFG.com does ask for responsible acknowledgement as the source of MFGWatch data. Industries represented include aerospace/aeronautics, automotive, medical, defense, textiles and consumer products manufacturers.