Outsourcing Archives - Mental Laps

“Steel prices make up only a fraction of the retail cost of a car or truck. In other industries, such as canned beverages and food, “it’s even more trivial… a fraction of 1 cent,” stated Commerce Secretary Wilbur Ross to address the Section 232 report for Steel and Aluminum.

That’s great; rising steel prices will have a limited effect on the cost basis for the end manufacturer of complex products like automobiles (or appliances), but what about the fabricators and manufacturers who provide the components to those end products? Manufacturing suppliers will most certainly get squeezed as they buy more expensive raw material and are unable to pass on that increased cost to the automakers.

And why does that matter? The manufacturers of metal components employ 16 times more people than the 140,000 American steelworkers. Notwithstanding Section 232 action triggering a trade ware on the international stage, close to home it is difficult to disconnect such a move from having a negative effect on small and medium manufacturers.

An op-ed piece in the Wall Street Journal recently, put a thoughtful perspective on the concern threat of 232 action costing American jobs. As a point of reference, if we look to the Section 201 action taken during the second Bush administration, the temporary import relief to steel industry through tariffs, had a negative impact, raising costs and resulting in job losses. At that time, I recall a Tier 1 automotive supplier telling me they lost a long-term contract, at a Big 3 automaker, for a steel dashboard support component. The Big 3 buyer’s new source, overseas, had a price for the complete part that was less than the domestic supplier’s raw material cost. Due to situations like this across the country, it is estimated that roughly 200,000 jobs were lost in American steel-consuming industries due to that section 201 relief. For comparison, there were roughly 187,500 people employed in the US steel industries. Sadly, many were sacrificed to protect jobs of the few.

Why overreach and protect the primary industries like steel and aluminum? Its hard to set aside the deep pockets to lobby for those two industries, compared to the much larger and less organized small and medium business manufacturers. And perception? Fortunately, steel is a defined, census tracked industry. So let us look at a little Q&A to debunk some populist fodder of our threats and benefits.

Question 1: How much steel is China sending to the US?

Answer: Not much. 2.2% of total steel imports are from China, which is less than 1% of total US consumption. Surprisingly, Russia, which the US has numerous sanctions against, supplies 3x more steel to the US than China.

Question 2: What percentage of steel used in the US is domestic or foreign made?

Answer: Roughly 70% is domestic and 30% is imported.

Question 3: What is the current capacity utilization rate of the US steelmaking industry?

Answer: 75.9% as of February 19, 2018, up 0.8%-points from the previous week.

It is easy to look at the statistics and think, “Oh, we are at 75% utilization capacity and 70% of the steel we consume is domestic, so if we increase to 100% capacity, then we will only need to import 5% of our needs. Math!”

Nooooooooooooooooo…It is not that simple. Steel is a catch-all term, of which there are many types: carbon, alloy, electrical, among others. On top of that, those types come in many forms: ingots, bar, plate, and coil. The capacity available in the US is not being utilized for various reasons, particularly efficiency and need. There are other mills that produce those same products as the idled facilities, but much more productively, so those mills are profitable at a lower steel price. Once steel prices rise, through tariffs or supply-demand dynamics, then the less productive mills can get in the game. That would displace some imports, but not all. At idled mills, there are some products and grades of steel that are not in demand. As higher grades of materials are specified in industries, such as the latest generation of ultra-high strength steels (UHSS) in automotive applications, or Grade 80 material for metal roofing and construction, it has left mild or commercial quality (CQ) steel capacity less needed. There is not enough capacity of the sophisticated alloys available domestically, and there is too much capacity of common materials. Thus, effectively utilizing 100% of domestic steel capacity is not possible. We could not build enough ‘bridges to nowhere’ to utilize some of the idled capacity.

What is happening now? This week, a metals buyer told me their primary steel supplier informed 15% price increases were coming. This announcement was four days after the section 232 report’s release. How much does 15% matter? In high volume, competitive industries like construction or tubing, material costs make up 70-90% of the selling price of the product. Will those manufacturers pass on the material cost? To make money they will have to raise prices and they may lose some orders in the short term while cheaper inventory at competitors gets absorbed in the market.

And what else will happen? Imports of finished products will go up, which will hurt the manufacturers of value-added products. Like the automotive example with the dashboard support component, supply chain experts will resource overseas as they will be able to find finished products that are less expensive than their domestic vendors raw material cost. It took the Commerce Department 10 months to submit their Section 232 report on the steel and aluminum industry. How long would it take them to identify all the industries that consume these materials, who will be hurt by finished goods imports displacing their products in the market?

With history as an indication, we would be foolish to ignore the effects of Section 201 action to protect the steel industry in the early 2000s. A move by the government to proceed with Section 232 protection, whether it is through tariffs, quotas or minim prices, will be a detriment to competitiveness and employment in the broader American manufacturing landscape.

Sources:

https://tradingeconomics.com/united-states/steel-production

https://www.census.gov/foreign-trade/Press-Release/2017pr/02/steel/index.html

http://www.steel.org/about-aisi/statistics.aspx

https://www.wsj.com/articles/how-to-punish-american-workers-1519078840

An edited version of this article, THE NEW MANUFACTURING LANDSCAPE, appeared in the September 2009 issue of FF Journal

The recession of the last 18 months and its causes have been well documented. The decrease is spending and capital availability has cascaded throughout manufacturing, resulting in layoffs, rolling shutdowns, and factory liquidations. The cutbacks have created a range of challenges for those of us in manufacturing and manufacturing services. Spread thin, limited internal personnel, a lack of cross training, outsourcing and furloughs have caused an uncertain landscape for employees.

Outsourcing

Since the 1980s, layoffs of production, engineering and support personnel have been a common action to reduce costs during declines in business activity. These layoffs, along with retirements, have wittled away the manufacturing base in the United States to the point it is today. For many companies, with the pool of direct labor stripped to its core of personnel required to conduct business, other avenues have been pursued to cut costs. With the decreased business activity, it has created an environment for manufacturers to take the chance and outsource administrative activities, such as human resources, purchasing, and even accounting. As automotive and appliance manufacturers have done over the last several decades; small and medium producers are testing the waters with local outsourcing of component and production activities that may be done by job shops. Though these outsourcing activities may be a necessary step for businesses to survive this economic climate, it presents new challenges. For example, the outsourcing to local job shops may reduce the need for some on-hand inventory, but the manufacturer is no longer in control of the lead times or the opportunity to fill rush orders, which are more common as everyone has shed inventory to meet demand. This can be frustrating for customers and manufacturers alike: eventhough no one is ‘busy,’ ie., at or near full production, leadtimes for manufacturered items are nearly unchanged, or longer than usual.

In-Sourcing

Several years ago, because of the overwhelming cost savings touted by offshoring components, for some manufacturers it was automatic to try this. As offshore costs have approached parity with local capabilities, in-sourcing has become an admirable way for manufacturers to maintain a level of self-reliance and insure work for their remaining core of employees. In-sourcing has presented complications, though. For example, a manufacturer of scaffolding brought back their production of planks. Upon assembly they found their planks and fasteners, still offshored, no longer fit together per their print. Since they had purchased this fabricated subassembly for years, it had changed from the original specifications but went unnoticed because the deviated subassembly still fit within the overall system. Because the supply of offshored planks could not be instantly turned on, it was necessary to retool their plank. Additionally, a manufacturer of vacuums found their quality problems increased when they insourced production because they no longer had technical personnel familiar with the critical assembly of their equipment.

Cross Training

The recession and layoffs have pushed a lot of companies to no longer have backups in their workforce, there is one person to do each job or there are a handful of personnel that are doing all the various disciplines that are now required on a smaller scale. This has emphasized the need for cross training core personnel; on a given day it may require an engineer to design a component, purchase the materials, and schedule the production. It’s as if small business structure is being projected onto larger businesses.

Productivity?

Since this recession has proliferated the use of furloughs to meet business demand, it has caused a delay in opportunities. For the companies with liquidity to pursue capital projects, the possibility of purchasing new equipment or automation to increase productivity or in-house capabilties, the rolling layoffs impede the justification process. For example, a company furloughing on a four week rotation, the week off and week of catching up can cause the process of justifying a capital project by two or three fold, when considering the time required to coordinate technical personnel with outside vendors, review quotations and successive revisions.

Taking Risks (expanding in a down economy)

Developing technologies and new industries are a common sources for increasing economic activity or ‘green shoots,’ as has become the common buzzword lately. Even as some companies pursue the opportunities to create or expand their business to pursue these new opportunities, they are finding substantial roadblocks, particularly fiancial. Major banks and financing companies have restricted leasing to any LLC without several years of credit history or businesses of any kind that are less than a year old. It’s also disheartening that banks are resistant to finance capital equipment, even when the suppliers are willing to back the loans to some rate. For example, a small business that was not eligible for equipment financing because the banks no longer considered their debt ratio acceptable. The business was eventually able to lease the equipment, a used model financed directly by the manufacturer, at a 12% interest rate.

Inventory & Maintenance

As demand decreased, manufactruers have been forced to lower minimum order sizes. A few tubing manufacturers have been forced decrease their minimum production run from 100,000 feet to 30,000 feet to maintain orders. This adjustment to demand has caused the manufacturers to changeover tooling every single shift. These lower production quantities have resulted in more changeover time for products, higher scrap rate and more wear and tear on equipment. In the short term, manufacturers have met the maintenance needs of these demands by using parts from one of their mothballed production lines to keep the other one(s) running. When happens when the economy picks back up? Will the mothballed and scavenged equipment be operable to bring back online?

Flexible Employment

Where is manufacturing going? What will it look like when things rebound. Several manufacturers have commented that they will never have the number of employees they did before. They have found their ability to do more with less. A portion of our current unemployment rate are baby boomers who are still willing and able to work as well as people only a few years out of school that were fulfilling entry level roles. It seems that we are coming to a new era of freelance employment. Industry veterans, who may have been pushed out earlier than they desired, may be available on a a consulting basis. Additional personnel may fit into the puzzle as temporary employees, to fulfill fluctuations in business demand, since companies may choose to stick with their core of compotent, cross trained personnel.

Tag: Outsourcing

What will Section 232 Action on Steel do to US Manufacturing?

Question 1: How much steel is China sending to the US?

Question 2: What percentage of steel used in the US is domestic or foreign made?

Question 3: What is the current capacity utilization rate of the US steelmaking industry?

What Are We Going Through