Posted on Sep 5, 2019

Even if your manufacturing company has been successful at selling its current line of goods, it’s probably not smart to keep producing the same products indefinitely. Now, in fact, is an excellent time to expand your product offerings. With global competition ramping up, the manufacturing market is only becoming more crowded and less certain. By anticipating customer needs, you can fortify your position and help ensure continued profitability.

4 Reasons to Consider Expansion

You probably know your market inside and out and take pride in the fact that customers are satisfied with your current products. Unfortunately, this may not be good enough. Here are four reasons to consider product line expansion:

1. Life cycle limits. Most manufactured goods have a limited life cycle. If your company makes products that have already passed through the introduction, growth and maturity stages, they’re probably on the decline. Products enter the decline stage when they no longer meet customer needs or their performance pales compared to new goods on the market — particularly if those new products rely on improved technology.

To avoid being left behind, stay on top of technological developments and upgrade accordingly. If you haven’t turned out version 2.0 or 3.0 of your flagship product yet, it’s probably time to do so.

2. Different market sectors. Expanding your product line enables you to tap new markets and service new industries. A men’s dress shoe manufacturer, for example, could expand its product line to include casual footwear. Or the company could customize existing products for a different target market, such as adolescents. Market research can provide insights into what products consumers or business customers are demanding and what they’re willing to pay.

3. Customer needs. Customer needs change over time, requiring manufactured goods to change with them. Encourage input from customers by distributing surveys and tracking comments on your website and social media accounts. Make sure you follow up and respond directly to customers with suggestions, concerns or complaints. And before you start investing money in new products, be sure to assemble focus groups where you provide potential customers with product previews.

4. Customer loyalty. A solid list of repeat and long-time customers is a hallmark of a successful business. With an established customer base, you can add products or variations of existing products without putting much additional stress on your marketing budget.

Research the purchase history of existing customers to identify products that competitors are currently supplying. For example, a manufacturer of construction equipment can develop new products that offer greater variety and innovation to crews in the field.

Secrets of Success

Let’s say you’ve decided to pursue product line expansion. How should you go about it? For starters, do your due diligence. Solicit customer feedback to ensure a market exists for proposed products.

Also make sure any proposed products make sense from a financial standpoint. Given operational or supply chain constraints, can you make goods cost-effectively? What kind of gross margin and break-even point are you looking at? Will you need to invest in new equipment to make the new products, or do you have excess capacity to handle the orders with your existing equipment? Likewise, are your existing distribution channels up to the job or will you need to hire sales representatives or build a new e-commerce site?

It’s also important to address macroeconomic factors. Everything from sluggish consumer spending to rising interest rates to foreign tariffs could make launching a new product now difficult.

Make sure you keep an eye on the competition, too. Clothing manufacturers have long used competitors as a resource by modeling new designs (with tweaks) on already-successful ones. Sometimes, jumping on current trends is easier and less expensive than attempting to create new ones.

Creative Solutions

Many manufacturing companies begin to decline because they keep producing the same products they’ve made “forever.” To remain competitive, monitor customer trends and technological advances and respond with goods that are desirable in today’s marketplace.

Look for creative solutions — even those outside your field. For instance, an aerodynamic design or stitching technique that works for making sports equipment might be co-opted by a furniture manufacturer. At the very least, investigate any promising new ideas, regardless of their origin.

Posted on Aug 1, 2019

Manufacturing company owners and managers generally focus their attention on what’s happening — or isn’t happening — on the plant floor. Activities in overhead departments, such as human resources (HR), can become a secondary consideration. If this sounds like your company, consider this: Manufacturing is a labor-intensive industry, and you can’t afford to ignore HR.

A well-oiled HR department enables your business to run on all cylinders and overcome many challenges. Conversely, HR problems can slow down your company’s growth. If, for example, HR doesn’t proactively search for new machine operators, you may not be able to fill a big order that comes in unexpectedly.

7 Critical Functions

Here are seven ways HR departments can support a manufacturing company’s operational and performance objectives:

1. Recruitment.

This may be HR’s most important function. Finding the best talent to keep the plant humming without breaking the bank is always an issue, but it’s even more so in the current tight labor market. Today’s unemployment rate has reached record lows in some markets, and many applicants lack the skills and training to operate complex machines and computers that are used by advanced manufacturers.

One challenges for HR is that Millennials have shown less interest in manufacturing than previous generations. This may be due to a widely held misconception that manufacturing isn’t “cutting-edge.” Some younger workers may also believe that manufacturing jobs aren’t secure due to a reliance on temps to handle seasonal or periodic work.

The numbers bear this out. According the National Association of Manufacturers (NAM), in the first quarter of 2019 more than 25% of manufacturers had to turn down new business opportunities for lack of skilled employees. By 2025, millions of manufacturing jobs are expected to go unfilled. Your HR department must constantly strategize and think creatively to ensure that this doesn’t happen to your company.

2. Compensation.

For many manufacturers, compensation is the second largest business expense next to raw materials. Of course, wages alone aren’t enough to attract the top talent. Today, jobseekers look for a complete package that includes a good salary, benefits and perks, such as bonuses, paid time off and retirement plans.

Your HR team needs to know enough about the labor market to offer the best combination of these elements. At the same time, HR must align salary and incentive programs with your company’s performance markers — all while working within a tight budget. It’s a tough balancing act.

3. Health care benefits.

No question, the biggest-ticket under the benefits umbrella is health insurance. As health care costs rise, premiums will also continue to soar.

HR managers must balance the needs of employees against the cost to your company. Increasingly, this means asking workers to pay a larger percentage of premiums and accept high deductibles. But your company can’t put too much of the burden on employees or it risks losing them. HR must understand the health insurance marketplace and know how to find the best “deals” without sacrificing quality or violating laws governing employer-sponsored health insurance. This may require them to outsource some work to benefits experts.

4. Training.

Manufacturers hoping to rely on “interchangeable” workers probably won’t last long in the global marketplace. You need workers with specialized skills — and that means devoting resources to training.

Extra training isn’t only about the right hands operating critical machines. When workers are well-trained, they tend to care more about the quality of work, leading to higher productivity. Accordingly, HR should use every tool at its disposal, including mentoring, coaching, internships, career development plans, tuition reimbursements and motivational speakers.

5. Performance management.

Skilled performance management promotes employee success and, if HR is successful, results in better financial performance. Many HR managers design and implement internal employee appraisal programs. But input from performance management consultants can be valuable as new “best practices” emerge.

6. Labor relations.

In most U.S. states, manufacturers can’t ignore unions. Managing union relations may fall to your HR department. It’s important that this team maintains a positive and productive relationship with unions and union members. Of course, if conflict arises, upper management must step in.

7. Compliance.

Whether they want to be or not, HR managers must be labor law experts. Your HR manager may be responsible for drawing up policies that protect workers and keeping corporate officers abreast of changing regulations. There’s little room for error because failure to comply with labor laws can lead to litigation and financial penalties.

Protect Your Assets

Your company’s HR department to integral to its success. Make sure that this team receives the budgetary and other support it needs to excel at recruiting, training, reviewing, compensating and protecting your most valuable asset — your workforce.

Posted on Apr 19, 2019

The manufacturing sector ranks third in terms of days lost due to workplace injuries, according to the National Safety Council (NSC). This isn’t surprising considering many manufacturing workers operate heavy machinery and are exposed to a variety of physical and environmental hazards. In some cases, technology has helped manufacturers reduce the incidence of workplace injuries. But there’s still a long way to go. Fortunately, your company can reduce safety risks by implementing and enforcing safety precautions and properly training both supervisors and workers.

The Occupational and Health Safety Administration (OSHA), which enforces employment safety laws, says that companies can reduce lost work by almost 50 days a year by focusing on workplace safety. To ensure you’re doing everything you can, focus on five areas:

1. Equipment Use

Most workplace injuries can be traced to the misuse of equipment — including heavy machinery and tools. For example, accidents often occur when equipment is used for purposes other than its intended use. They’re also more likely if equipment isn’t kept in good operating condition or is stored improperly.

To minimize these risks, insist that workers use equipment only as intended and as they have been trained. Be sure to penalize any infractions of this rule. In addition, regularly clean equipment with industrial vacuums and other appropriate tools. Even a little dust can potentially cause fires and explosions under certain conditions. Also store equipment and tools in the right place and position. Equipment with electrical components should be kept in the “off” position when not in use. And if a piece of equipment isn’t functioning property, require workers to report it immediately so that it can be repaired or replaced.

2. Fire Hazards

Aside from the obvious risk to workers’ health and lives, workplace fires can lead to devastating financial losses. Imagine how profitability would suffer if you had to shut down operations to clean up, make structural repairs or even replace entire buildings.

If your plant uses combustible materials, house only the amount you need for the job. Extra stores could possibly turn a containable fire into a towering inferno. Also house flammable materials in secure, fire-resistant areas when not in use. Combustible waste from current operations should be temporarily stored in metal bins and discarded daily.

Finally, to minimize threats to human life, make sure everyone in your company complies with fire safety codes by keeping doorways and walkways clear and emergency exits clearly marked.

3. Slip-and-Fall Accidents

Slips and falls are common workplace incidents. Employees might take a tumble while working on ladders, using staircases or walking on slippery floors or uneven surfaces. Even a simple fall can require months of recovery and cause permanent physical injury.

Some common-sense measures can prevent most of these incidents. For example:

  • Keep your facilities’ aisles clear.
  • Clean up (or cordon off) spills immediately.
  • Install anti-slip flooring in any parts of your plant where liquids are frequently used.
  • Perform regular inspections of floors for loose boards, holes and protruding nails.
  • Replace damaged or inferior flooring as soon as possible.
  • Ensure that ladders and similar equipment are safe and in good working order.

4. Flying Objects

You should pay as much attention to hazards above workers’ heads as those below their feet. To prevent injuries from falling objects, install nets, toe boards and toe rails under parts and equipment. Require employees to store heavier objects on lower shelves and avoid stacking objects in heavily trafficked areas.

Also train workers in how to safely move objects without causing back injuries. In general, they should bend their knees and keep their backs straight when lifting. No stooping or twisting! If employees use forklifts to move objects, they should ensure that the workspace is clear of people who could be struck if the object fell out of the bucket.

5. Personal Protective Equipment (PPE)

Some workers consider PPE a hassle and may enter workspaces without proper protection. Stand firm on this point and require workers to always wear:

  • Safety glasses when operating machinery that may cause flying particles or when working with caustic chemicals,
  • Steel-toe boots where heavy materials could be dropped or a worker’s foot might be run over by a vehicle,
  • Gloves when hands are exposed to cuts, abrasions or puncture wounds, or when working with hazardous materials,
  • Ear protection when noise levels are 85 decibels or higher, and
  • Hard hats if overhead objects could fall and result in head injuries.

If a worker refuses to don PPE, or only complies some of the time, take disciplinary action. Of course, the carrot works just as well as the stick. Praise and reward workers who always wear PPE and comply with other safety procedures without having to be asked repeatedly.

No Guarantees

Taking these precautions won’t guarantee an injury-free workplace. However, these steps can minimize risks and reduce potential liability. You owe it to your workers and the future or your business to prioritize safety.

 

Posted on Mar 19, 2019

In the current political climate, just about the only thing manufacturers can be certain about is continuing uncertainty. Everything from changes to foreign trade policies, to new tariffs, to military actions threaten to disrupt smooth operations in the manufacturing sector.

To complicate matters, there’s no clear timeframe for when (or if) events will transpire. Already, manufacturers are coping with the rising costs of raw materials and subsequent pushback from customers with long-term contracts. For example, your firm may have been forced to find cost-effective alternatives or make certain concessions.

So what’s the forecast? For most manufacturers, it’s “wait and see.” However, you can take several steps now to weather the storm and minimize potential economic damage. These steps can also help position your company to benefit from any favorable conditions that may arise.

Business Benefits

Review the following to determine whether they may benefit your business.

1. Negotiate and renegotiate.

Even if the goods your company produces aren’t directly affected by tariffs, you may be hurt indirectly by extra costs associated with materials like steel and aluminum. Take this into account when hashing out contracts. For instance, build higher supplier costs into new customer agreements.

For agreements already in place, see if the other party is willing to renegotiate Then consider a long-term arrangement that provides pricing you think you can live with. Incorporate clauses into the contract that provide protection if additional tariffs are imposed.

2. Analyze profit margins.

Thorough analysis is necessary to help prepare your company for possible tariffs and rising materials cost. This involves deciding which costs your firm can absorb and which ones you can pass along to customers. Of course, you might also be able to find a satisfactory middle ground.

To help offset unexpected expenses, locate opportunities for efficiencies or cost rationalizations that customers will be able to tolerate. If a customer has an existing contract that provides price escalation clauses or limits, further renegotiation may be required.

3. Explore alternate sources.

You might be able to avoid disruptions by tariffs if you can find alternative sources for supplies and materials. And be prepared to move quickly when warranted. This may include modifications to existing systems and processes to accommodate new business relationships. Have your professional advisors guide you concerning the logistics and legalities.

4. Get into “the zone.”

One way to cut costs may be right under your nose: Take advantage of free-trade zones (FTZs). These are areas where goods can be landed, stored, handled, manufactured or reconfigured, and re-exported under specific customs regulation. Generally, these goods aren’t subject to customs duty.

FTZs usually are organized around major seaports, international airports and national frontiers.

There, your business can produce products and export them to a U.S. customs territory or foreign destination, thus bypassing potential tariffs.

5. Join the club.

Be aware that you’re not facing these complex issues alone. To share thoughts and possible solutions, participate in trade compliance groups that focus on issues such as inventory and supply chain strategies, resource alternatives, and multiple data sources. Consider how your association can present a united front.

And if you can’t find a group? Start one yourself.

6. Find an exclusion.

Your company may be eligible for an exclusion retroactive to the date a tariff becomes effective. Contact the U.S. Commerce Department to request exclusions for aluminum and steel tariffs and the U.S. Trade Representative for China tariffs. The Commerce Department has been willing to provide exemptions from the 25% tariff on steel and the 10% tariff on aluminum imposed in 2018.

7. Assess imports.

Whether a product will be affected by a tariff depends on its classification. Therefore, misclassifications in borderline cases can result in unnecessarily higher costs. In addition, if imports of materials are currently subject to a low tariff or have no tariff, you might be able to stockpile those materials now. A CPA can review your company’s books and may be able to help you avoid unpleasant surprises.

Don’t Wait

In any event, it doesn’t make much sense to just sit back and wait for the other shoe to drop. Be proactive about protecting your manufacturing company’s interests.

Posted on Feb 20, 2019

Many businesses will pay less federal income taxes in 2018 and beyond, thanks to the Tax Cuts and Jobs Act (TCJA). And some will spend their tax savings on merging with or acquiring another business. Before you jump on the M&A bandwagon, it’s important to understand how your transaction will be taxed under current tax law.

3 Favorable TCJA Changes for Businesses

The Tax Cuts and Jobs Act (TCJA) contains several provisions that will lower federal income taxes for businesses. Here’s an overview of three pro-business changes.

1. Tax Rate Changes

The TCJA permanently reduced the corporate federal income tax rate to a flat 21% for tax years beginning after 2017.

For 2018 through 2025, the TCJA also lowered the individual federal income tax  rates on income from pass-through business entities. These include sole proprietorships, limited liability companies (LLCs), partnerships and S corporations. For those years, the maximum individual federal rate is 37%. However, the 3.8% net investment income tax (NIIT) may also apply to passive business income recognized by individual taxpayers.

Important: The federal income tax rates  are unchanged for long-term capital gains recognized by individuals. The maximum rate is 20%, but the 3.8% NIIT   may also apply.

2. New Deduction for Income from Pass-Through Business Entities

For tax years beginning in 2018 through 2025, the qualified business income (QBI) deduction is potentially available to  individual pass-through entity owners. The deduction can be up to 20% of an owner’s share of passed-through QBI. This break expires at the end of 2025, unless Congress extends it.

Numerous rules and restrictions apply to the QBI deduction. For example, above certain income levels, the deduction may be limited or eliminated for service businesses and businesses that haven’t paid enough in W-2 wages or invested enough in fixed assets. Contact your tax pro to determine whether you qualify for this tax break.

3. Expanded First-Year Depreciation Breaks

The TCJA allows 100% first-year bonus depreciation for qualifying property placed in service between September 28, 2017, and December 31, 2022. The bonus depreciation percentages are scheduled to gradually phase out as follows:

  • 80% for property placed in service in calendar year 2023,
  • 60% for property placed in service in calendar year 2024,
  • 40% for property placed in service in calendar year 2025, and
  • 20% for property placed in service in calendar year 2026.

Bonus depreciation is scheduled to expire at the end of 2026, unless Congress extends it.

Important: For certain property with longer production periods and aircraft, the bonus depreciation cutbacks are delayed by one year. For example, the 100% bonus depreciation rate applies to such property that’s placed in service before the end of 2023, and the 20% rate applies to property that’s placed in service in calendar year 2027.

In addition, the TCJA permanently increases the maximum Section 179 deduction to $1 million for qualifying property placed in service in tax years beginning in 2018. That amount will be adjusted annually for inflation.

The Sec. 179 deduction phaseout threshold has also been permanently increased to $2.5 million, with annual inflation adjustments.

For tax years beginning in 2019, the maximum deduction is $1.02 million, and the phaseout threshold is $2.55 million.

As under prior law, Sec. 179 deductions can be claimed for qualifying real property expenditures, up to the maximum annual allowance. There’s no separate limit for real property expenditures, so Sec. 179 deductions claimed for real property reduce the maximum annual allowance dollar for dollar.

Stock vs. Asset Purchase

From a tax perspective, a deal can be structured in two basic ways:

1. Stock (or ownership interest) purchase. A buyer can directly purchase the seller’s ownership interest if the target business is operated as a C or S corporation, a partnership, or a limited liability company (LLC) that’s treated as a partnership for tax purposes. This is commonly referred to as a “stock sale,” although some sales may involve partner or member units.

The now-permanent flat 21% corporate federal income tax rate under the TCJA makes buying the stock of a C corporation somewhat more attractive for two reasons. First, the corporation will pay less tax and, therefore, generate more after-tax income. Second, any built-in gains from appreciated corporate assets will be taxed at a lower rate when they’re eventually sold. These considerations may justify a higher purchase price if the deal is structured as a stock purchase.

In theory, the TCJA’s reduced individual federal tax rates may also justify higher purchase prices for ownership interests in S corporations, partnerships and LLCs treated as partnerships for tax purposes. Why? The passed-through income from these entities also will be taxed at lower rates on the buyer’s personal tax returns. However, the TCJA’s individual rate cuts are scheduled to expire at the end of 2025, and they could be eliminated even earlier, depending on future changes enacted by Congress.

2. Asset purchase. A buyer can also purchase the assets of the business. This may be the case if the buyer cherry-picks specific assets or product lines. And it’s the only option if the target business is a sole proprietorship or a single-member LLC (SMLLC) that’s treated as a sole proprietorship for tax purposes.

Under federal income tax rules, the existence of a sole proprietorship or an SMLLC treated as a sole proprietorship is ignored. Rather, the seller, as an individual taxpayer, is considered to directly own all the business assets. So, there’s no ownership interest to buy.

Important: In certain circumstances, a corporate stock purchase can be treated as an asset purchase by making a Section 338 election. Ask your tax advisor for details.

Divergent Objectives

Business buyers and sellers typically have differing financial and tax objectives. While the TCJA doesn’t change these basic objectives, it may change how best to achieve them.

Buyers typically prefer asset purchases. A buyer’s main objective is usually to generate sufficient cash flow from the newly acquired business to service any acquisition-related debt and provide an acceptable return on the investment. Therefore, buyers are concerned about limiting exposure to undisclosed and unknown liabilities and minimizing taxes after the deal closes.

For legal reasons, buyers usually prefer to purchase business assets rather than ownership interests. A straight asset purchase  transaction generally protects a buyer from exposure to undisclosed, unknown and contingent liabilities.

In contrast, when an acquisition is structured as the purchase of an ownership interest, the business-related liabilities generally transfer to the buyer — even if they were unknown at closing.

Buyers also typically prefer asset purchases for tax reasons. That’s because a buyer can step up (increase) the tax basis of purchased assets to reflect the purchase price.

Stepped-up basis lowers taxable gains when certain assets, such as receivables and inventory, are sold or converted into cash. It also increases depreciation and amortization deductions for qualifying assets. Expanded first-year depreciation deductions under the TCJA make asset purchases even more attractive, possibly warranting higher prices if the deal is structured that way. (See “3 Favorable TCJA Changes for Businesses” at right.)

In contrast, when corporate stock is purchased, the tax basis of the corporation’s assets generally can’t be stepped up unless the transaction is treated as an asset purchase by making a Sec. 338 election.

Important: When an ownership interest in a partnership or LLC treated as a partnership for tax purposes is purchased, the buyer may be able to step up the basis of his or her share of the assets. Consult your tax advisor for details.

Sellers generally prefer stock sales. On the  other side of the negotiating table, a seller has two main nontax objectives:

  • Safeguarding against business-related liabilities after the sale, and
  • Collecting the full amount of the sales price if the seller provides financing.

A seller may provide financing through an installment sale or an earnout provision (where a portion of the purchase price is paid over time or paid only if the business achieves specific financial benchmarks in the future).

Of course, the seller’s other main objective is minimizing the tax hit from the sale. That can usually be achieved by selling his or her ownership interest in the business (corporate stock or partnership or LLC interest) as opposed to selling the business assets.

With a sale of stock or other ownership interest, liabilities generally transfer to the buyer and any gain on sale is generally treated as lower-taxed long-term capital gain (assuming the ownership interest has been held for more than one year).

Important: Some, or all, of the gain from selling a partnership interest (including an interest in an LLC treated as a partnership for tax purposes) may be treated as higher-taxed ordinary income. Consult your tax advisor for details.

Balancing Act

When negotiating a sale, the buyer and seller need to give and take, depending on their top priorities. For example, a buyer may want to structure the deal as an asset purchase. Agreeing on a higher purchase price, combined with an earnout provision, may convince the seller to agree to an asset sale, which comes with a higher tax bill than a stock sale.

Alternatively, a seller might insist on a stock sale that would result in lower-taxed long-term capital gain. In exchange, the buyer might agree to pay a lower purchase price to partially compensate for the inability to step up the basis of the corporation’s assets. And the seller might agree to indemnify the buyer against certain specified contingent liabilities (such as underpaid corporate income taxes in tax years that could still be audited by the IRS).

Purchase Price Allocations

Another bargaining chip in asset purchase deals — including corporate stock sales that are treated as asset sales under a Sec. 338 election — is how the purchase price is allocated to specific assets. The amount allocated to each asset becomes the buyer’s initial tax basis in the  asset for depreciation or amortization purposes. It also serves as the sales price for the seller’s taxable gain or loss on each asset.

In general, buyers generally want to allocate more of the purchase price to:

Assets that will generate higher-taxed ordinary income when converted into cash, such as purchased receivables and inventory, and
Assets that can be depreciated in the first year under the expanded bonus depreciation and Sec. 179 deduction breaks.
Buyers prefer to allocate less to assets that must be amortized or depreciated over relatively long periods (such as buildings and intangibles) and assets that must be permanently capitalized for tax purposes (such as land).

On the flip side, sellers want to allocate more of the purchase price to assets that will generate low-taxed long-term capital gains, such as intangibles, buildings and land. Tax-smart negotiations can result in allocations that satisfy both sides.

Need Help?

Buying or selling a business may be the most important transaction of your lifetime, so it’s critical to seek professional tax advice as you negotiate the deal. After the deal is done, it may be too late to get the best tax results.

Posted on Feb 15, 2019

Information is power. And today’s manufacturers are more informed — and powerful — than ever before. Owners and managers can assemble volumes of data, ranging from real-time information gleaned from machines and RFID readers on the plant floor to regular input from customer service and sales staff.

But data collection is only part of the story. Once you have all this information, what do you do with it? In broad terms, data analytics can be used to improve your business processes, refine operational efficiency and even transform your existing business model. Increasingly many manufacturers are investing large sums in analytics technology.

Upsides of Analytics

Let’s take a closer look at three specific ways analytics are likely to benefit manufacturers:

1. Enhanced cost efficiency.

Manufacturers have made great strides in reducing costs by implementing lean manufacturing and Six Sigma programs. Such approaches have enabled many companies to improve yield and quality while reducing variability and production process waste.

Nevertheless, certain manufacturing niches — for example, chemical and pharmaceutical companies — typically still experience significant variability due to production volumes and the complexity of their processes. These niches may need to take a more granular approach to identifying and correcting process flaws. Analytical tools, including ratio analysis and statistical trends, can help. Specifically, manufacturing managers may focus on historical processing data to understand relationships and patterns, then use the analysis to optimize production.

Companies may “slice and dice” real-time information from the plant floor, as well as performing sophisticated statistical assessments. For example, a biopharmaceutical manufacturer that produces two batches of a specific substance using identical processes might experience a yield variation of 50% to 100%. Such broad variability can affect both quality and quantity. However, the company can use targeted data analytics to identify key variables and enable it to eliminate waste and reduce production costs.

2. Improved productivity.

Data analytics can uncover unexpected or overlooked opportunities to maximize production efforts. Even if a manufacturer has been in business for decades and has seemingly exhausted opportunities for greater efficiency, management may find room for improvement by exploiting the information now at its disposal.

Management consulting firm McKinsey points to a mining company that discovered, from data collected from environmental monitoring and control systems, a positive correlation between worker productivity and oxygen levels in mine locations. Recognizing this factor, the company altered the oxygen levels in its underground mines, thereby increasing average yield by 3.7% over a three-month period. On an annual basis, this simple modification boosted profits by roughly $10 million to $20 million — without requiring any incremental capital investment.

3. Higher customer satisfaction.

For most companies, customer satisfaction is a top priority. However, before you can meet the needs of customers and earn their long-term loyalty, you must obtain information about customer practices and preferences.

Online surveys or questionnaires can be used to collect data from customers, and then the results can be analyzed and shared with members of the management team. It’s important to identify similarities and differences between customers. Although you can’t satisfy all of the people all of the time, you can adapt enough to meet the needs of most customers and engender broad support for your brand.

For example, German automaker BMW uses big data to analyze input from manufacturing outlets and dealerships around the world. Before full production of a car begins, BMW tests its prototypes, identifies any problems through analytics (a single prototype might have more than 15,000 data points) and makes necessary adjustments. As a result, BMW enjoys a reputation for manufacturing luxury cars that include features that customers appreciate (like laser cruise control and in-vehicle infotainment systems) and that cost less to produce and require fewer repairs.

Surviving and Thriving

Manufacturing is a competitive industry. Surviving and thriving requires your company to seize opportunities and implement reasonable cost-saving measures. It’s critical that you collect and analyze data — and use it to change your production processes, as necessary. Talk to your financial advisor and consult technology experts about how your company can profit by using the latest data analytics tools.

Posted on Jan 21, 2019

Security has always been a vital issue for manufacturing firms, but the threat of cyber attacks requires ever more sophisticated preventative measures.

If your firm hasn’t stepped up its game, it’s vulnerable to all sorts of predators. That could leave it open to  financial losses, production delays and, in a worst-case scenario, failure.

Threats from Synergies

Technological advances, including the Internet of Things (IoT), continue to dominate the manufacturing sector. To increase the benefits of technology, manufacturers typically unify operations and business processes in some manner. A logical approach is to coordinate Internet technology (IT) functions that control the business with operational manufacturing technology.

The synergies of this approach are obvious, but security risks are increased. With systems being connected through the IoT, new entrance points have opened up to cyber criminals. And this has led to a corresponding rise in the number and severity of cyber attacks.

For instance, an industrial IoT environment may feature sensors at various locations at a manufacturing plant. Although they provide a valuable stream of business and operating data, the sensors are gateways to critical infrastructure and processes. Sophisticated hackers can now enter a system, seize data, cause malfunctions or otherwise use the information for their own purposes.

Countering the Attacks

How can you best protect your firm from cyber attacks at this defining moment in time? Here are four practical suggestions.

1. Employ best practices.

Increasingly, cyber attacks are being conducted on a geopolitical level, involving foreign nationalists and governments that have massive resources at their disposal. This spans many industries and triggers protocols on a national level.

For U.S. manufacturing firms, the groundwork for current best practices was laid in 2013 when the National Institute of Standards and Technology (NIST) was directed to develop the framework for an authoritative source. According to a 2016 study, 70% of the organizations view the NIST Cybersecurity Framework as the most popular best practice for IT. Other countries have followed suit by adopting similar standards or are actively working on their own versions.

These national standards create a methodology for addressing cybersecurity issues. They focus on common sense risk analysis, risk tolerance assessment and risk avoidance. Other industry standards outside of government direction can provide protection. Notably, IEC 62443 is a robust standard for industrial automation technology that can safeguard operations across multiple layers.

Nevertheless, cyber threats change daily, so these standards are constantly being updated. It is essential to keep close track of new protocols and standards signifying best practices.

2. Study the financial aspects.

Virtually every manufacturer recognizes the risks of cyber attacks in the current environment. But firm management needs to assess these problems in terms business owners can truly understand: dollars and cents.

Simply put, it’s time to shift the conversation from the fears of a cyber attack to protecting the bottom line. Data breaches cost manufacturers billions each year worldwide, not to mention the damage to reputations. Also, insurers may limit how much coverage that can be acquired for cyber attack protection. In some parts of the world, insurance premiums are based on responses to questions about how the firm is adhering to cybersecurity best practices.

By its very nature, cybersecurity is expensive. But managers must invest enough to protect overall interests or risk losing the company entirely.

3. Perform risk management.

Once business leaders buy into the premise that better cybersecurity is worth the investment, they can move to protect their interests. This means determining the size of the gap that needs to be closed.

For starters, ascertain the value of manufacturing processes and company assets to the company. This involves a calculation of the size of the security risk. For example, if the plant were forced off-line for a week due to a cyber attack, what would the dollar loss be?

Each firm is different, so you must figure out how to integrate security risk management functions into the infrastructure. These functions can take the form of risk avoidance, mitigation, acceptance or transference. Then you can address the gaps specific to your operation and plant.

Also, remember that people are the first line of defense. Security must be incorporated into everything from personnel screening to employee training. Every employee must take ownership of their own security, adhere to industry standards and follow vendor documentation for system configuration. Finally, develop a corporate culture that emphasizes security.

4. Continue to adjust.

This isn’t a “get it and forget it” proposition. Your cybersecurity plan should be a living, breathing document that is analyzed on a regular basis and updated when necessary. Programming elements, such as threat monitoring and bug patching, must be continuing. Cybersecurity risk management isn’t a single event, it’s a long play.

In the past, you may have said, “If it ain’t broke, don’t fix it.” But that doesn’t work anymore. The safety of your business, and ultimately its future profitability, depends on your plan.

Emphasize the suggestions outlined above and keep up with evolving industry standards. Don’t wait for a catastrophe to strike before you adopt sufficient protective methods. If you need assistance in implementing these objectives, consult your business advisors.

How Bad is the Problem?

The statistics don’t lie. About half of the country’s manufacturers have been hit by a cyber attack.

According to a 2018 report from the UK manufacturers’ organization EEF, 48% of UK manufacturers surveyed have suffered cyber attacks, with half of those victims sustaining financial or other business losses. Managed security services firm NTT Security, in its 2018 Global Threat Intelligence Report, identified manufacturing as the fourth-most targeted industry, trailing only finance, technology, and business and professional services.

As attacks have risen, so have the damages. According to a report from the nonprofit consortium Alliance for Manufacturing Foresight, about 400 manufacturers were attacked every single day in 2016, resulting in more than $3 billion in losses.

Posted on Jan 10, 2019

The manufacturing industry is at a pivotal point in its history. Recognizing the significance of this juncture, the Manufacturing Leadership (ML) Council recently released its Critical Issues Agenda for 2018/2019, titled The Journey to Manufacturing 4.0.

The result of extensive research, consultation and refinement involving more than 1,000 members, this agenda identifies key issues facing the industry. Manufacturers of all shapes and sizes are advised to take note.

Real Challenges

The modern manufacturing plant, featuring robots doing jobs previously performed by humans and workers on the floor communicating electronically with supervisors in remote locations, may seem like something out of The Jetsons. Yet the challenges are real. Even with cutting-edge technology, manufacturers face pressure to be more innovative, nimble and cost-effective.  

In fact, the evolution of advanced digital and analytical technology is forcing manufacturers around the globe to rethink the normal rules of competition, revisit how work is performed, and revise how companies are structured and managed. This fresh approach is what the ML Council calls Manufacturing 4.0 (M4.0). 

The Cost of Progress

Make no mistake: Manufacturers will need to pay tolls along the road to Manufacturing 4.0. Firms must invest time, energy and capital to implement advanced technology and best practices. 

Cost is likely to be the biggest obstacle for many small- to mid-sized companies. Pilot programs may require you to revisit your budget and raise additional capital. And your firm may need to make tough decisions regarding strategic investments, such as launching new products, purchasing new assets and making strategic acquisitions. You simply  don’t have the resources to do everything at once. Your CPA can run financial projections and create decision trees to help you determine which alternatives to pursue today and which to table for future years.

Features

M4.0 goes a step beyond previous iterations of the new technology-driven manufacturing sector. The new regime is characterized by:

  • Production and supply networks that are increasingly data-driven, automated, modular, agile, sustainable, predictive and rapidly reconfigurable to meet changing demands and competition.
  • Products that are smart, customized, connected and self-diagnostic, and that provide a rich platform for new revenue streams.
  • Supply chains that are visible, traceable, risk-resilient, responsive and constantly analyzed in real time.
  • Enterprises that are cross-functional, collaborative and highly-integrated, often surrounding a single digital thread that stretches from design to deployment.
  • Leaders and employees who are highly engaged, digitally savvy, customer-centric and ready to meet new challenges and grasp emerging business opportunities.

Such a massive transformation doesn’t come without substantial effort. Manufacturers must identify and master various technological, organizational, cultural, workforce and leadership aspects. With that in mind, the agenda is designed to help manufacturers align their thoughts with practices. 

Opportunities to Grow

The agenda covers five specific manufacturing areas.

1. Factories. Both large and small manufacturers need to recognize and embrace the potential of new and evolving production models, materials and technology. This will help them create cost-efficient, responsive, flexible, transparent, connected, automated, and sustainable factories, production models and business plans.

The agenda spotlights:

  • M4.0 guidelines, maturity models and transformation frameworks that can help manufacturers move from current production models (often based on legacy systems) to a future state of digitally-enabled production readiness.
  • End-to-end digitization and analysis of manufacturing and engineering processes and functions in both centralized and distributed production networks.
  • Cybersecurity risk management.

Such cybersecurity includes preventive measures and cyberattack response strategies that minimize vulnerabilities of highly networked production platforms.

2. Culture. Manufacturers of all sizes need to transform traditional operations so that their culture becomes collaborative, innovation-driven and cross-functional. This will drive growth, new product and service development, operational efficiency and success.

The agenda recommends:

  • Cross-functional processes and integrated organizational structures that harness multiple sources of data to drive innovation, facilitate faster and better decisions, reduce time-to-market and enhance competitive agility.
  • Collaborative innovation cultures and platforms that leverage the ideas and resources of employees, suppliers, external partners, customers, academics and “‘the crowd” to create new products, improve business processes and spawn innovation.
  • Best-practice approaches in deploying integrated M4.0 technology and platforms, such as digital threads, that enhance collaboration and integration to help deliver new ideas and improvements faster across the enterprise.

3. Technology. Manufacturers must learn how to identify, adopt and scale promising technology. This will result in greater speed and efficiency while opening the door to new business models and improved customer experiences.

The agenda covers:

  • The impact of artificial intelligence (AI), machine learning and cognitive analytics on the industry’s future.
  • The latest developments in related transformational technology, including the Internet of Things, 3D printing, modeling and simulation, collaborative robotics, augmented and virtual realities, 5G networks, block chain and other emerging technologies.
  • Best practice approaches for selecting and deploying new technology in a manufacturing enterprise while implementing standards and architectures that support open systems.

4. Next-generation leadership. It isn’t just the machinery that’s changing. Manufacturers must be more collaborative, innovative and responsive to disruptive change. Leaders will adopt new behaviors, structures, cultures, value systems and strategies. And they’ll consider ways to attract and engage the talent and skills of both the current workforce and the next generation of employees.

The agenda pinpoints:

  • Effective leadership role models, behaviors and mindsets that define a successful profile for tomorrow’s manufacturing leaders.
  • Employee transition, development and engagement strategies for an inclusive, diverse, multigenerational, multicultural, multinational workforce that interacts with AI and collaborative robots (“cobots”) and whatever else is developed in the future.
  • Identifying, attracting, and encouraging talent and skills for the next-generation manufacturing workforce.

Effective next-generation leaders will adopt new working cultures, change value systems and develop better ways to collaborate with educational and community organizations. 

5. Sustainability. This new vision provides an opportunity to leverage new analytical insights and more flexible production platforms. It maximizes resources, achieves major efficiency gains, drives revenue growth and minimizes environmental impacts. To successfully engage with others, manufacturers must become more transparent about their environmental and socially responsible practices. 

The agenda recommends: 

  • Products designed for easier reuse, remanufacture, refurbishment or recycling.
  • Production strategies that streamline production processes to increase efficiency and reduce costs and waste.
  • Holistic, sustainable manufacturing business models supported by collaborative cross-sector partnerships and deeper community engagement that can create a circular manufacturing economy. 

Seize the Future

What does all this mean for your company? Manufacturers must embrace the future or risk being left in the dust. As you set your budgets and goals for 2019, review the ML Council’s agenda and consider ways you can leverage emerging technology, innovative business strategies, sustainable practices and other opportunities to grow your business agenda. Visit the ML Council’s website [Insert: http://nammlc.wpengine.com/about-us/#critical].

Posted on Mar 10, 2018

After being extended more than a dozen times by various pieces of legislation, the research and development (R&D) credit was finally made permanent by the Protecting Americans from Tax Hikes (PATH) Act of 2015.Now the Tax Cuts and Jobs Act (TCJA), goes one step farther. Not only does the law preserve the credit in all its glory, it generally enhances it in context of several other provisions.

Calculate the R&D Credit

The R&D credit is intended to encourage spending on research activities by both established firms and start-ups. Generally, the credit equals the sum of:

  • 20% of the excess of qualified research expenses for the year over a base amount,
  • The university basic research credit (20% of the basic research payments), and
  • 20% of the qualified energy research expenses undertaken by an energy research consortium.

The base amount is a fixed-base percentage of average annual receipts — net of returns and allowances — for the four years before the R&D credit is claimed. The fixed-base percentage can’t exceed 16% and the base amount can’t be less than 50% of the annual qualified research expenses.

Alternatively, a manufacturer or other business entity may claim a simplified R&D credit of 14% of the amount by which its qualified research expenses for the year exceed 50% of its average qualified research expenses for the preceding three tax years.

The credit is only available for qualified expenses, which must:

  • Qualify as a “research and experimentation (R&E) expenditure” under Section 174 of the tax code (see box below “Change in Store for R&E Deduction”), and
  • Relate to research undertaken to discover information that is technological in nature and the application of which is intended to be useful in developing a new or improved business component.

In addition, substantially all the research activities must relate to a new or improved function, performance, reliability or quality.

While the R&D credit has always offered tax saving benefits for manufacturers, the TCJA opens even more opportunities to use the credit.

Enter the TCJA

Under the TCJA, the benefits of the R&D credit are enhanced when the following related provisions are taken into account:

Corporate AMT.

Previously, the corporate alternative minimum tax (AMT) was a thorn in the side of firms utilizing the R&D credit. But the TCJA changes the landscape.

Before the TCJA, a manufacturing firm generally could use the R&D credit only to offset regular tax liability, but not the corporate alternative minimum tax (AMT). Under a provision in the PATH Act, a limited exception was approved under which a business with $50 million or less in average gross receipts for the previous year could use the R&D credit to offset AMT liability.

That issue is largely moot, as the new law repeals the corporate AMT beginning in 2018. As a result, some larger firms will realize the tax benefits of the R&D credit. For individuals, though the AMT still exists, albeit at higher limits. Thus, if your R&D credit is from a pass-through entity, your ability to use it to offset the AMT may continue to be limited.

Expensing.

The TCJA enhances both the Section 179 deduction and bonus depreciation. Under Sec. 179, the maximum expensing allowance is doubled from $500,000 to $1 million for property placed in service in 2018. The phase-out level increases from $2 million to $2.5 million. In addition, 50% bonus depreciation is doubled to 100% for a five-year period, beginning in 2018, before being gradually phased out over the following five years.

Thus, the new law encourages businesses to buy depreciable equipment for its research activities. In most cases, a firm will be able to expense the full cost in the year the equipment is placed in service.

Net operating losses (NOLs).

Previously, a business could carry back an NOL for two years before carrying it forward for 20 years. Beginning in 2018, NOLs generally can’t be carried back and may be carried forward indefinitely. However, they are limited to 80% of taxable income. Consequently, the R&D credit may be a valuable tool for firms with an NOL, because to the extent that they are not able to use an NOL to shelter income, the credit can be used to offset the tax that would otherwise be due.

Maximize the Credit

The R&D credit is still standing after the tax reform law and can be an even more effective tax shelter for manufacturers in the wake of the new law. Consult with your tax advisor for ways to maximize this credit and its related tax-savings opportunities.

Change in Store for R&E Deduction

The Tax Cuts and Jobs Act (TCJA) makes a significant change in the deduction for research and experimental (R&E) expenditures allowed by Section 174.

Briefly stated, the TCJA requires firms to spread out the tax benefit over time, rather than deduct the expenditures, starting in 2022.

Prior to the TCJA, taxpayers could either currently deduct R&E expenditures or amortize the costs over a period of not less than 60 months. Qualified expenses are limited to the following:

  • In-house wages and supplies attributable to qualified research,
  • Certain time-sharing costs for computer use in qualified research, and
  • 65% of contract research expenses, that is, amounts paid to outside contractors in the U.S. for conducting qualified research on the taxpayer’s behalf, or, in the case of qualified research consortium, 75%.

Under the TCJA, firms can deduct R&D costs through 2021. Beginning in 2022, firms must amortize R&E expenditures over a five-year period (or a 15-year period for foreign R&D expenditures).

Posted on Feb 20, 2018

Using sophisticated inventory management software is supposed to solve the problem of inaccurate counts, but that’s not always the case. Delays in order fulfillment and angry customers are inevitable if your warehouse is plagued by erroneous inventory counts.

If your inventory data doesn’t match what you physically have in your warehouse, it’s time to take corrective action.

Achieving Inventory Accuracy

Unfortunately, there’s rarely a quick fix to inaccurate inventory counts. Most likely you’ll need to employ a multipronged solution. First, turn your attention to defining and mapping your work processes. Work with your staff to gain a comprehensive understanding of all steps that affect inventory.

Also chart the actual workflow and document how the processes should work down to the individual task level for each position involved in the process — from purchasing, receiving and stocking to order processing, fulfillment and shipping. This includes completing and processing paperwork, entering data through automated scanning techniques or manually at workstations, and performing any required monitoring checks for inventory.

Next, ensure your employees are properly trained. Set up training sessions for all of your staff to review inventory processes and individual responsibilities. This will help them gain a solid understanding of workflow and how one process affects another.

Consider customizing your training so new employees receive more extensive training while more experienced employees receive periodic refresher courses as processes change. Test your employees on their knowledge of, and ability to perform expected tasks, and provide constructive guidance for correcting errors.

The next step is to set realistic goals for minimum inventory accuracy. On a regular basis, such as monthly, identify and report inventory inaccuracies — for example, improper counting, data entry errors or goods lost to theft, damage or disorganization. Translate what these inaccuracies mean in terms of lost profit.

Finally, continuous improvement is a must. Regularly review your operations with your staff to pinpoint broken process areas and identify solutions for reducing errors. This will allow you to incorporate enhancements or new processes as business needs change.

Try to batch together several process improvements at one time to avoid confusing employees with multiple process iterations. Then roll out the changes through formal training sessions to ensure everyone is on the same page.

Implement Cycle Counting to Improve Inventory Accuracy

To help you reach your inventory accuracy goal, be sure to include cycle counting. Cycle counting involves taking a physical count of part of your inventory in the warehouse each day.

These physical counts are then compared against the levels shown on your inventory management system. By pinpointing inventory discrepancies, cycle counting helps you identify the source of accuracy problems, so you can implement the right solutions.

To this end, there are two types of cycle counting that distributors need to employ in combination:

  1. Control group cycle counting.This type of counting involves selecting a control group made up of a cross-section sample of inventory, including parts and materials, and then counting the control group and comparing it against your inventory management system data. Control groups are rotated according to an established set schedule to ensure that all inventory in the warehouse is counted at least annually. Because control group cycle counting should be performed at least weekly, it can help you timely identify the source of errors.
  2. Random cycle counting.After you’ve implemented control group cycle counting, identified any sources of inventory accuracy problems and put the necessary solutions in place, begin implementing random cycle counting. With this type of counting, take a random mathematical sampling of your inventory to assess conformance against inventory accuracy expectations. An inference of the accuracy is then made relative to the entire inventory.

Cycle counting shouldn’t be a one-time event. Conducted frequently, it will ensure continuing improvement in the accuracy of inventory.

Does it Add Up?

If inaccurate inventory counts are a problem at your company, you need to take corrective steps as soon as possible. Not taking proactive measures may result in a loss of customers and reduced profits. If you need help remedying inventory inaccuracy, contact your CJ business advisor. We can help you ensure your numbers add up.