Posted on Jun 29, 2016

Safety First

“Safety First” should be your corporate mantra. Focusing on the safety of your products as you make them can help avoid complaints and litigation, give you a marketing edge and raise the bar for other manufacturers, according to the Consumer Product Safety Commission.

10 Quick Manufacturing Safety Tips

1. Build safety into product design.

2. Test products for all foreseeable hazards.

3. Stay up to date on manufacturing safety developments.

4. Educate consumers about product safety.

5. Track and address your product’s safety performance.

6. Fully investigate safety incidents.

7. Report product defects promptly.

8. If a defect occurs, quickly start a recall.

9. Work with the Consumer Product Safety Commission on any recall.

10. Learn from your mistakes — and others.

The two companies took a proactive approach rather than waiting for an industry standard to address the problem. They developed a method to “pinch-proof” the hinged joints between the doors’ panels. Their leadership challenged other manufacturers to meet the same high standards.You don’t have to be a huge corporation to come up with safety innovations. For example, Martin Door Mfg., a small Salt Lake City firm, and Wayne-Dalton, a larger company in Mt. Hope, OH, were both confronted with a safety issue in the garage doors they made — a large number of crushed or amputated fingers were reported after using their products.

Taking the lead is the key to improving manufacturing safety. There are several steps you can take — even before a problem develops:

Investigate your customer base. Who will use your product? For example, will a ladder hold a 300-pound person painting a house? How about a 350-pound person? If the ladder could collapse under a certain amount of weight, warn the consumer.

Study how customers will use your product. Back to the ladder. Although it may be intended as a means to climb, some people are apt to use two ladders and a plank for makeshift scaffolding. Warn the consumer if a product isn’t safe when it is used in ways you didn’t intend.

Stay informed about product safety developments. For example, stronger materials may become available for the ladder.

Keep up with safety regulations, as well as safety precautions taken by other companies. When the garage door manufacturers realized they had a problem, there were no state or federal regulations regarding it. But both firms recognized that safety made good business sense.

Fully investigate reports of injuries and accidents. A problem could stem from unintended use, but it could also result from a manufacturing or design flaw. An inquiry can help you determine the cause, guide you toward fixing any defect, and let you know whether a product recall of the lot or the entire line is necessary. If a recall is needed, the Consumer Product and Safety Commission will work with you to ensure the plan is effective.

An added benefit: Consumers and the media tend to go easier on companies that police themselves and promptly deal with problems. The media can also get safety warnings out quickly, helping you to avoid future incidents and potential lawsuits.

Posted on Jun 17, 2016

MD Blog PicManufacturers may get an additional boost from a beneficial program that helps small and medium-sized companies.

The Hollings Manufacturing Extension Partnership (MEP), a program run by the U.S. Department of Commerce, would be expanded and strengthened by the MEP Improvement Act. This legislation was recently introduced in Congress and is widely thought to have a good shot of enactment. If passed, the bipartisan act would:

  • Permanently adjust the federal MEP cost share to one-to-one,
  • Strengthen and clarify the review process MEP centers use,
  • Authorize centers to support the development of manufacturing-related apprenticeships, internships and industry-recognized certification programs,
  • Increase the program’s funding level to $260 million a year through 2020, and
  • Require the program to develop open-access resources describing best practices for small manufacturers.

Top Shelf Endorsements

The bill has been endorsed by some high-visibility entities, including:

  • Information Technology and Innovation Foundation
  • American Small Manufacturers Coalition
  • Alliance for American Manufacturing
  • Honda North America
  • Association for Manufacturing Technology
  • National Council for Advanced Manufacturing
  • Manufacturing Skill Standards Council.

MEP is built on a nationwide system of service centers that are partnerships between the federal government and a variety of public or private entities, including state, university and not-for-profit organizations.Since its inception in 1988, MEP has focused on strengthening the U.S. manufacturing sector. The program’s power lies in its partnerships. Through collaborations with federal, state and local entities, it puts manufacturers in position to develop products and customers, expand globally and adopt new technology.

Return on Investment

Although MEP’s strategic objective is to create value for all manufacturers, it concentrates on small and mid-sized enterprises (SMEs). These account for nearly 99% of manufacturing firms in the United States.

The program has delivered a high return on investment (ROI) to taxpayers. For every dollar of federal investment, MEP generates $17 in new sales growth and $24 in new client investment, according to the program’s website.

MEP’s partnerships are expanding in response to rapidly changing global dynamics. The program has established relationships with diverse organizations. MEP centers also increasingly support government initiatives launched to strengthen U.S. manufacturing. Some of the program’s specific objectives are:

  • Educate local and regional partners on SME needs and causes of behavior,
  • Connect manufacturers to other programs and services offered by partner organization,
  • Identify firms that are interested in a particular technology, as well as informing information technology developers about manufacturer’s technology needs, and
  • Support workforce development programs.

Examples of Success

Here are two examples of how MEP has worked in action:

The exporter. One family-owned business in Wisconsin made standard products for metal fabricators and produced custom products, primarily for handrails. The organization exported some of its products and was able to increase export sales by connecting with the local MEP center and participating in three monthly training sessions, as well as coaching and assistance between the sessions.

Through this program, the exporter joined a group of noncompeting firms that worked together to create an exporting strategy to tap into new markets. The company was able to increase export sales 40% a year and expanded its reach from two to 16 countries.

The device maker. A North Carolina company designed and made high-performance radio frequency systems and solutions for applications that drive wireless and broadband communications. It enlisted the help of an MEP center to provide onsite training on Six Sigma and lean manufacturing principles. Participants were given real-world projects to continue working on after training was complete. The training helped management improve inventory controls and final product test efficiency, resulting in multi-million dollar cost savings.

Continued Challenges

Manufacturers face constant pressure to cut costs, improve quality, meet environmental and international standards, and “go to market” faster with new and improved products. At the same time, new opportunities are constantly beckoning.

As you try to keep pace with accelerating and emerging changes, consider taking advantage of the valuable resources MEP offers. If the MEP Improvement Act passes, the program’s role in the American manufacturing sector is likely to become even more critical.

Posted on Jun 7, 2016

conveyor line

It’s a build-to-order manufacturing environment and that means frequent changeovers in your production line. And each time you make changes to produce a new item, you suffer significant downtime. But there may be ways to shave time off those non-productive periods. These four suggestions have proven to buy manufacturers time and keep production lines efficient:

1. Measure setup time. It should be a key metric in batch-driven processes. If you’re not establishing goals and monitoring setup time, it can get away from you.

2. Mimic NASCAR. One company occasionally stops production to hold a contest, putting together “pit crews” to see who can set up a machine the fastest. The winning team’s time becomes the new goal. Winners get bragging rights.

3. Think Japanese. Manufacturers in Japan are known for their efficiency and ability to make quick changes. One of the techniques they use is Kaizen. Assemble a team that cuts across disciplines and spend three to five days tackling a process improvement problem. For example, one company had a team reconfigure work and storage areas. It reduced setup time from 6 hours to 40 minutes.

Several factors contribute to Kaizen success:

  • Holding the event elevates the problem to priority level.
  • Include people on the team who have no production experience, along with those who do. This improves the problem-solving process.
  • Follow the Kaizen event outline.
  • Set the expectation that the team will make a major achievement in a very short time.

4. Consider another Japanese method.Japanese industrial engineer Shigeo Shingo developed the “Single Minute Exchange of Dies” process for Toyota as an essential component of just-in-time manufacturing. He maintained that most approaches to reducing setup time limit their success by focusing on improving employee skills rather than on making changes in the process that lower the skills needed. Shingo describes how to implement SMED in his book, A Revolution in Manufacturing:

  • Analyze the production system thoroughly and the role setup plays in that system.
  • Study the internal setup, or those processes that can be carried out only when the machine is idle, for example, changing dies.
  • Study external setup, or those processes that can be carried out while the machine is running, such as transporting dies or checking availability of materials.
  • Determine how internal setup can be converted to external setup, thus streamlining the entire process.

Lean Material Stocking

Instead of trying to trim retooling time, try eliminating it with a lean material stocking system.

An established principle of time management is to handle each piece of paper just once. It’s rare to achieve that efficiency, but aiming for it makes you think about unnecessary steps. Applying that principle to parts and maintenance, compare these two scenarios of the typical route from delivery to production:

Before the lean method:

  • Shipment arrives.
  • Parts are stocked until needed for production.
  • Parts are assembled into kits and sent to production.
  • The parts are ready for production when needed.

After the lean method:

  • Shipment arrives.
  • Parts are sorted and sent to carts holding bins labeled for each part number.
  • When production is ready, the cart is moved to the job.

What the lean material stock system does:

  • Eliminates the labor-intensive steps of storing, locating and retrieving materials and assembling kits.
  • Provides visual inventory control, because by looking at a bin, you can see if a part is in short supply.
  • Offers just-in-time capabilities. Almost as soon as materials are received, they are ready to be used in production.

The best changeover is no changeover. Look at ways products can be redesigned to share more of the same parts. Moreover, if you’re running small batches of similar products, you might be able to avoid changeover by taking some processes offline.

Posted on Jun 29, 2015

Why are we hearing more about Captive Insurance Companies at happy hours, networking deals and professional conferences? Well, it’s simple… people are more open now to new ideas to lessen their tax burden than they were in 2011.

It doesn’t take an Ivy League education to figure out that out of the top 5% of taxable income earners in America – (the vast majority being hard working successful business owners like you) have watched their effective tax rate increase from the low 30’s to an effective rate of almost 40% in the last couple of years. Between our wars in Iraq and Afghanistan, and the “sucking sound” created by promises in the Affordable Care Act – there is no relief in sight from these higher tax rates in the foreseeable future.

Regardless of the reasons or your political persuasion, – John or Jane business owner operating in North Texas, whether in a growing service business, a construction company, a small manufacturer, or a franchisee with 10 dry cleaners, are getting taxed… and taxed hard.

When these business owners become tax “stunned” they become both more creative, more resilient, and more receptive to ideas to help them save on their tax bill. When that occurs certain ideas that were previously reserved for a few (the fortune 500 or fortune 1000 size companies)…. start having traction with middle market companies that may have revenues of 10MM to 200MM, have a strong cash flow, or a fairly predictable earnings history year over year.

So, enough about the why. How do captives work for the common business owner? What does he need to be aware of?  Where is the sizzle in the steak? And finally… What risks do you need to avoid if you are a 5%-er that wants to explore Captives?

 

How They Work

The operating or income producing company (your company) forms a captive and basically pays annual premiums to ensure against risks and pays the premiums to a newly formed insurance company that you own and/or control…

By paying premiums of $500K and you will receive a $500K deduction. Your insurance company receives the $500,000, pays $70k to $100k in operating expenses, small claims settlements and maintenance costs, and assuming no major claims occur- your insurance company makes a profit of around $400K per year.

A specific code section and available election under Sec. 831b, available only to small closely held captives with premiums of less than $1.2 MM annually, keeps the captive from having to pay tax on the premiums it receives at the insurance company level, and it only has to pay tax on its investment earnings.

Meaning, you are getting a deduction for 500K, and your captive is not paying tax on the $400K on the other side.

If your business does this for ten years with no major claims- then your insurance company and its owners has amassed $4,000,000 inside the insurance company which they can dividend or liquidate at 20 to 24% tax rates to the owners of the Captive (you and your family).

If you and your spouse’s net worth exceeds 10MM, you can also, with careful planning, set up your Captive ownership outside of your estate, saving your family an additional 50% of that 4 million in estate taxes that can be passed on to your heirs instead of the IRS.  Over ten years you have likewise saved $2,000,000 in your operating company from ten years of getting $200,000 a year in tax benefit (500,000 x 40%).

In other words, you are getting a 40% deduction and accumulating wealth on a deferred tax advantaged basis over time, which lets you accumulate faster and achieve greater returns.

So friends that’s where the SIZZLE in the steak comes from – the tax rate arbitrage and the estate planning you can accomplish by having your kids own the shares of the captive. Keeping your captive outside of your estate makes for a nifty tax advantaged structure for building wealth transfer to future generations.

 

So, that’s The Good News. What’s the Downsides- or Things to Avoid?

  1. First and foremost – illegitimate or thinly veneered promoters that are selling captives as promoted tax shelters versus an experienced risk management insurance company or Captive management company that operates in the fairway and will advise you correctly on insurable risks and doing it right, with real actuaries that have been doing this a long time.
  2. Insuring faux (not legitimate) or real risks inside your company. For example, anti-terrorism insurance for a small group of doctors versus real risks like malpractice.
  3. Not evaluating your liquidity needs, knowing what is reasonably possible regarding funding of premiums, and how realistic it will be annually to manage your premium levels and payments. While it is possible to change your risks that you cover to toggle or increase or decrease your premiums actuarially, it may reduce the efficacy of your insurance company.
  4. Making sure under your accounting method you can properly deduct the premiums, kind of a bad deal if you go through all this and then remember your cash basis business has to write a 500K check by 12/31 and it doesn’t have the funds to make this happen.
  5. IRS scrutiny- Captives primarily because of the promoters mentioned in #1 above have received a jaundiced eye by our friends at the IRS, and captives even made the dirty dozen list published by the IRS annually for targeted tax scams.
  6. So there are some of our clients that would not be comfortable with this kid of exposure legitimate or not , and then there are some clients that are ok with it because they have done the right things by having the right kind of advisors and captive operators that don’t deal in the fringe element.
  7. Claims- if your captive is legitimate – you will have claims and occasionally some of those could be expensive. How your operating company manages its risks as well as how your Captive manages its reserves and risk can be a difference maker in this area.

 

So If This Is Something You Want To Explore Further, What Are Your Steps?

First, a business owner through his insurance company, financial advisor, or CPA is referred in to a company that can help him form and organize a new Captive Insurance Company and manage its operations going forward.

The CPA works with the captive management company, the business management team, their existing insurance agents or risk manager to come up with a team approach to risk management and evaluate the overall feasibility of using a Captive as a part of the overall risk management plan of the business.

A captive insurance company is a fully licensed insurance company owned by the business or the business owners. It is a unique entity and is a standalone insurance company with policies, policy holders, risks, claims, and a license to do business in various domiciles – some domestic and some off shore.

What does this cost – well of course it varies – but the set up seems to run somewhere between $50K and $70K – with some variability to this figure if you use a domestic captive (with higher initial capital formation requirement), or a foreign captive that may have less stringent initial capitalization requirements.

Done well, a CIC strategy can be a great tool for tax-advantaged risk management and wealth preservation- the veritable combo pack that most of us are looking for. To learn more about it contact Gary Jackson or Cornwell Jackson’s strategic alliances and advisors in this area.

Blog post written by: Gary Jackson, Tax and Advisory Partner