ROSEMONT, IL. -- Warning that rising health care, energy, and other costs have conspired to create a pervasive structural issue for industry, two keynote speakers at the National Manufacturing Week conference here told manufacturers that they must tackle cost issues in a much more "programmatic" way to ensure the industry's competitiveness.
Doug Engel, vice chairman and U.S. manufacturing industry leader at Deloitte and Touche USA, and Tommy Thompson, former Secretary of Health and Human Services in the Bush administration, both said that a fundamental change in the way manufacturers think about and deal with health care, energy, regulatory, and other costs is needed to prevent the cost gap between U.S. companies and foreign manufacturers from widening.
A December 2003 study by the National Association of Manufacturers (NAM) said that U.S. manufacturing's costs are about 22% higher than the costs borne by foreign competitors.
But Engel said on Tuesday that most manufacturers have not yet fully appreciated the depth of the structural issue relating to costs. "Structural costs are a gathering storm for manufacturers, perhaps the perfect storm," Engel said. "Over the last four years, economic improvement has not signaled an improvement in profitability for U.S. manufacturers. Even in a rising tide, profitability isn't improving."
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The problem, he said, is that most manufacturers continue to approach cost management by placing energy, legal, health care, and other costs "in buckets," which prevents managing them in a systematic way. "A transformational approach is needed, not incremental change," Engel said. "Manufacturers need to think about costs on an enterprise basis, across all areas. A portfolio approach and a program office are needed as well as a different kind of executive leadership."
Engel recommended that manufacturers adopt what he called a "programmatic approach" that would entail: developing an overall cost strategy, assessing the existing cost structure, planning a cost management program, implementing cost reductions, and, finally, sustaining a new cost structure. "The cost issue isn't a sourcing issue," he said. "Manufacturers must change the game on structural costs."
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Thompson, who was a four-term governor of Wisconsin prior to his service in the Bush Administration and is now chairman of the Deloitte Center for Health Solutions, echoed Engel on health care costs, saying that the U.S. and manufacturing companies should reorient their thinking about health care to emphasize disease prevention.
"$1.9 trillion is spent on health care in the U.S., and this will double in seven years to $4 trillion," Thompson said. "The 2013/2015 timeframe is when the health care system is going to collapse in America.
"We have a curative system," he continued. "Ninety-three percent of the money goes to an individual after they get sick. But preventive health is where the money is."
Thompson urged manufacturers to be proactive about prevention and encourage employees to stop smoking, get more exercise, and for companies to band together to get better and more affordable insurance coverage. He said manufacturers had to take on the issue because the government would not. "Congress is afraid of the health care issue and won't change it," he said.
At a NAM press conference following the Engel and Thompson speeches, Tony Raimondo, chairman and CEO of Behlen Manufacturing Co., a metal fabricator, said he agreed with the cost assessments by Engel and Thompson.
Raimondo, who is also a member of the NAM board of directors, said that Behlen's energy and health care costs have skyrocketed over the past year.
"We had $1 million in natural gas costs in 2005," he said. "This year this cost will be between $1.3 million and $1.4 million. Our health care costs in 2000 were $3.3 million; today, they are $5.8 million."
The cost issue, NAM suggested in the release of its 2006 survey of U.S. manufacturers, is showing up in manufacturers' attitudes about industry prospects for this year.
NAM said that 44% of the 349 respondents to its new survey expect manufacturing to trail the overall economy in 2006, up from 34% in last year's survey, and that a substantial majority expect the economy to grow only about 2.9% this year, a figure that is under what many economists predict.
NAM president John Engler said that survey respondents indicated that their biggest challenge is rising costs associated with health care, materials, and energy, which they can't make up through product pricing. "External cost burdens are having the biggest impact on manufacturers -- lowering their profitability and tying up more funds that would otherwise be spent on investment, research and development, and new product lines," he said in a statement.