Episode 204: Ideas That Drive Success In Your Manufacturing Business

Dustin: And so they know a lot of the employees and it gets tough at times if you’ve got to decrease your employee group and make those decisions. If you can do that ahead of time and put a plan together and follow that plan, not saying it’s going to be a lot easier, but it might take some of those tougher decisions out of the equation where you feel like you’re making a quicker or a rash decision, you already have a plan for it.

Doug: From Rea & Associate studios, this is unsuitable, a management, financial services podcast for entrepreneurs, tenured business leaders and others who are ready to look beyond the suit and tie culture for meaningful, measurable results. I’m Doug Houser.

There was a time when the word manufacturing would conjure up images of dark, dirty, and dangerous work. These days, business owners and leaders in the field are working hard to repair the industry’s reputation. Dustin Raber, principal with Rea and director of the firms manufacturing services team has witnessed the strides companies have made to overcome the negative stereotypes, but there’s still a ways to go. On today’s show, we’re going to talk about some pressing challenges manufacturers are currently facing. Then we’re going to get Dustin to share some best practices.

Welcome Dustin.

Dustin: Hello Doug. How are you doing today?

Doug: Good. Thanks for making the trek down from the Northeast. Hopefully the drive was okay.

Dustin: It was actually pretty nice today. The traffic wasn’t too bad.

Doug: Good. Now we’ve got, if I’m, maybe I’m mistaken, but we’ve got National Manufacturing Day coming up here pretty soon, right?

Dustin: Correct. National Manufacturing Day is actually October 4th so it’s the first Friday of October every year. This is the third year we’re going to actually be doing something as a firm for National Manufacturing Day.

Doug: Awesome. That’s fantastic. Talk to me a little bit about what you’re seeing out there in terms of the manufacturing climate within our client base here in Ohio.

Dustin: Well, I don’t think it’s surprising. It’s a great climate at this point for most manufacturers business is good, but with that comes some struggles or some difficulties, which a lot of it revolves around the employee base and finding good employees. And so it’s been a struggle for a lot of employees, they’re basically robbing Peter to pay Paul and stealing from each other to build their base up.

Doug: Okay. Now obviously we hear a lot about productivity and those types of things over time. Employee productivity has grown immensely, that type of thing. Do you still see those type of productivity gains with our client base in terms of efficiencies, things like that? Or has that slowed down in recent years?

Dustin: It’s actually still picking up. Lean is still important in the manufacturing industry and robotics have really becoming growing and growing and a lot of people feel robotics is going to just take over employees’ positions and really it’s supporting those employees and allowing the employees that are doing more of the lower level work, ones that usually are typically struggling to come to work on time, be there every day. We’re replacing those individuals with robotics, is what we’re seeing and then elevating some of your better employees to do other practices in the business.

Doug: Okay, so in other words, you’re taking away some of the, maybe the more mundane stuff and if anything, giving people a greater sense of fulfillment because there’s something more enjoyable to do and more involved in a technological type of process. Is that fair to say?

Dustin: Yes it is. I would agree with that. That’s what we’re seeing with a lot of our clients right now is robotics is really going towards those lower level positions at this point along with, if there’s assembly lines or different facets there where you’re seeing it too.

Doug: Sure. If I think about what’s ahead and everybody likes to say, “Oh well I see, we’re hearing all this talk of a recession coming and all of that.” Frankly, I haven’t seen that with the client base that I deal with. I don’t know what you’re seeing in terms of the manufacturers out there. Have you seen any sense of a potential slow down or is that, are they still running pretty hot at this point?

Dustin: Most industries are still running pretty hot. I would say the furniture manufacturing industry has slowed is where we have seen it, if anywhere.

Doug: Interesting.

Dustin: And it’s been interesting because we really haven’t figured out why because you’d think with the economy being so well and consumers still purchasing that would keep that going. And a lot of our clients that are in the furniture manufacturing are going to more commercial helping, with hotels and different restaurant industries. And so it’s been interesting from that side, but for the most part manufacturing has stayed pretty strong right now.

Doug: Okay. Now what are some of the things you’re seeing clients do to try to address the employee shortage out there? How do you, you can’t I guess fully solve for that problem, but beyond the technology and that type of thing, what are some folks doing? Are they getting creative with benefits or flexible work schedules? What are you seeing in terms of that?

Dustin: I would say both of those is what we’re really seeing is flexibility in the work schedule and trying to work on a work life balance, which I think everyone in society is wanting more of at this time. And just working on benefits. I tell people, usually money is about three or four or five on their list. There’s other aspects of feeling like their input is valuable and wanting to come to work and feeling like they’re a valued employee is usually number one. We’ve seen cafeterias being put into place as different things like that to help them from those sides. It’s really interesting to see the creativity that clients are trying or companies are trying to do to retain their good employees and actually attract other employees too.

Doug: Okay. Yeah, that’s exciting. We always like to see the employees benefit from the the economy as well. Are there any specific sectors that you see having more robust growth right now within manufacturing? Or is it broad based? What are your thoughts there?

Dustin: For the most part we’re seeing it broad base other than the furniture market, like we noted before, but oil and gas is still going strong in that manufacturing department. Metal stamping, anything along those lines. Automotive is still going strong for the parts and some of those pieces that we’re seeing. Really it’s been across the board for the most part that we’re seeing it. Now tariffs and some of those pieces have slowed it down in some facets, but a lot of it’s around the wood furniture industries where we’re really seeing it.

Doug: Interesting.

Dustin: Because a lot of that stuff’s going across seas potentially.

Doug: Oh, okay. Okay. You spoke a little bit about the tariffs. Have we heard from the client base in terms of concern about that? Or has it been a case where they’ve been able to pass the cost onto their customers for the most part? What are we seeing in terms of financial impact?

Dustin: For most of our clients outside of the wood industry, they’re being able to pass it on. It seems like it’s been harder in the one industry, foresters, milling, all those aspects, they’re really struggling and that’s the organization or the manufacturing group that I see that’s really having some tough times right now, being able to pass that on.

Doug: Yeah, interesting. Hopefully that will rectify itself before too long.

Dustin: It has to soon because we’re starting to see sawmills shut down and other facets happening, shipping companies shutting down and so at some point there’s going to be a demand of the byproducts and even the milling. It’s got to go somewhere.

Doug: Yeah, that’s, yeah, very, very good point. Looking ahead, in terms of impact to manufacturers, either tax law changes or accounting changes are there anything from a manufacturing perspective or anything specific that they should be aware of? I know we’ve got new revenue recognition standards, lease accounting standards coming in. Obviously we have the tax cut and jobs act. What do you see having the biggest impact? Or something they should be most aware of there?

Dustin: I would say the first two that you noted, the the lease and the rev rec are probably the two of the bigger ones. The jobs cut act actually really helped a lot of our manufacturers because they are doing so well and having that 20% that was able to be carved off really helped them from an opportunity to invest back into their business, help out their employees, maybe beef up their programs and plans for the benefits side. But I think leases and and rev rec are still going to be a big component. I think leases more than rev rec for most of our clients because rev rec is more of a timing at the end of the year where leases, it affects them throughout the year in how they’re going to be purchasing and doing those leases.

Doug: Sure. And for, if I’m correct in understanding this, that the lease standard was just extended in terms of when it’s going to go into effect for private companies. Is that correct?

Dustin: Yes.

Doug: Any fiscal year after 12/15/20?

Dustin: Yes. Correct.

Doug: In essence for 2021 at this point.

Dustin: Yeah. And it’s really helpful that they did separate that from the rev rec because both of those are really strong standards that are coming out and there’s going to be a lot of work involved with both, potentially for some clients. And so to have a break in between those I think will help the clients to be able to work through step one and then go to step two versus having to do them both at the same time.

Doug: Yes. For all you clients out there, be prepared. There are some, there’s some extra due diligence that that we’ve got to do and they’ve got to do as well. That gives us more time to understand really the impact on individual clients and see if we can make sure that we’re helping them appropriately.

Dustin: Yeah, and I would recommend, if you haven’t started talking to your accountant yet about these, you should hopefully be soon because it’s not something you’re going to figure out in a week or two. It’s going to take a couple months to work through some of this data.

Doug: Right, right. What about capital equipment purchases? We talked a bit about technology, but do you continue to see companies investing in capital equipment either to expand their current business or to just replace aging equipment? Is that still pretty prevalent?

Dustin: Yeah, it is actually. We’re seeing a lot of companies expanding their capital expenditures and even building and adding additions, especially up in the area, I’m up around Worcester in northeast Cleveland where manufacturing is very heavy. We’re seeing a lot of the excavation companies that are six, eight months out because they’re doing all this work for the commercial side and a lot of it’s manufacturing. And so I think with the economy being so well and strong that a lot of these businesses are trying to invest and grow and become more modern. A lot of the Amish community and conservative communities around our area, they’re not as apt to move forward as quick and replace things, they’ll just fix it. And I think they’re seeing the time where they’re also struggling to find employees also. And so it’s a trickle-down effect from the larger companies to them. And so they’re trying to replace some of this with a little bit better technology for equipment and different pieces to help with that employee shortage.

Doug: Yeah, and I know from a construction and real estate perspective that the industrial sector as we call it, is just booming as you said. There are so many projects in the pipeline either for expansion of existing facilities, new facilities, whatever the case might be. And that of course again brings planning opportunities as well, such as cost segregation and things like that. Can you talk a little bit about what that means for manufacturers, that type of thing?

Dustin: Cost segregations we see a lot throughout the manufacturing side as they’re building these larger buildings. And usually we look at something over $750,000 as an opportunity. If you have something in that ballpark or higher, there’s a lot of opportunities there to be able to break down those costs of the building and to be able to depreciate it quicker than what you typically would without a cost segregation. It essentially puts cash in your pocket now versus waiting over the years to get that. Cash is king and any money I can get today is better than what I can get tomorrow.

Doug: Yep. Liquidity is always of utmost importance. Well, you spoke a little bit when we started about National Manufacturing Day and we typically have an event that surrounds that. Can you talk a little bit about what we’re doing for that this year?

Dustin: We’re starting our third event this year with National Manufacturing Day. It’s held up in the Berlin Millersburg area, which is about a half an hour southeast of Worcester. And we’ve started there just to see with manufacturing being so prevalent in that area, what our response is. And it’s really starting to gain traction. And typically we spend about a half a day, have seminars and we really try to focus on value add, not compliance related with taxes, auditing, financials. That stuff’s great, but how can we help grow our businesses and our clients, help them grow their businesses?

And so we’re working on, you mentioned recession readiness this year, retirement plans and incentive compensation for employee retention. HR consulting is a big piece. Knowing your employees, getting the right people in the right seats. We’re also going to be talking and having a panel up front with three individuals that have anywhere from 30 to 50 years of business experience. Business owners that are going to be talking about some of the trials and tribulations that they’ve dealt with. And so I think it’s going to be very valuable. And our goal is hopefully in the future as this continues to gain, is to bring it into other regions. Maybe come down towards Columbus or Cleveland and have some other ones the same day to really give some value back to our clients and let them know some of the different things that we’re seeing in the communities in the industry also.

Doug: Yeah, and you talked, I know about recession readiness a little bit. Those are conversations that I’m certainly trying to have with our construction client base. I think it’s important to try to get ahead of that certainly. Not that we want to see a recession come, but you’ve got to think about those things. What are some of the things that we’re running through with our client base in terms of recession readiness?

Dustin: I think it’s just being proactive versus reactive. I think a lot of people in 2008 were probably a little more reactive than they wanted to be and trying to take the heart out of it because most of our clients, their employees are smaller manufacturing. Anywhere from maybe 15, 20 employees to maybe a 100. And so they know a lot of the employees. And it gets tough at times. If you got to decrease your employee group and make those decisions. If you can do that ahead of time and put a plan together and follow that plan, not saying it’s going to be a lot easier, but it might take some of those tougher decisions out of the equation where you feel like you’re making a quicker or a rash decision, you already have a plan for it. We see it from the employee base. It’s also talking to your clients and the manufacturers about what if tomorrow you had 25% of your sales go away, or two or three large customers, what would that effect be?

It’s not always having the exact answer, but starting to talk about that and putting some ideas together of what would we do? How would we incorporate that? How would we take that into effect? Because it’s that side. And then if you have financing with banks or financial institutions, you still have to cover those costs. And so there’s a lot of different pieces where it kind of just trickles down and it just starts with an open conversation of, how did you guys handle it last year and what would you do differently? That’s where we like to usually start.

Doug: And if you talk about employee attrition, it’s much easier if you plan for it over time as people either decide they want to leave the employment of your company or they’re retiring, whatever the case might be. If you can ladder those out and plan and have those transparent conversations with your employee base rather than addressing, as you said, say a number at a time and say, “Hey, we’ve got to make some tough decisions.” If you’re all part of the same team and sort of have a plan, it’s always much better.

Dustin: Plus also cross training your employees. It’s a lot easier to be able to handle those decisions if you have someone on staff that can do multiple tasks and be able to handle some of those jobs that you might be cutting where you only need it for a portion of the time.

Doug: Right. And planning for liquidity needs as well because certainly receivables will slow and you’ve got to watch inventory turns and all those things. It’s sort of modeling through all those things to understand the impact financially rather than trying to manage in the whirlwind as we say, right?

Dustin: Yes, I agree. And even having the conversation with your bank. Talking about, when a recession hits, what are the goals? How can we work through this? Showing them even the plan sometimes helps. That you’re prepared for it and that makes them more comfortable on their end also.

Doug: Right. And just to be clear to the audience, there, we’re not predicting a recession at this point. We don’t want self-fulfilling prophecy as far as that goes. But it’s again, better to be prepared than not. I think the most of the runway we see for folks next year still looks quite strong and I think we’re seeing that across a number of industries there’s just so much activity that, pent up demand and all those types of things. Hopefully that continues, right?

Dustin: I agree. And I’m not an economist, but I think they’ve been wrong so far and we hope they stay that way.

Doug: Right. I think it was about two years ago they said, “Well there’s going to be a recession next year.” That obviously hasn’t happened so we’ll hope that that continues. What else from your perspective do we need to be aware of in terms of the manufacturing sector? Are there any specific risks from a compliance perspective or OSHA or anything like that that you deem as maybe a a risk that somebody ought to be taking a look at?

Dustin: We’ve seen a lot of opportunities in the HR consulting side, which I know we’ve talked about before. And just making sure the records are up to date. We always have those types of audits that can pop up. And then just your state and local, you look at the state and local governments and the taxes that Wayfair are driving. That’s been a big deal to a lot of clients and even manufacturers also. They might not be over by the dollar side but they’re over by the transaction side and it’s driving a lot of tax regulation. I think just talking through those and working with your accountant through those of, should we be in this state? Should we be working here if we only have so many sales? And it’s probably driving more compliance or risk than it is actually driving value. And so having some of those conversations I think are a big area that we’ve seen a lot of changes over the last year or two.

Doug: Just understanding in essence where your risks are, where you’ve maybe got potential nexus from a tax perspective on the state and local side and having those conversations.

Dustin: Yes, I agree because state and local governments are really struggling and it seems like they’ve really started to really tighten their grips on those laws and those rules for the taxes that are due.

Doug: Yeah, that’s great tidbit for sure. Well Dustin, we really appreciate having you here today. It’s been great conversation. I think there’s just so much to be aware of. If I’m looking at my business from a manufacturing perspective and I think my gosh, I’ve got all this capital tied up, how can I manage all of this risk? That’s where you and your team come in, correct? To kind of take a holistic view of what the client is doing?

Dustin: Yes. We have about 30 people on our team right now. We have a lot of variety from the side of backgrounds. We have CFOs, we have controllers, we have cost accountants on staff, and so definitely if there’s ever questions, there’s a lot of different things that our team can prepare and bring to the table to add value for our clients.

Doug: That’s great. I’ve certainly seen that firsthand with what the team has been able to do. So many businesses don’t truly understand what their costs are and where they’re making money, which revenue streams are actually important and which aren’t.

Dustin: And it’s very important if a recession ever hits to know what your costs are and how to adjust those.

Doug: Absolutely. Yep. Well that’s great stuff. Well, thanks Dustin. Appreciate having you here. If you want more tips and insight or to hear previous episodes of unsuitable, visit www.reacpa.com/podcast. Thanks for listening. You can subscribe to unsuitable on iTunes or wherever you like to get your podcasts, including YouTube. I’m Doug Houser. Join us next week for another unsuitable interview from an industry professional.

Disclaimer: The views expressed on unsuitable on Rea Radio are our own and do not necessarily reflect the views of Rae &Associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.