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Optimism Returns as Manufacturing Picks Up

October 13, 2009
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CHICAGO-A growing sense of optimism is returning to the manufacturing sector, evoked by improved revenues, customer demand and hiring expectations, according to the fourth Prime Advantage Group Outlook (GO) survey, which seeks to reveal the top economic concerns of midsized industrial manufacturers for the remainder of 2009. Prime Advantage is a buying consortium for midsized industrial manufacturers.

Among the highlights of the survey findings, 80% of respondents indicated that they expected revenue for the second half of 2009 to either stay the same or increase. This is a dramatic turnaround from the February GO survey, in which only 38% were predicting revenues to either stay the same as 2008 or increase. Also, just 31% said that capital spending would likely decrease from the first half of 2009, whereas the February GO survey results found 66% of respondents indicating that capital spending would decrease from 2008 levels.

This turnaround is reflective of U.S. Commerce Department data showing durable goods orders increased nearly 5% in July, and that they have steadily increased during the past few months. In addition, the ISM’s PMI for August is also at its highest level in more than a year, and has reached a growth mode for the first time in 20 months.

Survey data was collected in August from 96 representatives of industrial manufacturing companies, including business owners, vice presidents of procurement and purchasing professionals. The survey polled respondents on their projections for the next six months of the year, in comparison to the past six months.

“The results of the latest Group Outlook survey show that small and midsized industrial manufacturers, across many sectors, are seeing new orders materialize after many months of slow activity due to challenging financial and economic conditions, as they capitalize on new product development and new market penetration” says Louise O’Sullivan, president and founder of Prime Advantage. “With inventories lean, and reflective of demand, many manufacturers waited to replenish stock until as late as possible, but these results indicate that the recovery is starting to gain traction across a broad spectrum of our economy and that new orders are coming in.”

Economic Outlook

Forty-three percent of respondents expect revenues to stay the same as the first half of 2009, up from the 26% that projected no increase from 2008 levels in the February GO survey. Meanwhile, 25% expect revenue to increase up to 10%, and 12% are predicting an increase of more than 10% for the rest of 2009.

In total, 80% are now expecting revenues in the last half of 2009 to either stay the same or increase, as opposed to just 37% of respondents believing revenues would stay the same or increase from 2008 when they responded to this question in February.

In addition, 86% of respondents indicated that capital spending for their U.S. locations would either stay the same (55%) or decrease (31%) from the first half of 2009.

Yet, just 12% said they have seen an increase in business this year stemming from the American Recovery and Reinvestment Act, while 33% said they expected to see an increase in 2010 or later from the ARRA economic stimulus program.

Top sourcing concerns for the second half of 2009 are an ability to focus on business process issues, such as cost savings and efficiency measurement, with 36% in agreement, followed by an ability to manage costs of raw materials (32%) and the costs of components (31%).

Top Expected Cost Pressures for Second Half of 2009

For the fourth GO survey in a row, raw material costs (such as metals and plastics) are the top cost pressure concern, as cited by 53%. However, this has come down from the past two surveys, when 67% (February 2009) and 93% (July 2008) mentioned it as the top cost pressure concern.

Overhead costs again ranked as the second greatest cost pressure at 24% (and down 26% from the February 2009 GO survey, when it was cited by 50% of respondents). Logistics/supply chain costs continue to rank among the top three concerns, with 40% in agreement.

The top external concern facing small and midsized manufacturers is customer demand at 58%. This can be seen as an encouraging sign because 83% indicated customer demand was their greatest concern in the February GO survey. The second greatest concern was the state of credit markets and interest rates at 21%, followed by the ‘cost of non-fuel commodities’ at 16%.

Purchasing and Sourcing Strategy

All sectors of the economy have had to make concessions in 2009, and purchasing professionals are no different. Asked about what critical tasks have become lower priorities due to limited resources, 46% said the need to reduce or control costs on low volume items had been put on the back burner, while 42% said that the need to identify alternative and back-up suppliers and the need to implement a supplier evaluation system had been de-emphasized.

“Survey results indicating that procurement professionals have less time to implement supplier evaluation programs reinforces the confidence our members have in our ability to provide these services for them,” says O’Sullivan. “It is at times like this when we are proud to be able to provide our members with a supplier network that is both pre-qualified and regularly audited, enabling our manufacturer members to have confidence in any Prime Advantage supplier they would choose as a partner.”

Eighty percent of survey respondents agreed that the level of direct goods they purchase from US-based vendors over the next 12 months would either stay the same (52%) or rise (28%).

Also, for non-U.S. based vendor purchases, 66% said they would look to China as their low-cost country of choice, while 14% said they would look to Mexico, 5% said they would look to India, and 15% said they would look outside these three locations.

Planning for the Future

Study results reveal that inflation also is a concern for small and midsized manufacturers, with 90% saying that they have seen or expect to see rising prices on raw materials during the next six months. In addition, 57% indicated the same belief for energy costs and 56% indicated this for the cost of components.

However, 82% said they believe their employment ranks will either stay the same or increase by the end of 2009.

And for the first time, respondents provided some insight into their marketing priorities, with 87% of respondents indicating that they allocate less than 25% of their overall marketing budgets to online marketing activities.

Methodology

In August, Prime Advantage surveyed executives and purchasing professionals that represent durable goods manufacturing firms, with annual revenues ranging between $10 million and $10 billion, of which the majority ranges between $20 million and $500 million. The survey received an 18% response rate from 528 professionals representing U.S.-based manufacturers in more than 25 different industries, including commercial foodservice, packaging, truck and trailer, material handling, food processing and construction.

Since its inception, Prime Advantage has returned more than $82 million in rebates and discounts to its members. These real savings are helping U.S. manufacturers gain a powerful competitive advantage in the face of economic instability.

For more information, visit www.primeadvantage.com.

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