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Equipment Leads $2.5B Quality Spending

May 1, 2003


Almost everyone has read, and in some cases ridden, the rollercoaster of financial and manufacturing news of the past year. The first part of 2002 saw consecutive gains in factory orders, and declines in inventory and an overall manufacturing upswing. Then the talk centered on the misdeeds of corporate accounting giant Andersen and the abuses carried out by its client Enron. Then the news began to include the failings of Worldcom, Qwest, Imclone, and Tyco to name a few. Personalities that included Robert Torricelli, Dennis Kozlowski, Jack Welch and even Martha Stewart became the focus of the nation's attention.

The ride continued during the months of July and August when manufacturing slipped and the talk at trade shows became one of, "Wait until next year." Nevertheless, recent anecdotal evidence seems to show that many of the quotes that were requested earlier this year will come to fruition during 2003 -- especially in some key equipment areas.

In its third annual spending survey, Quality magazine saw bright spots in the spending plans for 2003. Despite a projected 15% decrease in overall spending from 2002 levels -- $2.9 billion during 2002 vs. $2.5 billion for 2003 -- the forecast shows plenty of reason to be excited.

Equipment drives excitement

Test, measurement and inspection equipment purchases, which often drive discretionary spending in software and services, is projected to experience a 6.5% increase from 2002 levels. The average plant is projected to spend almost $41,000 per plant during 2003, an increase from 2002 levels of about $38,000.

In total dollars, Quality magazine is projecting nearly a $100 million increase in test, measurement and inspection equipment spending during 2003 -- $1.59 billion vs. $1.49 billion spent during 2003.

Most of the increase in expected spending is projected to come from the Midwest -- from the Dakotas to Ohio, from Minnesota to Kansas and Missouri -- to reduce scrap and rework. Companies in this region are projected to spend more than $560 million on measurement, test and inspection equipment. While the lion's share of dollars in equipment is being spent in the Midwest, the southern region of the United States -- from Texas to the Carolinas and Florida to Maryland -- is projected to have the highest per plant expenditure when it comes to test, measurement and inspection equipment expenditure. It is expected to be slightly more than $44,000 per plant, or 7.5% more than the national average.

Not surprisingly, the larger the company, the more that is spent on equipment. However, the stalwarts of American manufacturing, companies with 50 to 500 employees, are expected to spend an average of a little more than $44,000 per plant, which is above the national average.

Suppliers looking to focus their efforts on a particular industry would do well look at the transportation industry, which beside automobiles also includes aerospace, industrial vehicles, military weapons and associated parts for all these industries. This sector is projected to spend nearly $83,000 per plant, or twice the national average, on test, measurement and inspection equipment. In actual dollars, this group of industries represents more than $410 million in equipment alone. With more than $225 million projected to be spent on quality software and services, this group of industries represents more than 25% of the projected buying to be done during 2003.

Reasons to spend

Are manufacturers still committed to quality? Yes. According to the Quality magazine survey, when comparing their quality initiatives today to those of three years ago almost three-fourths of the companies, 72%, rated quality as a higher or of increased importance. Why?

During 2002, manufacturers indicated they wanted to spend money on equipment, software and services to reduce costs -- 57% indicated that reason for spending. That number has not changed in the goals of manufacturers for 2003. However, a full 14-percentage points more of manufacturers in 2003 want to improve productivity and are using quality technology and methods to accomplish that goal. In 2002, increasing productivity was the motive of only 43% of survey respondents; the 2003 survey reveals improving productivity as a motive for 57% of respondents.

According to the survey, meeting tighter part quality standards is less of a concern during 2003 than it was for 2002, but the desire to comply with formal standards, such as those set by ISO, will be driving more spending during 2003, 49%, than it did during 2002, 38.6%. According to the survey, , manufacturers will most likely rely on outside resources to meet those standards needs, rather than build that skill set in house. So, where will manufacturers spend most of their money and on what will they most focus internal resources? Hardware.

Hot equipment purchases

Tools at the high end of automation and measurement, as well as those more commonly found in number on the shop floor, are each expected to experience significant increases during 2003.

Spending on coordinate measuring machines (CMMs) is projected to increase 30%, or $38 million, from 2002 levels. Total spending on CMMs is projected to be $167 million during 2003. CMMs will also make up 10.5% of the 2003 budgeted amount for test, measurement and inspection equipment. This is a 2-percentage point increase from 2002 levels.

Confirmation on the upward spending on CMMs would seem to coincide with recently reported figures from the Metrology Automation Association (MAA). The Michigan-based trade association, whose members include the largest suppliers of CMMs, predicted a 2% gain in sales during the third quarter of 2002.

As with overall spending on test, measurement and inspection equipment, the transportation industries are expected to lead all industries in purchasing CMMs -- a projected $65 million spent during 2003.

While the high end of dimensional measurement is expected to see increases during 2003, the ubiquitous handheld measuring tools, including micrometers, calipers and indicators, is projected to experience 12% growth during 2003. The Quality Magazine survey shows manufacturers are expecting to spend almost $228 million, $124 million more than was projected for 2002, on handheld gages during 2003. Part of the reason for these tools' continued increases lies in the fact that most are not considered capital expenditures, thereby making the approval process for purchases easier to negotiate than for equipment in the tens or hundreds of thousands of dollars.

Inbetween handheld gages and CMMs are countless other types of test, measurement and inspection devices. Despite some flat or negative spending trends projected for individual product types, most of the major groups of test, measurement and inspection equipment categories, made up of these individual product types, are predicted to experience increases during 2003. Optical inspection and measurement systems, including borescopes, microscopes, video measurement, and optical comparators, is expected to experience an 11% gain, or $13.8 million increase from 2002 forecast numbers. Color and coatings thickness instruments, environmental test, leak testing and torque testing equipment are all projected to experience modest to significant increases during 2003. Calibration equipment, data collection devices and laser systems are projected to experience slight to significant increases, as well.

The news isn't all rosy, though. While air gages and bore gages are forecast to experience a $13 million and $300,000 gain respectively, most other gages in this group-plug, ring, snap, thickness and thread, are projected to remain relatively flat through 2003. This would be in line with anecdotal reports recently made at the American Measuring Tool Manufacturers Association (AMTMA) fall meeting. There, several of the attending supplier companies reported that there were some upturns early in 2002, but that business had slowed from the early 2002 rate and they expected that to continue into 2003. The AMTMA has formed an internal group to perform market research among member companies.

A 'soft' market

As the equipment sector looks to improve next year, what keeps the 2003 numbers from showing an overall gain is a substantive drop projected for software spending during 2003. Quality magazine is projecting $210 million to be spent on software during 2003. Initially, this would appear to be more than a 60% decrease from 2002, however, because 2002 actual spending numbers did not reach the projected $564 million forecast for this year, the decrease is less than would appear.

Spending on standards-related software -- ISO 9000, ISO 13485, ISO/TS 16949, ISO 17025 and QS-9000 -- is projected to be $42.6 million during 2003. While this is a drop from 2002 projected numbers of $105.7 million for ISO 9000 and QS-9000 software alone; the numbers need not be completely disappointing. Beside the numbers for actual spending on this type of software during 2002 not being yet available, the 2003 forecast marked the first time for measuring spending on ISO 13485, ISO/TS 16949 and ISO 17025 software. With the phase out of QS-9000 for ISO /TS 16949 and Guide 25 for ISO 17025 announced during this past year, a projected decrease in spending on QS-9000 software during 2003 is not unexpected. The Quality magazine 2004 spending survey bears watching on these new standards-related software types.

For those that will be selling software during 2003, the survey expects most of the spending to be done in the Midwest. Beside the transportation industries' predicted heavy spending on software during 2003, high-tech industries such as communications equipment manufacturers, semiconductor and printed circuit board makers, and household appliance manufacturers, which have an ever increasing level of technology built in, are expected to buy calibration, data collection and mining, document control and standards-related software.

Turning to service?

While spending on software is projected to decrease during 2003, manufacturers may substitute internal expertise on software and standards compliance with outside resources. Spending on consulting and training services is projected to be almost twice the amount as software -- $400 million projected for consulting and training services.

The most dollars in consulting and training will come from certification and registration needs. With the recent adoption of ISO/TS 16949 in place of QS-9000, replacement of Guide 25 with ISO 17025 and revision of ISO 9000 standard series, consultants and trainers can expect to garner nearly $184 million in revenue during 2003. As compared to projected 2002 numbers, the 2003 numbers indicate a somewhat flat market on spending on registration and certification.

Besides requiring consulting and training services for registration and certification, more than 17% of manufacturer budgets will be spent on outside sources for quality management and process improvement needs. Spending on outside resources for process improvement purposes is projected to be slightly more than $61 million during 2003, while spending on quality management is expected to be more than $62 million. While both of these numbers represent double-digit decreases, the fact that 36.5% of manufacturers plan to spend money on these outside sources for process improvement and 37.4% plan to spend money on quality improvement are in keeping with recent reports on the drive toward lean manufacturing and productivity gains.

As manufacturers look to focus on what they do best, i.e., manufacture, there is an increased need for outside test, measurement and inspection services. Spending on this need is projected to reach nearly $300 million during 2003. While this is a decrease from 2002 projections, a full 84.4% of manufacturers expressed an intention to make these services a budget item during 2003. And while spending during 2003 on this group of services is projected to decrease, there is a bright spot within the category. Projected spending on calibration services should remain fairly constant from 2002 to 2003 -- almost $210 million projected for 2003 vs. $263 million projected for 2002. And, nearly 80% of those who will be spending money on any test, measurement and inspection service say they plan to target calibration services.

The survey method

Quality magazine would like to thank all the respondents who participated in the Third Annual Quality Spending Survey.

Quality is sent to more than 64,000 manufacturing engineers and managers, quality engineers and managers, corporate managers and other professionals in more than 38,000 plants. Questionnaires were sent to managers and other professionals on August 27, 2002, who have the highest degree of equipment, software and services purchasing influence in a representative group of 5,000 plants. The cutoff date for returning the surveys was September 27, 2002. Some 996 surveys were returned for a response rate of 20%. Responses were weighted against the number of plants in SICs 30, 33, 34, 35, 36, 37 and 38 that Quality magazine reaches.

Quality magazine will continue to bring its readers more information on projected spending and quality trends that were revealed in this survey at www.qualitymag.com and inside the pages of Quality magazine's Industry News.

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