Category: Manufacturing and Distribution

Posted on Jul 20, 2016

Warning. The execution phase of succession planning requires singleness of purpose. Within the first 90 days of succession planning, you will likely find issues and gaps with your plan or personal retirement plan — items that need tending. Don’t let these issues become a distraction to your ultimate goal of developing a clear and actionable succession plan! To stay focused during this phase, use the following questions to keep your plan on track.

  • Who will help you execute and monitor the plan?
  • What are the gaps and issues?
  • How can you prioritize fixing the gaps and issues?
  • What if all doesn’t go as planned?

Maintaining Deadlines

Succession planning for small businesses can be accomplished within 210 days if you don’t let these issues become a hindrance. But often, business owners feel that they have to have every detail figured out before they can execute. Not so. For example, you may have:

  • Wills that need updating based upon new tax laws
  • Missing non-compete agreements with some of your key management
  • A woefully inadequate disability policy based on the level of income needed
  • Your personal investment portfolio performing below average (e.g. 1 percent rate of return when it needs to be at least 5 percent)
  • Legal entity structure changes needed to pay less tax upon sale
  • Unaddressed estate tax problems

Rather than diving into one rabbit hole after another to tackle each of these somewhat complex issues, document each one and prepare a to-do list. In the check-in meeting with your advisors, share the list and prioritize it. This process will help you move along the path of creating a well-written succession plan while scheduling the action items that will support smart execution of your plan down the road.

Now it’s time to meet with your advisors, which can include your lawyer, CPA, financial advisor, board and/or board of advisors and leadership team. Give them an outline of your progress over the past 90 days, your discoveries and expected next steps. It is important to discuss the following in this meeting:

  • Plan A and Plan B – Plan A is your preferred scenario for transitioning out of the business. However, things can change in year one, three or five…requiring a back-up plan. Discuss your preferences and potential changes that could require shifting from Plan A to Plan B. This will keep you on the same page with your advisors and help you prepare logically and emotionally for that shift if necessary.
  • Your list of gaps, issues and problems for Plan A — let your advisors weigh in on these and other issues they foresee.
  • Your list of gaps, issues and problems for Plan B — again, gather advisor feedback and any additional foreseeable issues that may be different than in Plan A.

Do not let the blind spots or additional issues brought up in this meeting distract you from the ultimate goal of creating a plan. Obstacles can be overcome in most scenarios by taking them one step at a time. Right now, you are simply gathering feedback and advice. Don’t give up even if the issues seem insurmountable. Stay in control of the process.

Name a Quarterback

When I say that business owners should stay in control of execution, I mean that owners are the ultimate decision makers in the transition of their businesses. However, that doesn’t mean trying to handle every detail. You are still trying to run a business! Instead, place a chief advisor in charge of facilitating discussion and outlining next steps. This advisor can be accountable for research, scheduling the next check-in meeting and coordinating feedback from other advisors.

Some business owners prefer their CPA in this role (like a succession planning quarterback) while others choose their attorney or financial advisor. Just make sure it’s a trusted relationship that you believe will keep things moving forward in a timely way and bring about the best results. By choosing a quarterback, you can avoid your own blind spots in the planning process as well as soften the emotional impact of certain decisions.

For example, many small business owners avoid setting up an emergency management plan. This plan provides a designated leader or leaders to operate the business in the event of an owner’s incapacitation. Because buy/sell agreements are only engaged if the owner dies, an emergency management plan fills that gap if the authorized person is in a coma or otherwise disabled. Designated leaders are given limited legal power to make financial or other important business decisions and operate the business on behalf of stakeholders such as family members. You can even include incentives for key people to stay and see the business through a set time period until transition or succession decisions can be made.

Now that you have organized your advisory team (including your quarterback), determined your Plan A and Plan B and received feedback on gaps and issues, it’s time to assemble all the documents and create a timetable and strategy around communication with family and key employees/managers.

Continue reading for the last phase in Succession Planning: Phase III – Communication: Establishing Timing and Deliverables for Your Succession Plan

For more information on guiding your small business through succession planning, talk to the tax team at Cornwell Jackson.

Gary Jackson, CPA, is the lead tax partner in Cornwell Jackson’s business succession practice as has led or assisted in hundreds of succession and sales transactions. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services such as succession planning to management teams and business leaders across North Texas. 

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Posted on Jul 14, 2016

Product Liability for Manufacturers

The limits of product liability are not always easy to define. But in one case, the Nebraska Supreme Court helped identify the limits by ruling that two manufacturers aren’t liable for harm caused by the criminal acts of others — even if their product’s failure led to the harm.

The court ruled that Ford Motor Co. and Bridgestone/Firestone were not liable for the death of a 19-year-old college student who was murdered by a man who offered her a ride after she had a flat tire.

“We have found no authority recognizing a duty on the part of the manufacturer of a product to protect a consumer from criminal activity at the scene of a product failure where no physical harm is caused by the product itself.”
– Nebraska Supreme Court

There was no allegation that the young woman sustained any injury as a result of the tire failure itself. Instead, the student’s parents charged negligence on the part of the manufacturers, claiming that the malfunctioning Firestone tire on their daughter’s Ford Explorer set in motion a chain of events that culminated in her murder. They argued that the manufacturers knew — or should have known — of the potential for criminal assault after the breakdown of a Ford Explorer.

The court disagreed, invoking the legal concept of “proximate cause.” Under the law, it is generally not enough to show that an event would not have happened if it weren’t for another prior event. Liability generally lies with the last negligent or intentional act that leads to the harm. In this case, that act was committed by the murderer because he shot the young woman.

The court responded: “Assuming the truth of these allegations, the most that can be inferred is that Ford and Firestone had general knowledge that criminal assaults can occur at the scene of a vehicular product failure. However, it is generally known that violent crime can and does occur in a variety of settings, including the relative safety of a victim’s home.”

The court made its decision even though the federal government had found the tires on the woman’s Ford Explorer to be unsafe. Millions of ATX, ATX II and Wilderness AT tires have been recalled after it was determined that they are prone to losing their treads at high speeds. The plaintiffs argued that their daughter might not have driven alone, early in the morning, if she had known of the tire’s tendency to blow out. The court did not find this argument persuasive. (Stahlecker v. Ford Motor Co., 266 Neb. 601, 08/08/03)

While this case does express a principle that protects companies from liability from unforeseeable criminal acts, it should not be interpreted as a blanket protection from liability in all cases of criminal behavior by third parties.

A variation: A different set of circumstances could lead to a different outcome. For example, imagine a situation where a man tries to use a jack supplied by the automaker to change a flat tire. The design of the jack requires that the car be close to the edge of the road. The man is then struck by a drunk driver and killed.

This is a scenario where the automaker could be held liable for its negligent design of the jack, even though the criminal act of the drunk driver was the ultimate cause of the man’s death.

The difference: In this hypothetical case, the court could determine that the automaker should have foreseen the possibility that an accident might occur.

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Posted on Jul 11, 2016

Phase I – Assessment

Because your business is probably your largest asset — and because it also is probably your largest single source of income — your decision-shaping and calendar of events for your plan are going to be built around assessing alternatives to preserve the asset, nurture the asset, monetize the asset or liquidate the asset for optimum results for you, your family and the business. Some of the questions you should ask as you begin the journey of planning your succession are:

  • What is your business really worth?
  • What do you really need in retirement?
  • How does ownership translate into retirement assets?
  • Who will step into the ownership role(s)?
  • What’s your Plan A and Plan B scenario?
  • What will you do next?
  • What is your timetable for fully transitioning out?

So, what is your business really worth? If you’ve never had a formal or even informal valuation of your business, now is the time to schedule it. You will need a reasonable estimated value of your business — and an honest assessment of after-tax available cash to you in the event of a sale. You need a valuation regardless of whether you desire to sell to a third party or to your management team, or create an ESOP, family gifting or charitable gifting options.

There are formal valuations and there are informal valuations. For the purposes of succession planning, most small business owners simply need a valuation professional to determine an estimation of value within $100,000. Don’t try to calculate the value online with a low-end, do-it-yourself tool. All of your decisions going forward derive from this number, so it pays to consult a professional.

Once you have a clear estimation of value, you will want to visit with your investment advisor or financial planner to assess your personal finances, current and post retirement cash flow, retirement goals and sources of cash flow up to your official retirement date. In my experience with succession planning, this process will take at least three separate meetings in order to:

  • Determine what you want to do in retirement
  • Assess the lifestyle you want to maintain
  • Incorporate the vision of the next successful chapter of your life into the succession plan

During this discussion, you may want to decide how much, if any, you want to continue working in the business. Independent of any valuation or legacy issues you carry, what would be a fair amount for you to be compensated in a less than full-time position at the company? What are the primary areas where you could add value to the business on a continuing basis?

Establish Plan A and Plan B

This decision, of course, hinges on the most likely acquirer of your business. You will need to rank on a 10-point scale the likelihood and viability of a sale or transfer to:

  • Your own family members
  • Your current management team or business partners
  • Your employees taking ownership stake through an ESOP
  • A strategic buyer
  • A private equity firm

Whichever option gets the highest ranking, call that “Plan A.” But call the second highest option “Plan B.” We’ll talk more about why having two options for potential owners are important in the execution phase of succession planning.

In addition to ranking a potential successor or outside buyer, you will need to obtain and review all of the following agreements and legal documents. You may find during this process that there are documents you don’t have and will need to create.

  • Will and estate documents
  • Emergency management plan – who gets the keys if you are temporarily out of commission
  • Shareholder agreements, often called buy/sell agreements
  • Bylaws or operating agreement of the business itself – voting, officers, classes of stock, etc.

The final piece of your Phase I Assessment is to target a specific year that will be the year of your exit — no matter what form that takes.

As you assess your current situation, including decisions around successors and timelines, your CPA should support you with a clear picture of cash flow, debt and proper entity structures. Your CPA can also help you assess certain buy-out scenarios that may involve selling to internal stakeholders, courting an external buyer or creating an ESOP. Rely on your CPA to weigh the pros and cons of your Plan A and Plan B to ensure that they are viable choices.

Once your first 90 days of planning are completed, you should begin to understand where the gaps lie in order to set the timeline for succession planning execution. Review each step that has been accomplished so far with your advisory team. Most of all, congratulate yourself for moving toward a viable plan for your business transition.

To continue reading about succession planning, read: Phase II – Sharing and Executing the Succession Plan

For more information on guiding your small business through succession planning, talk to the tax team at Cornwell Jackson.

Gary Jackson, CPA, is the lead tax partner in Cornwell Jackson’s business succession practice as has led or assisted in hundreds of succession and sales transactions. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services such as succession planning to management teams and business leaders across North Texas. 

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Posted on Jul 5, 2016

CNC LPG cutting with sparks close up

The U.S. manufacturing sector has rebounded and seems poised for more growth.

But is the revival as real as some have characterized? A number of recent reports have described the resurgence in manufacturing as a modest rebound rather than a boom. Even more compelling, some suggest the renaissance is over. This article takes a closer look at where the industry stands at midpoint 2016.

The Bright Side

Let’s start with the good news. Approximately 900,000 jobs were added to the U.S. manufacturing sector between 2010 and 2016. There’s no denying the positive impact of that growth. However, after taking a brutal beating before that, some recovery had to be expected. By most standards, the improvement was modest.

Plus, a true return to more manufacturing activity in the United States, sometimes called “reshoring,” should be backed by other data, including increased productivity in consumer goods. Although the nation has been importing more vehicles than it has been exporting for several decades (with Japanese and German automakers dominating the market) some traditionally strong sectors have eroded, including airplanes, medical equipment and semiconductors. Also, other longstanding areas of growth (oil and gas, mining and construction equipment) have slowed considerably.

Studies of U.S. manufacturing activity have produced a mixed bag of conflicting results:

  1. Boston Consulting Group, which helped popularize the concept of reshoring, has said that a number of top manufacturing executives are considering bringing back production from China. Thirty-one percent of respondents to the group’s fourth annual survey of senior manufacturing executives at companies with at least $1 billion in annual revenues said that their companies are most likely to add production capacity in the United States within five years for goods sold in the nation, while 20% said they are most likely to add capacity in China.
  2. A.T. Kearney, however, says its U.S. Reshoring Index suggests that reshoring is an aberration, not a trend. That index tracks actual U.S. manufacturing and import data. Kearney also notes that industries trying to avoid rising labor costs in China have been moving production to other Asian countries rather than back to the United States, a trend that is unlikely to reverse anytime soon. Countries in Southeast Asia, including India, have literally hundreds of millions of workers available in largely untapped pools. This is clearly apparent in activities such as clothing and furniture production. Another development affecting manufacturing is “nearshoring” on the North American continent, particularly in Mexico where labor costs are low.
  3. Information Technology and Innovation Foundation (ITIF), a nonpartisan think tank, suggests that the so-called renaissance doesn’t exist. It notes that the real manufacturing value added, which it says is the best measure of U.S. manufacturing, was still 3.2% below 2007 levels in early 2015, despite GDP growth of 5.6%. Among other “myth-busters,” the ITIF report, The Myth of America’s Manufacturing Renaissance: The Real State of U.S. Manufacturing, illustrates that wages in China are estimated to be just 12% of average U.S. wages in 2015, global shipping costs are back to normal after falling by 93% in a six-month period in 2009 and U.S. productivity isn’t increasing faster than that of other industrialized countries. And it is actually growing much slower than China and South Korea.

Clearly these results suggest that the so-called renaissance has been highly overrated.

The Current Landscape

The economic outlook for manufacturing darkened somewhat in June. The sharp drop in hiring prompted the Federal Reserve to keep interest rates steady. The manufacturing sector lost 10,000 jobs and it showed job losses in three of the four most recent months. Year-over-year growth in manufacturing employment has been negative for three months in a row. The numbers have led some observers to suggest the end of any post-recessionary manufacturing resurgence.

What’s the reason for the turnabout? The Bureau of Labor Statistics published its Job Openings and Labor Turnover Survey the same week as the jobs report suggesting that jobs weakness in manufacturing may be the result of a lack of labor supply rather than lack of demand. In April, job openings in the industry jumped to a 15-year high while the ratio of manufacturing job openings to manufacturing job hires hit a record, suggesting that employers are having trouble finding quality workers to fill open positions. In the meantime:

    • Layoffs remain relatively low, with fewer reported this cycle than at any point during the previous cycle,
    • Manufacturing wage growth outpaced overall wage growth over the past manufacturing year, and
    • The unemployment rate for manufacturing workers has been comparable to the three years leading into the most recent recession, when the economy was stronger.

All of this seems to indicate that the manufacturing sector is healthy.

What can manufacturers do about increased labor costs due to a shortage of qualified workers? One possibility is to increase overtime hours for workers on the payroll. Alternatively, if output from existing workers is nearing its limit, wages may be increased to attract new-hires from other sectors, even if this slightly dilutes the bottom line. Other solutions, such as locking in output and sacrificing the potential for growth, may be more difficult to swallow.

Final Word

Whether you believe that the manufacturing renaissance is over, or you aren’t convinced that any revival was particularly robust or even existed, shouldn’t discourage your firm from its main focus. Stick to the fundamentals that your company has relied on: Remain diligent but retain enough flexibility in operations so your firm will be able to adapt quickly, if needed.

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Posted on Jul 2, 2016

Scenic high way

You Can “Manufacture” a Succession Plan in Months,
Enjoy it for Years.

As a longtime CPA in the Dallas area, I have worked with a lot of family-owned and closely held small business owners, particularly in manufacturing and distribution companies. If you are among the small and medium-sized business owners who are age 50 or older, that gives most of you a window of 10 years or less to fully execute a business transition or succession plan. Fortunately, creating the actual succession plan can take less than one year. This whitepaper can be your accounting starter kit or template for a fruitful business transition. Use it to support a healthier business and a more secure retirement. Your future begins…now.

As a business owner, you have always forged your own path, but at the height of your leadership lies the big question: What’s next?

Succession planning is like a nagging incompletion in the back of your mind. You have plenty of reminders from your attorney, your CPA, your spouse and maybe even your children. You know you need to face it, but inertia sets in. It all feels so complex, so overwhelming, and so FINAL.

WP Download - Succession PlanningOne day, you overhear a conversation on the golf course (or at your favorite restaurant). “Poor Fred. After 40 years, the only thing he can do is liquidate when he finally decides to call it quits. It’s too bad…”

If you don’t have a plan, someone or something will create the plan for you. Due to the unfortunate lack of business succession planning, only about 30 percent of successful family businesses survive into the second generation, according to The Family Firm Institute. A survey of advisors through the Financial Planners Association also found that only 30 percent of their clients had a written succession plan — even though 78 percent of clients planned to fund their retirements through a business sale.

Really? A Succession Plan in Seven Months?

In our experience, about 80 percent of business succession planning can be developed in seven months. Some plans take more time, some less, but the average timetable is about 210 days.

Step one: declare your commitment to create a plan. Share this commitment with your three closest advisors. This team usually includes your attorney, your CPA and your investment advisor, but it could also include your banker, your CFO and/or members of your leadership team. This team will keep you accountable for the planning process by organizing meetings and asking important questions. Planning is divided into three phases:

PHASE I – 90 days of Assessment – facing the unknowns

  • What is your business really worth?
  • What do you really need in retirement?
  • How does ownership translate into retirement assets?
  • Who will step into the ownership role(s)?
  • What’s your Plan A and Plan B scenario?
  • What will you do next?
  • What is your timetable for fully transitioning out?

PHASE II – 90 days of Execution – sharing the plan and getting feedback

  • Who will help you execute and monitor the plan?
  • What are the gaps and issues?
  • How can you prioritize fixing the gaps and issues?
  • What if all doesn’t go as planned?

PHASE III – 30 days of Communication – establishing timing and deliverables

  • How will you communicate the plan to leaders, clients, employees, family?
  • What can reinforce buy-in and cooperation?
  • What contracts and documents must be in place?
  • What is the exact timetable and launch?

To dive deeper into each phase of planning a succession plan for your business, click on the links below to read more on each phase.

Phase I – Assessment: Facing the Unknowns of Succession Planning
Phase II – Execution: Sharing Your Succession Plan
Phase III – Communication: Establishing Timing and Deliverables for Your Succession Plan

 

For more information on guiding your small business through succession planning, talk to the tax team at Cornwell Jackson.

GJ HeadshotGary Jackson, CPA, is the lead tax partner in Cornwell Jackson’s business succession practice as has led or assisted in hundreds of succession and sales transactions. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services such as succession planning to management teams and business leaders across North Texas. 

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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.

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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.

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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.

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Posted on Apr 11, 2016

Women in ManufacturingWomen are sorely lacking in the manufacturing industry, according to a recent survey. They make up 47% of the U.S. workforce, but just 27% of workers are women in manufacturing jobs.

An annual survey commissioned by the Manufacturing Institute and others takes a look of this disparity and highlights some interesting points. The Institute, which works to develop manufacturing talent, conducted a survey of 600 women across a broad spectrum of the industry to try to understand why this gap exists.

Persuasive Argument for Attracting and Retaining Women in Manufacturing

The argument for attracting and retaining more women in manufacturing is compelling: They represent a vast untapped pool of workers that can help to fill a talent gap. Manufacturing is facing a shortfall of an estimated 2 million workers over the next decade, and a recent skills analysis referenced by the study shows that six out of 10 positions in the sector are currently unfilled due to a skills gap. It’s clear there is a place for more women in the sector.

And women are underrepresented in virtually every sector within the industry, from industrial and consumer products to technology, media, telecommunications and chemicals. In addition, the portion of women in leadership roles lags most other industries.

The respondents to the survey exhibited certain traits that are generally viewed as favorable when seeking new hires. Among them, the women:

  • Were experienced, with nearly 90% having more than 10 years experience and 47% with more than 25 years.
  • Held supervisory positions (65%),  including director (15%) and C-suite executive (12%).
  • Were well educated; about 75% had bachelor’s or master’s degrees, and about 66% studied general business, engineering or operations.
  • Were ambitious, with the majority aspiring to be senior managers or reach the C-suite (of those, 82% said they see a career path to get there).

Motivational Tools

Seven out of every ten women participating in the survey said they’d stay in manufacturing if they were to start their careers today. Only three out of ten said they’d take a different career path. For those who might leave, the main reasons were poor working relationships, lack of opportunities and low compensation.

When asked to list the benefits that are most likely to attract and retain female workers, the respondents listed the following three items as key:

  1. Flexible work practices,
  2. Formal and informal mentorship and sponsorship programs, and
  3. Identifying and increasing visibility of key leaders who serve as role models for employees.
    Respondents were also asked which industries are superior to manufacturing in attracting and retaining women. Here are their answers:
  • Retail (38%),
  • Consumer products (22%),
  • Life sciences and medical devices (20%),
  • Technology, media and telecommunications (14%), and
  • Others (6%).

Interestingly, 42% of the respondents represented women in the industrial products, process and transportation sectors, and none of those wound up in the list.

Furthermore, about 66% of the respondents indicated that their companies don’t have active recruitment programs to attract women and only about 33% said they believe that their company is good at recruiting, attracting and developing female workers. Notably, 71% believed that there is a pay gap between women and men. All those sharing this belief said men are paid more.

Six Steps for the Future

Only 12% of the respondents believed that the K-12 educational system actively encourages female students to pursue careers in manufacturing and 53% said that it doesn’t. A similar recent study from the Manufacturing Institute echoes the results with only 40% of the respondents stating that today’s students are qualified for a job in modern manufacturing.

Yet the studies also show that industry familiarity would foster a positive perception. The best path forward, according to the respondents, is based on these six steps:

  1. Start at the top. Any change in corporate culture must start in the C-suite. For diversity to have real meaning, executives must demonstrate their belief in programs and lead by example.
  2. Eradicate gender bias. When promotions arise, women should be placed on an equal footing with men and should be compensated in kind.
  3. Create a more flexible work environment. By accommodating a better balance between work and family, manufacturers improve the likelihood of attracting and retaining women.
  4. Facilitate sponsorship. A sponsor helps a worker develop and progress professionally. In addition, sponsors extend beyond mentoring and coaching to being a vocal advocate, enhancing a worker’s presence in the organization.
  5. Begin recruitment early. The survey cites a current lack of confidence in the education system. Manufacturers should begin recruitment in secondary school to encourage manufacturing careers.
  6. Promote personal development. Offering women challenges and opportunities to succeed is part of what will make manufacturing an attractive option.

Perceptions May Change

Granted, women in manufacturing have made great strides. But there still is a long way to go. As the industry continues to evolve, perceptions may be changed from both the male and female perspectives.

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Posted on Mar 10, 2016

The shackles are off. The expanded Section 179 deduction and first-year bonus Manufacturer PATH Act Tax Breaksdepreciation deductions are restored, with certain modifications, retroactive to the beginning of 2015. You can combine these two tax breaks with your company’s regular depreciation for a generous write-off of business assets.

The Protecting Americans from Tax Hikes- PATH Act which was signed into law on December 18, 2015, allows your business recover the cost of qualified business assets placed in service during the tax year within generous limits. These are the three main types of write-offs now available.

  1. Section 179 deduction. Your business can expense the cost of new or used business property up to the maximum threshold for the tax year (see the article in the box below). The expanded limits provide a near-instant tax break for most small and midsize manufacturers. But the property must be placed into service during the year, not just purchased by year end. The PATH Act retained and made permanent the 2014 maximum $500,000 allowance for qualified property. This limit will be indexed for inflation beginning in 2016.
  1. Bonus depreciation. The PATH Act restores the 50% first-year bonus depreciation retroactive to the beginning of 2015. It also extends the tax break for several years, along with a few technical modifications, under this schedule:
50% through 2017
40% for 2018
30% for 2019

Bonus depreciation applies to only new assets, not used ones. The bonus depreciation program is set to expire in 2019, unless Congress reinstates it.

  1. Regular depreciation. For federal tax purposes, depreciation deductions for business assets placed in service are typically calculated under the Modified Accelerated Cost Recovery System (MACRS). That method uses a graduated percentage based on the useful life of the property that lets you write off the cost earlier than the straightline method. Most types of business equipment are considered to have a seven-year useful life. Computers are classified as five-year property.

MACRS treats property placed in service at any point during the year as being placed in service on July 1 under a “midyear convention.” This allows your business to benefit from a half-year’s deduction even on property placed in service late in the year.

Important note. Deductions may be reduced if more than 40% of the cost of the property (excluding real estate) is placed in service in the final quarter.

Three PATH Act Breaks in Action

This is how you can combine the three tax breaks:

  1. Claim the Section 179 allowance,
  2. Take first-year bonus depreciation on any purchases that haven’t been written off, and
  3. Depreciate the remainder using traditional MACRS tables.

For example, an auto parts manufacturer placed $1 million of new machinery in service in 2015. The machinery has a seven-year useful life. Assuming the company didn’t make any other qualified purchases, it can maximize the combined deductions in 2015:

Section 179 deduction. It would first claim an immediate Section179 deduction of $500,000, or half of the cost, leaving a balance of $500,000.

Bonus depreciation. Then, it would take a bonus depreciation deduction equal to 50% of the remaining balance, or $250,000.

MACRS deduction. Finally, using the table for seven-year property, it could write off 14.29% of the remaining $250,000 cost of the property, or $35,725.

The total deduction for all three tax breaks is $785,725. Only $214,275 of the $1 million cost remains to be depreciated over the next six years.

Also, note that the MACRS percentage for seven-year property jumps to 24.9% of the cost in the second year. In the example provided, the company would be able to deduct another $62,250 in the second year. In other words, you can essentially depreciate almost 40% of the remaining cost (14.29% plus 24.9%) in the first two years.

Two Key Limits under Section 179

While the PATH Act permanently preserves the generous $500,000 Section 179 allowance, it encompasses two other important provisions:

Income limit. The Section 179 deduction can’t exceed your net taxable income from business activities. For example, if your business generates $400,000 a year in net taxable income and it places $450,000 of business property in service, the deduction is limited to $400,000. Bonus depreciation can be used to reduce your taxable income below zero, however.

Spending threshold. If the cost of assets exceeds an annual threshold, the maximum Section 179 deduction is reduced on a dollar-for-dollar basis. This threshold was moved in lockstep with the allowance, but now the PATH Act retains a $2 million limit, retroactive to 2015 (subject to indexing starting in 2016). If you placed in service $2.1 million of assets last year, for example, the Section 179 deduction is reduced to $400,000. The bonus depreciation program isn’t subject to a spending limit, however.

Professional Advice

Factor these enhanced tax breaks into your plans for purchasing equipment and you likely can substantially reduce your company’s tax liability. Contact your Cornwell Jackson tax adviser for more details on these tax-saving opportunities, including any rules and restrictions.

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