In short:
- Reducing the cost of goods sold requires a triple focus on materials, overhead and labor
- Tariffs are driving up costs and are largely out of manufacturers’ control. USMCA will worsen the situation
- A culture of continuous improvement can uncover points of yield recovery, raising efficiency to offset macroeconomic woes
The story of manufacturing in the United States is a dynamic one. If you only read headlines, you might think that the industry will disappear from these shores on some not-too-distant date. The reality is that as of 2018, the U.S. manufacturing sector is producing more goods than it ever has, surpassing the levels it attained before 2009 and the Great Recession, according to the Bureau of Labor Statistics.
That’s the story of real output.
Manufacturing employment is another matter, however. While it has bounced back some since its 2010 low, that recovery has been much slower than the recovery in output.
Why?
There are two factors that drive up output faster than employment: automation and the trend towards producing higher-value goods domestically.
On one hand, slower jobs growth is an unhappy fact that has been with us since 1979, when U.S. manufacturing peaked at 19.6 million employed workers. Job losses in the sector have hit some areas hard. But while many of the jobs that have replaced those lost in manufacturing since the late ‘70s aren’t as good, replace them we have.
Now, however, manufacturing firms find themselves in the unenviable position of slow jobs growth combined with a lack of correctly skilled people, exacerbated by the impending retirement of the Baby Boomers and significant upward wage pressure.
You don’t need spot welders. Robots do that. What you need are people who can program and maintain the spot-welding robots. While those experts are scarce and expensive, there are tactics to fill the gap.
If skills were the only problem faced by manufacturers looking to contain the cost of goods sold, it would be concerning enough. But it isn’t — not by a long shot. Tariffs and a slowing global economy loom just as large. In fact, tariffs rank as the No. 1 overall concern for manufacturers in Brainyard’s Winter 2020 Outlook survey.
When we break down the data by business type, manufacturing execs were almost 50% more likely to cite tariffs as a concern (77%) versus execs overall (52%), as shown in the chart below. The new USMCA treaty will, in the short term at least, make the problem worse, with the nonpartisan Congressional Budget Office predicting an additional $3 billion in tariffs for automakers alone versus NAFTA.
Smart manufacturers understand these issues and are returning to fundamentals to make certain they’re operating as efficiently as possible to lower the cost of goods sold. That means re-examining manufacturing processes with an eye toward lower waste and a culture of continuous improvement.
Control what you can. You can’t fully counteract tariffs and other negative macroeconomic factors, but you can put a dent in their effect by reevaluating your main manufacturing processes from the ground up. In this video, we take you through a simplified version of optimizing COGS.
