BE FRUITFUL: MULTIPLY
When specialty vehicle maker Supreme Industries, Inc., of Goshen, Indiana, converted a truck body plant in Woodburn, Oregon, into a maker of shuttle buses in 2009, the goal was surviving the recession. The impact of that decision, though, was felt in many more places than Woodburn, and with many more people than the 48 employed directly by Supreme’s new bus operations.
Supreme’s new shuttle bus operations triggered a force, known as the economic multiplier, that could help revitalize North American manufacturing if more employers would take similar steps.
In its simplest definition, the multiplier refers to the ripple effect of spending that happens when a manufacturer builds domestically and sources materials domestically as well. When you pay a dollar for goods or services, at least part of that dollar likely will be spent again and again, multiplying economic activity well beyond your initial transaction. Manufacturing is the best generator of the economic multiplier. A study by The Manufacturing Institute, an arm of the National Association of Manufacturers (NAM), found that every dollar in final sales of manufactured products supports $1.40 in output from other sectors of the economy, compared with 55 cents in wholesale trade and 58 cents in retail trade. But to work more effectively for a nation’s economy, the multiplier requires two conditions: Consumers and businesses must spend, and the supply chain of goods, from raw materials to the point of final sale, must be within a nation’s borders.
But here’s the downside. In a recession, the Manufacturing Institute study shows, the manufacturing multiplier works in reverse, as idle capacity and bloated inventories shrink spending and jobs throughout the economy, not just in manufacturing. Likewise, the lure of outsourced jobs and imported goods throws the multiplier off track. Restarting the multiplier cannot be left to chance.
The Supreme Industries Northwest division pledged to shrink its supply chain to a relatively small radius of the Woodburn plant if local suppliers could at least match the so-called landed cost of parts, including per-unit costs and freight costs, compared with more distant sources. Supreme Industries, which reported 2008 sales of $268.7 million, uses the local supplier approach at other operations in the United States, but the impact in Oregon is especially noteworthy at a time when suppliers to regional truck and recreational vehicle makers are suffering. With more than 300 distinct parts going into the shuttle buses, “we are helping the Oregon suppliers keep working,” Supreme CEO Wilson says.
It would be wrong to romanticize this idea during a recession and a long-running decline in North American manufacturing jobs. “I would prefer to buy in front of my door, but it’s not always possible,” says Mario Forgues, director of corporate procurement and external partnerships for Levis, Quebec-based Teknion Roy & Breton Inc., a unit of privately held office furniture maker Teknion Corp., based in Toronto. “We have to go where it is possible, and sometimes it’s possible at 100 kilometers or 10,000 kilometers. We buy where the best opportunity is, and the market is the world now.” If he doesn’t obtain the best all-in cost for parts, his competitors will, Forgues adds.
Still, the simple power of the multiplier as a business tool and job creator deserves more attention. In recent years, the long-term benefits of a deep, flexible domestic supply chain employing a skilled workforce at home have not been as popular as chasing cheap labor abroad. The economic multiplier pump needs to be primed in North America by North American companies to quicken the recovery from recession.
This won’t be easy. Despite lip service to the idea among manufacturers, the greatest champions of the multiplier effect are politicians and government policymakers. The effect is most often touted in promoting spending and domestic content regulations. In other words, politics long ago captured the multiplier as a publicity gimmick.
In public policy circles, the multiplier lies at the heart of Keynesian economics, named for 20th century British economist John Maynard Keynes, who promoted the idea of government spending to correct recessionary business cycles. Keynes, who is not the favorite economist in business circles, never described or advocated a fiscal multiplier, but the idea fit easily into his principles. “It was a Keynesian concept for the development of fiscal policy,” said Cliff Waldman, an economist at Manufacturers Alliance (MAPI), a Virginia-based trade group for major manufacturers.
“We have what economists call the multiplier,” White House economic adviser Lawrence Summers told NBC’s “Meet the Press” in January 2009. “When the government spends a dollar creating a job, that person has higher income; because they have higher income, they’re able to spend more, that creates other jobs down the road.”
Obviously, the process that Summers describes applies as well to private sector spending. In recent years, innovators of business logistics and supply chain management systems have embraced a broader concept of the multiplier. Smart supply chains multiply economic value at each stage by cutting transportation costs and delivery times, increasing shop floor flexibility, reducing inventories and improving business-to-business communication.
Economist Waldman notes another aspect of the multiplier: “Manufacturing tends to be a very innovative sector. They are creating new technologies and new processes that are going to have unimaginable implications for the creation of new firms.” Joel Popkin, a Washington, D.C.-based economic consultant with Joel Popkin and Co., agrees. “The ability to conduct R&D is known to be facilitated by proximity,” he said.
An increasing number of companies “are fairly smart about this,” although they don’t want to be seen turning away from their business partners overseas, says Tom Mentzer, a former General Motors Corp. plant engineer who is now an authority on supply chain management at the University of Tennessee’s Department of Marketing and Logistics. “What are the total costs to get it to Wichita, to the final customer point? Are there some things we ought to be making in Asia and some things we ought to be making in Wichita?
“You’re getting a lot of companies that are saying offshoring is a good idea, but it’s not a panacea,” Mentzer says. “If I spend money, I’m creating income wealth for other people. If I move those jobs overseas, I move more than just the manufacturing jobs. I create jobs for people working on ocean-going ships. That’s a good thing, but they are not Americans. I create jobs for people who do the local logistics in China to get the product to the port. You’ve taken more than just the one manufacturing job.”
Economists debate the size and composition of the manufacturing multiplier within a nation’s borders. But they agree on its power to jump start and sustain an economic rebound.
“If the additional income put into consumers’ wallets through stimulative policies is saved rather than spent, it will generate little extra demand and bring few resources into production,” said Peter R. Orszag, director of the White House Office of Management and Budget, in congressional testimony in January 2008. “The degree of stimulus that a policy can provide to the economy also depends on how much of the resultant spending goes to purchase domestically produced goods. If the additional consumption or investment demand is satisfied by imported goods, the income of foreign producers will rise, and the stimulus essentially will be exported.”
You don’t have to be an economist to see the result of domestic spending. Fred Ballowe, vice president and general manager of Supreme’s operations in Woodburn, points to a steel entry door frame for his shuttle buses. Dollars spent to fabricate and install each frame are spent in his plant as salaries, operating expenses and capital investment for shearing, forming and welding steel. Additional dollars go to local steel suppliers in Oregon, including American Steel in Canby, Oregon, a unit of Reliance Steel & Aluminum Co., Farwest Steel Corp. of Eugene, Oregon, and Oregon Metal Slitters Inc. of Portland. Advantage Powder Coating, of Turner, coats the assembly. Final installation onto the bus chassis is performed at Supreme’s plant. Each supplier, in turn, spends a portion of its income from Supreme for labor, operating expenses and materials and capital.
Metals service center American Steel has been a supplier to Supreme for several years, and it’s hard to quantify how many jobs have been saved as a result of Supreme’s decision to substitute bus-making for more depressed truck-making, says Nicole Heater, general manager of American Steel’s Canby facility. But “it’s been good business. Maybe they haven’t fallen off the way other people have, which is a big help for sure. If they had not diversified and done something, who knows if they would be there. At least they’re still going. Any work is helpful at this point. We got hit pretty hard in the Northwest.”
Haircut or Scissors?
Another piece of the multiplier puzzle in fiscal policy concerns whether stimulus money spent on tangible, manufactured goods generates a faster, larger multiplier than money spent on intangible services. If you were interested in helping the U.S. economy recover from recession, would you contribute more by paying $20 to get a haircut or by buying new pair of scissors?
That’s a complicated question. Economic data and analysis are sorely lacking on this subject. One reason for the dearth of research is that the distinction between services and tangible goods manufacturing is fading. “It’s like pitting the heart against the kidneys,” says economist Waldman. “The economy is a remarkably integrated machine and getting more so all the time with technology and globalization. It’s getting harder to decide which sector does what and every sector is becoming more important to every other sector.”
Improving inventory management, maximizing quality, expediting delivery times, integrating suppliers, advising on green technologies—these and other value-added functions performed by manufacturers and distributors are services, not traditional fabrication and conveyance of hard goods. Services represent an increasing share of income in the manufacturing sector.
“The future of manufacturing will move more toward services,” says David Bourne, director of the Rapid Manufacturing Lab at Carnegie Mellon University in Pittsburgh, Pennsylvania. The greatest driver of service work in manufacturing concerns quality improvement and inventory reduction, he says. “No one wants inventory. We’re still making things. We still need aluminum. But manufacturing will look more like a service industry because it will become the process of building something to satisfy the customer’s immediate need. The implication of this is that very little will be built for future sale [inventory], and at the same time huge demands will be placed on the rapid production of products [almost immediately] after an order has been placed.”
Nonetheless, the idea that spending in the manufacturing sector creates a greater economic multiplier than spending in the service sector seems logical, for one reason: The chain of commerce in manufacturing normally is longer, with more transactions along the way. At the margin, the next haircut to be performed by your barber does not, by itself, induce him or her to spend any of the $20 you handed over. But your purchase of a $20 pair of scissors immediately generates demand down the line for metal, scissor blade fabrication, fasteners, grip cushions, assembly and packaging to enable the retailer to restock the scissor display.
The Washington, D.C.-based Economic Policy Institute (EPI), which in a 2003 working paper attempted to measure the multiplier effect using government data, detected the potential of the manufacturing sector to create jobs. “Employment multipliers are much higher in manufacturing industries than in the rest of the economy,” concluded EPI economist Josh Bivens. “Each 100 jobs in manufacturing supports 291 jobs elsewhere in the economy, compared to 154 jobs in business services and 88 jobs in retail trade.”
The numbers were even higher in durable goods manufacturing—372 spin-off jobs from each 100 manufacturing jobs. Looking at it from the negative viewpoint, Bivens said, “one can surmise that job loss in durable manufacturing would have larger ripple effects throughout the larger economy than similar job loss in business services.…Manufacturing industries across the board support more secondary employment than the retail trade or business and personal service sector.”
But Bivens’ analysis contains a giant caveat that helps explain why the manufacturing story has been hard to sell in the political arena. It may be true that 100 jobs in manufacturing multiply to a greater number of jobs in the economy than 100 service jobs. But creating those 100 manufacturing jobs is far more expensive than generating 100 service jobs, especially when manufacturers’ inventories are frozen by weak demand during a recession. An inventory that isn’t moving generates no multiplier, except for the bankers who finance it. Furthermore, manufacturing entails greater capital costs and, often, higher wages than service-sector enterprises. As a result, the manufacturing multiplier deflates versus service activities when viewed in terms of dollars of sales.
“Any given amount of final sales manufacturing generates fewer jobs than an equivalent amount spent in other sectors,” he said. “This is only true because of the high wages and high capital requirements in manufacturing.”
Given this premise, it’s not surprising that fiscal stimulus dollars would be directed to lower-cost job creation—even the proverbial make-work jobs cleaning streets—instead of manufacturing, where capital costs and unsold inventories impede a short-term multiplier payoff. Even if President Obama himself wrote a check to a manufacturer sitting on bulging inventory and a thin order book, the short-term economic multiplier would be minimal.
Assuming that government spending yields countercyclical benefits when private spending disappears in a recession, the cheapest solutions include saving public service-sector jobs in education, law enforcement or health care. Such spending, which comprised the initial phase of the Obama administration’s stimulus program, pleases local politicians, to be sure. More to the point, investments to build a school and train a teacher facing a layoff already have been made. There are never any excess inventories of knowledge, safety and public health. As a result, saving a teacher, police or nursing job is virtually costless. And such service jobs are unlikely to be sent offshore as cogs in global trade.
“The quintessential non-tradable good is a personal service,” says economics professor Kenneth Kuttner at Williams College in Williamstown, Massachusetts. “Your barber is looking better as a contributor to the economic multiplier, unless you get your hair cut in London,” he says.
But all is not lost. Knowing that success breeds success, the ability of North American manufacturers to demonstrate the sustainable bottom-line benefits of the economic multiplier is drawing strength from at least three related sources.
First, not all current government stimulus spending and tax benefits are aimed at the public service sector. According to the White House, more than half of the $787 billion stimulus package remained to be allocated as 2009 ended. President Obama has pledged that the targets of later tranches of the stimulus will include infrastructure spending needed to upgrade domestic supply chains. On a per capita basis, Canada’s fiscal stimulus for 2009 and 2010 is among the largest in the industrialized world, notes Jean-Michel Laurin, vice president for global business policy at Canadian Manufacturers & Exporters (CME). The national government pledged more than C$51 billion, including matching funds from provinces and municipalities, for 2009 and 2010. Of that amount, nearly C$21 billion, or 40%, was earmarked for infrastructure projects in Canada’s “Economic Action Plan,” says the Canada Department of Finance.
Where construction contractors see bridges and tunnels, domestic manufacturers see a more efficient supply chain, expediting the delivery of high value-added products to domestic industries, retailers and seaports. Warren Buffett’s $44-billion deal, through Berkshire Hathaway Inc., to purchase Burlington Northern Santa Fe Corp. put a spotlight on the opportunities in the domestic supply chain infrastructure. When announcing the deal in November, Buffett said: “Our country’s future depends on its having an efficient and well maintained rail system. …It’s an all-in wager on the economic future of the United States. I love these bets.”
The multiplier impact of infrastructure spending has even made it into media conversations about the recession. Speaking on MSNBC’s “Hardball with Chris Matthews” in October, stock market commentator Jim Cramer focused his legendary zeal on the multiplier effect. “We are not seeing the real money trickle down into the construction jobs that really end up being much larger job creators than the teacher jobs,” he said. “When you create those infrastructure jobs, you don’t only start there, you create multiple jobs away from that….I’m very conscious of how great teachers are, but the teacher multiple of job is not nearly as great as if you’re going to rebuild a bridge or build a tunnel.”
Second, the debate over local content regulations remains unsettled, to say the least. But local content mandates, despite their compliance and enforcement costs, can work during a recession to save underutilized domestic manufacturing capacity from permanent abandonment. If it’s cheap to save a teaching job, it’s also smart to save a manufacturing job and the existing capital investment that stands behind it, because of the long-run multiplier effect of manufacturing jobs.
Third, innovation in small-batch, customized manufacturing and green manufacturing favors close-knit knowledge transfer networks, often centered at universities, as well as shorter transportation systems. These trends reflect the power of long-term business thinking, not short-term government spending. In the best of all possible outcomes, North American manufacturers will become more sustainable and valuable partners in local communities, a role that reflects the rich history of American manufacturing and guarantees a robust multiplier effect for jobs and spending. Supreme Industries’ new shuttle bus plant in Woodburn, Oregon, illustrates the point.
For its truck production in Woodburn, Supreme had shipped in a greater percentage of raw materials, including steel and aluminum as well as fabricated parts from Midwest plants, especially its Goshen, Indiana, headquarters, says Fred Ballowe at Supreme Northwest. Goshen may be nearly 2,500 miles from Woodburn, but “you can buy a lot of these materials at a better price in the Midwest, where there is more traditional manufacturing,” he said. “The price point is totally different.”
With the aid of local development officials, Supreme took another look. The catalyst of federal government stimulus dollars in Oregon didn’t hurt. “That became a part of the success aspect,” Ballowe said. “People want the jobs to be secure locally. That’s the incentive.”
But the stimulus program didn’t exist nearly two years ago when Supreme first began planning its production shift to shuttle buses in Woodburn. “There’s another side of that,” Ballowe said. “You can maintain lower inventory levels if can you purchase locally. If you’ve got to add in a week and a half or two-week travel on a trailer from the Midwest to the Pacific Northwest, that inventory is going to ride on you for that transportation time. You have to hold a higher level of inventory than you would if you bought it locally. It’s in all of our best interests if we can find it locally.”
The multiplier impact of Supreme’s local content pledge was evident immediately, says Nick Harville, retention and expansion manager for the Strategic Economic Development Corp. (SEDCOR), a regional economic development enterprise based in Salem, Oregon.
“I worked with Fred Ballowe,” Harville says. “He gave me his parts list, the actual drawings and the specs for the parts. I took them to all the metal manufacturers and job shops that are members [of SEDCOR] and said, ‘here are the parts they need made; what can you do and can you be competitive with Goshen or wherever?’”
In addition to American Steel, Farwest Steel, Oregon Metal Slitters and Advantage Powder Coating, companies that answered the call were Miles Fiberglass & Composites of Portland; Pacific Metal of Tualatin, a subsidiary of Reliance Steel & Aluminum Co.; and a Portland-based metals service center owned by Ryerson, Inc. In the case of Miles Fiberglass & Composites, Supreme brought its side, roof, front cap and transition molds from Goshen and handed them to the company, which was suffering from a recession-induced decline in recreational vehicle sales, Ballowe says.
There was no government cash for clunkers program for RVs, but dollars spent on municipal shuttle buses multiplied into jobs at RV parts suppliers in the Northwest, Harville said. “Buy American” regulations and local content rules played no role. Supreme’s operations in the Midwest remain in place, but manufacturing capacity in the Northwest is better utilized. Among the suppliers receiving a boost are several companies that supply the Dallas, Oregon, plant of Forest River, Inc., a Berkshire Hathaway-owned recreational vehicle maker.
“There’s definitely a multiplier effect,” says Kathy Figley, mayor of Woodburn. She notes that the Supreme bus relocation decision was business, not politics. “Sometimes, you have to go out of your way to cajole and persuade,” she said. With Supreme “we really had very little of that. Sometimes the best thing [a mayor] can do is say ‘welcome’ and then get out of the way.”
Local Content for Defense
An even greater incentive for local content exists in the world of North American defense and domestic security contracting, where stringent regulations come under such daunting labels as International Traffic in Arms Regulations (ITAR), the Customs-Trade Partnership Against Terrorism and Partners in Protection. Because of the sensitive nature of its work, defense contracting is an ideal incubator for the economic multiplier. Its lessons can be applied broadly among manufacturers that do not face similar mandates.
The ITAR regulation in effect in defense manufacturing in the United States and Canada reflect both economic conditions and security concerns, says Howard Nash, president of Northstar Network Ltd., a subsidiary of Vancouver-based defense contractor Northstar Electronics Inc., which posted 2008 sales of $2.25 million. Northstar Network is based in St. John’s, the capital city of the Canadian province of Newfoundland and Labrador.
Talk about local content. Under U.S. defense and domestic security contracting regulations, only individuals born in Canada are automatically permitted to work on U.S. subcontracts in Canada, Nash says. Workers born outside Canada must be named on the Manufacturing License Agreement (MLA) in place with the U.S. company and filed with the U.S. government. Even in that circumstance, there is a list of countries that are excluded totally, so individuals from these countries must be segregated from the work being performed in the factory and from having access to any of the drawings, tooling or anything else required to perform the contract.
“All the way up and down the supply chain, any of these employees might have come to Canada when they were babies, but they would not be allowed to work on any of the programs we are running without adhering to ITAR regulations,” Nash said. “We have to go to the human relations departments of all of the companies in our supply chain and determine who they have working on the floor, in the drafting department, et cetera to ensure there are no ITAR staffing violations. It means you’ve got to have a much tighter rein on your supply chain.”
International defense contractors seeking bids from the Canadian government are also subject to the nation’s Industrial Regional Benefits (IRB) Policy, which requires them to “make investments in advanced technology sectors of the Canadian economy in an amount equal to the contract value. The investments can either be directly related to the procured item, or indirectly related to it,” says a September 2009 statement from Industry Canada, the government agency that will be enforcing IRB policies.
Such mandates complicate manufacturing and collide with free-market sensibilities. But they act as catalysts and models for smarter manufacturing supply chains and a sustainable economic multiplier effect, regardless of the size of the businesses involved.
“I’ve got a select group of precision machine shops, sheet metal fabricators, composite facilities, electronics contracts manufacturers and software people included on our team. I’ve got about six companies in each grouping located in Eastern Canada, thus we have an almost limitless supply chain,” Nash says. Recently, Northstar’s major original equipment manufacturer (OEM) customer asked the company to apply its business model to Western Canada, to support them in dealing with Canada’s Western Regional Industrial Benefits requirements. As a result, Northstar has started expanding into the Winnipeg and Edmonton areas in Western Canada.
Other benefits emerge, including “the guarantee of being able to get priority treatment in our shops anytime they want,” Nash says. “The tier ones and OEMs know that we deliver cost-effective solutions and quality products with on-time delivery. In the quoting process, we are prepared to give a full breakdown of our raw material costs, our overheads, our labor rates, and so on. It is rare that we lose a contract on pricing and once we have a customer doing business with us they usually stay.”
“The Northstar Systems integration and supply chain management approach can be applied anywhere in the world where there is a cluster of small- to medium-sized businesses feeding into the larger OEM’s supply chain,” at the arrangement,” he said. “We have not applied the model in the United States as of yet, but we would if we were to start bidding U.S. contracts directly or through our U.S. partners. The model has proven to be a success in Eastern Canada and I would expect it to be just as effective in the United States.”
Setting aside the carrots and sticks of government procurement and security policies, the key takeaway from supply chain integration is maximizing value creation and agility, says Tom Mentzer of the University of Tennessee.
“It depends on how picky your customer is,” he says. When customers demand fast turnarounds, “it means my supply chain has to be a lot more agile, a lot more visible. I’ve got to know where the inventory is. Powerful supply chain drives costs down.”
Boosting the economic multiplier domestically works in this context, Mentzer says. “Worst-in-class companies say, ‘We can save $1 million in unit cost of product if we make it in Southeast Asia.’ I have companies that have saved $1 million a year in procurement costs and transportation while inventory cost them $5 million more. It doesn’t sound like a good business model to me.”
Economist Waldman says global employment in manufacturing is not a zero-sum game, wherein jobs and economic growth in one country necessarily mean fewer jobs and growth in another. “It could be that I’m working for an American company that expands in China and is going to get bigger and richer and innovate more products. It is found that the United States was smart to let those competitive countries into the game. More and more U.S. companies are coming to these countries for market potential. Labor costs are a driver, but they are going to the back of the bus as a driver.”
Demand for so-called green technologies is another prompt for hitting the multiplier accelerator, if only because more intimate sourcing reduces the carbon footprint of a manufacturing business, Mentzer says. “As green becomes more important, domestic supply chains by default are going to become more important.”
The Keynesian multiplier needs to be rescued from economic textbooks and political debates. Its benefits to job and wealth creation as well as to the environment need to be explored in the real world.