Resurrecting America’s Resurrecting America’s Manufacturing Manufacturing

DominanceDominance

2

BenchmarkingWhy Benchmark?

1. Good decisions begin with good information

2. What’s the standard? Speculate about own performance.

Identify best practices.

Performance gap.

Credible, objective insight.

3. Identify strengths & weaknesses

3

SMI Annual Market Summary Sales Size Category

<$4 Mil, $4-7, $7-12, $12-20, $20+

Range of Common Experience Lower Quartile Upper Quartile

Trend Data – 5 years

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Financial Performance Return On Investment Product/Customer Profile Income Statement Balance Sheet Financial Ratios Asset Productivity Employee Productivity

5

Changes in World Commerce Collapse of the Soviet Union – 1991

2 billion more people practicing capitalism

Globalization Removed barriers to economic competition

Asia Low wage, high-skilled workers

I.T. revolution PC’s, Internet, Software Cheap/Mobile connectivity, Cloud computing

World energy consumption How to manage it

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Hyper-connected world Source everywhere

Manufacture everywhere

Sell everywhere

Create new jobs with greater ease & less money

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Changes in U.S. Economic growth

Technological innovation

Social/Economic mobility

Budget deficits

8

U.S. Prosperity depends on… How well you analyze & apply all the data

pouring through networks.

Your ability to provide better… Health care Education E-commerce Innovation Customer service

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Education Computers/robots make an educated person

more productive

Less-educated workers are less-employable

Everyone needs a post-secondary education

Start preparing for vocational track or college track in high school

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Job Killers Automation

Outsourcing – for lower labor costs

Efficiencies of process

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Shift in Core Values1. Long-term investment => Instant gratification

Sustainable values vs. Situational values

2. Question authority; lack of confidence in leaders Americans have little confidence in virtually every

institution Politics, science, teachers, religion, government, The Man

3. Weakening of our sense of shared national purpose Partisan politics Liberals vs. Conservatives, rather than Americans

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Mind-sets

Think like an immigrant View that nothing is owed you. You have to make it your own.

Think like an artisan Make things or provide services with a distinctive

touch & flair, personal pride. Willing to put your initials on it.

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Pervading Work Beliefs ofOlder Generations A job is what you are.

I remember when…

Good things come…

If your hands aren’t moving…

We have to have a system.

All this technology will never overcome the value of hard work.

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Pervading Work Beliefs ofYounger Generations A job is a contract, not a calling.

Focus on the outcome.

Balance is more important.

Training/knowledge = versatility

Management should be partners with employees.

Life is too short to pay dues.

Resurrecting Resurrecting ManufacturingManufacturing

There are no problems,only opportunities

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U.S. Productivity –U.S. Productivity – 2010 China $1 trillion plus in manufactured goods

U.S. $1 trillion minus

China 100 million factory workers

U.S. 11.5 million workers

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Reasons for productivityReasons for productivity More advanced machines, robots, and software

Greater valued added

U.S. worker can earn more than a Chinese worker.

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SMI Performance OverviewSMI Performance Overview

2007 2008 2009 2010 2011 2012Participants 60 57 48 55 59 62

Revenue $6.7 $7.9 $5.6 $7.6 $8.6 $9.0

Growth 3.1% 2.3% -21.6% 22.8% 11.5% 7.2%

Gross Margin 25.9% 28.3% 26.2% 28.6% 25.9% 25.6%

Profit Margin 4.7% 5.8% 1.5% 5.9% 5.3% 5.9%

ROA 9.4% 11.6% 2.5% 11.2% 10.1% 10.6%

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Profit Margin = Profit/SalesProfit Margin = Profit/Sales

Profit Margin

1.53.4 4.1 4.6 4.7

5.8

1.5

5.9 5.3 5.9

11.0 10.99.6

14.115.9 15.2

11.0

17.3

13.6 13.4

0.0

5.0

10.0

15.0

20.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Median High Profit

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Factors For SuccessFactors For SuccessFactors For Success 1st 3rd HighIncome Statement Quartile Typical Quartile ProfitSales Growth 0.5% 7.2% 18.4% 7.3%Gross Margin 17.4% 25.6% 30.9% 30.9%S,G&A Expenses 23.2% 19.2% 9.8% 17.4%Interest Expense 0.0% 0.5% 1.0% 0.2%Sales Per Employee $138,095 $166,724 $209,699 $173,763Balance Sheet FactorsAvg. Collection Period 35.0 42.8 52.2 44.5Inventory Turnover 4.2 6.3 8.3 7.3Sales to Fixed Assets 3.3 5.4 10.0 6.8Strategic Profit ModelProfit Margin 3.8% 5.9% 13.6% 13.4%Asset Turnover 1.6 1.8 2.8 2.3Return On Assets 10.2% 10.6% 28.3% 30.8%Financial Leverage 1.4 1.6 3.0 1.3Return On Net Worth 27.3% 17.0% 52.7% 40.0%

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Sales GrowthSales Growth

Sales Growth

-1.6

13.75.1 4.6 3.1 2.3

-21.6

22.8

11.5-2.9

22.1

9.5 8.7 4.9 1.4

-20.5

29.7

11.97.2

7.3

-30.0

-15.0

0.0

15.0

30.0

45.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Median High Profit

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Margin & S,G&A TrendsMargin & S,G&A Trends

Gross Margin and S,G&A Expenses

27.1 27.024.9 25.9 25.9

28.326.2

28.625.9 25.6

24.722.9

20.0 20.0 19.9 21.524.1

22.220.0 19.2

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Gross Margin S,G&A Expenses

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Gross Margin TrendsGross Margin Trends

Gross Margin

27.1 27.024.9 25.9 25.9

28.326.2

28.625.9 25.6

30.3

36.7

31.233.4

38.7

32.3

27.8

31.9 32.730.9

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Median High Profit

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COGS TrendsCOGS Trends

Cost of Goods Sold Components

28.830.8

33.0 32.2 32.7

37.8

29.327.2 27.9 26.2 26.3

23.7

14.8 15.0 14.2 14.0 14.111.6

15.412.4 12.6 13.3

33.1 31.834.8

37.2

27.0 28.225.3 23.9

0.05.0

10.0

15.020.025.030.0

35.040.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Material Costs Labor Costs Other COGS

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Direct Material CostsDirect Material Costs

Direct Materials

28.830.8

33.0 32.2

37.8

26.9 25.028.9 30.7

33.632.737.2

34.831.833.1 34.9

37.8

32.9

27.427.6

0.05.0

10.015.020.0

25.030.0

35.040.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Median High Profit

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Plant Labor CostsPlant Labor Costs

Labor Costs

27.2 27.926.3

23.7

25.9 27.1

22.2 23.4

26.229.3

27.0 28.225.3

23.9

26.6

30.5

26.7

23.221.0 21.6

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Median High Profit

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S,G&A TrendsS,G&A Trends

S, G&A Expenses

24.7

20.0 20.0

18.7 19.2 18.819.9

22.9

22.221.5

20.0

19.2

24.125.2

21.7

14.6

17.1

21.1

17.416.8

10.0

15.0

20.0

25.0

30.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Median High Profit

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Productivity ResultsProductivity Results China

Mass-produced, low-value goods Low-paying, low-skilled jobs

U.S. manufacturing High-paying, high-productivity Aircraft, medical equipment, scientific

equipment, control systems, specialized industrial machinery, chemicals

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For greater productivityFor greater productivity More sophisticated machines

Operated by higher-skilled workers

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Sales to Fixed Assets TrendSales to Fixed Assets Trend

Sales to Fixed Assets

3.5

4.5

5.4 5.7 5.4 5.44.2

5.7

7.5 7.6

5.9

6.8

5.3 5.0 5.24.6

7.07.4

6.8

5.6

0.0

2.0

4.0

6.0

8.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Median High Profit

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Sales Per Employee TrendSales Per Employee Trend

Sales Per Employee

$0

$100,000

$200,000

$300,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Median High Profit

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Sales Per Direct EmployeeSales Per Direct Employee

Sales Per Direct Employee

$0

$100,000

$200,000

$300,000

$400,000

2005 2006 2007 2008 2009 2010 2011 2012

Median High Profit

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21st Century Jobs Strategy21st Century Jobs Strategy Productive workforce Advance Internet bandwidth Openness to talent from anywhere Generous R&D funding Role of law, patent protection, and investment Manufacturing tax code superior to any other

country Hospitable to innovation and entrepreneurship

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The American Dream

Affluence

Work hard = rise in material circumstances

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ExceptionalismExceptionalism What makes America special

Wealth Power Economic opportunity for its citizens Example of liberty and prosperity

Hope in the American Dream Youth Openness Dynamism Best minds in the world Enormous human capital The deepest capital markets Unparalleled institutions of innovation A market no global business can ignore

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The Strategic Profit Model:The Strategic Profit Model:A Valuable Management ToolA Valuable Management Tool

Profit Margin

1Return On

Profit AssetsNet Sales

x = ROAAsset Turnover Return On

Profit Net Worth2 Total Assets

x = RONWNet Sales Financial Leverage

Total Assets Profit3 Net Worth

Total AssetsNet Worth

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Profit MarginProfit MarginProfit Margin

$531.0÷ = 5.9%

$9,000.0 Return OnProfit Assets

Net Sales

x =Asset Turnover Return On

Profit Net WorthTotal Assets

x =Net Sales Financial Leverage

Total Assets ProfitNet Worth

Total AssetsNet Worth

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Profit Margin TrendProfit Margin Trend

Profit Margin

1.53.4 4.1 4.6 4.7

5.8

1.5

5.9 5.3 5.9

11.0 10.99.6

14.115.9 15.2

11.0

17.3

13.6 13.4

0.0

5.0

10.0

15.0

20.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Median High Profit

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Asset TurnoverAsset TurnoverProfit Margin

$531.0÷ = 5.9%

$9,000.0 Return OnProfit Assets

Net Sales

x =Asset Turnover Return On

$9,000.0 Profit Net Worth÷ = 1.8 Total Assets

$5,000.0 x =$1.80 Net Sales Financial Leverage$1.00 Total Assets Profit

Net Worth

Total AssetsNet Worth

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Asset Turnover TrendAsset Turnover Trend

Asset Turnover

1.6 1.8 1.9 1.9 2.01.7 1.9 1.9 1.8

1.9 1.9

2.92.5

2.2

1.7

2.21.9

2.32.0

2.1

0.0

2.0

4.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Median High Profit

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Return On AssetsReturn On AssetsProfit Margin

$531.0÷ = 5.9%

$9,000.0 Return OnProfit Assets

Net Sales $531.0

x = ÷ = 10.6%Asset Turnover $5,000.0 Return On

$9,000.0 Profit Net Worth÷ = 1.8 Total Assets

$5,000.0 x =$1.80 Net Sales Financial Leverage$1.00 Total Assets Profit

Net Worth

Total AssetsNet Worth

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ROA TrendROA Trend

Return On Assets

2.46.1 7.8 8.7 9.4 11.6

2.5

11.2 10.1 10.6

20.9 20.7

27.8

35.2 33.4 33.4

18.7

38.1

25.830.8

0.05.0

10.015.020.025.030.035.040.045.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Median High Profit

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Financial LeverageFinancial LeverageProfit Margin

$531.0÷ = 5.9%

$9,000.0 Return OnProfit Assets

Net Sales $531.0

x = ÷ = 10.6%Asset Turnover $5,000.0 Return On

$9,000.0 Profit Net Worth÷ = 1.8 Total Assets

$5,000.0 x =$1.80 Net Sales Financial Leverage$1.00 Total Assets $5,000.0 Profit

÷ = 1.6 Net Worth$3,200.0

$1.56 Total Assets$1.00 Owner Equity$0.56 Outsiders

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Leverage TrendLeverage Trend

Financial Leverage1.7

1.51.7

1.6 1.61.4 1.4

1.6 1.6

1.4 1.41.3

1.51.4

1.31.4 1.4

1.3

1.7

1.4

0.0

1.0

2.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Median High Profit

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Return On Net WorthReturn On Net WorthProfit Margin

$531.0÷ = 5.9%

$9,000.0 Return OnProfit Assets

Net Sales $531.0x = ÷ = 10.6%

Asset Turnover $5,000.0 Return On$9,000.0 Profit Net Worth

÷ = 1.8 Total Assets $531.0$5,000.0 x = ÷ = 16.6%

$1.80 Net Sales Financial Leverage $3,200.0$1.00 Total Assets $5,000.0 Profit

÷ = 1.6 Net Worth$3,200.0

$1.56 Total Assets$1.00 Owner Equity$0.56 Outsiders

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RONW TrendRONW Trend

Return On Net Worth

4.1

10.4 11.714.8

18.6

3.5

15.7 16.2 17.0

29.3 29.0

38.9

45.8 46.8

24.3

36.140.0

15.0

50.1

0.0

25.0

50.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Median High Profit

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Setting Priorities:Setting Priorities:Relative Impact of a 1% ImprovementRelative Impact of a 1% Improvement

The Relative Impact on Profitof a Series of 1% Improvements

Area Of Improvement Profit Increase %

Raise Prices 16.3%

Lower Material Costs 6.3%

Improve Labor Productivity Sales Growth 8.1% Reduce Direct Labor 2.1%

Increase Unit Sales 6.0%

Reduce Genl. & Admin. 2.7%

Accounts Receivable 0.1%

Reduce Inventory 0.3%

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What happened there?Unit

Current Pricing SalesSales ($ 000's)($ 000's) 9,000.0 9,090.0 9,090.0Cost Of Goods SoldDirect Materials 3,348.0 3,348.0 3,381.5Direct Labor 1,125.0 1,125.0 1,136.3Indirect Labor 1,026.0 1,026.0 1,026.0Plant Depreciation 180.0 180.0 180.0Other Factory Costs 1,017.0 1,017.0 1,027.2

Total COGS 6,696.0 6,696.0 6,750.9Gross Margin 2,304.0 2,394.0 2,339.1S, G&A ExpensesSelling Expenses 324.0 327.2 327.2General & Admin. 1,449.0 1,449.0 1,449.0

Total S, G&A 1,773.0 1,776.2 1,776.2Profit ($ 000's) 531.0 617.8 562.9

Increase 16.3% 6.0%

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A Series Of 5% ImprovementsA Series Of 5% ImprovementsHigh

Current ProfitSales ($ 000's)($ 000's) 9,000.0 100.0% 9,900.0 100.0%Cost Of Goods SoldDirect Materials 3,348.0 37.2 3,348.0 33.8Direct Labor 1,125.0 12.5 1,125.0 11.4Indirect Labor 1,026.0 11.4 1,026.0 10.4Plant Depreciation 180.0 2.0 180.0 1.8Other Factory Costs 1,017.0 11.3 1,067.9 10.8

Total COGS 6,696.0 74.4 6,746.9 68.2Gross Margin 2,304.0 25.6 3,153.2 31.9S, G&A ExpensesSelling Expenses 324.0 3.6 356.4 3.6General & Admin. 1,449.0 16.1 1,449.0 14.6

Total S, G&A 1,773.0 19.7 1,805.4 18.2Change in Interest 0.0Profit ($ 000's) 531.0 5.9% 1,347.8 13.6%

A/R 1,250.0 1,250.0Inventory 1,400.0 1,400.0

Increase in Profit $816.8

Profit Margin 5.9% 13.6%

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SMI Benchmarking StudiesSMI Benchmarking Studies

Building on the basics to World Class manufacturing

1)Annual Market Summary – Financial Performance

2)Executive Compensation Report

3)Salaried Employee Compensation & Fringe Mid-level Managers, Administrative, Sales

4)Wage & Fringe Benefits Report Beginning & Experienced hourly wages

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Summary and ConclusionsSummary and Conclusions1. Good decisions begin with good information

2. Assess what is most importanta. Identify strengths & weaknessesb. Speculate about own performancec. Industry standards provide evidence to rethink assumptions

3. Informed Decision-Makinga. Limited resourcesb. Shift resources from historical beliefs

4. Motivate Employeesa. Reinforces good performanceb. Identifies performance below competitors c. Support expenditure decisionsd. Reduce resources with least negative impact

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Who is this guy?John R. Mackay is President of the Mackay Research Group, a research and executive education firm headquartered in Boulder, Colorado. John has been conducting the Annual Market Summary survey for SMI since 2002. Mackay Research Group also conducts the Executive Compensation Survey, the Salary & Fringe Benefit Survey, and the Plant Wage & Fringe Benefit Survey for SMI.

Besides working with SMI, Mackay Research Group conducts financial benchmarking & compensation studies for AMT, NTMA, AGMA and other associations in the Metalworking Manufacturing Coalition.

John received his undergraduate degree from The Ohio State University and his MBA from the University of Colorado.