Enterprise Minnesota Magazine November 2012

RedEye jets into aerospace • Peer Council sparks partnership • HerdStar’s global gains

Helping Manufacturing Enterprises Grow Profitably

November 2012

CliftonLarsenAllen LLP CPA Virginia Harn with Packnet Ltd. Founder and CEO Mike Nyberg

5 Key Priorities Manufacturing

Should Focus on Now

Also: Public and private organizations team up to address manufacturing’s qualified workforce shortage. 12

How to control what you can as political and regulatory changes unfold.

Minnesota-based manufacturers develop leaders at every level to transform their businesses from the inside out. 24

Enterprise Minnesota 310 4th Avenue S. Suite #7050 Minneapolis, MN 55415

www.enterpriseminnesota.org

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American Peat Technology’s newest product could add thousands of mining jobs on Minnesota’s Iron Range. 29

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contents NOVEMBER 2012

Features 12 Greater than the Sum of the Parts

In communities across the state, coordinated efforts to address the qualified workforce shortage are yielding better results than any single manufacturing company or educational institution could create independently.

18 Five Key Priorities Manufacturing Should Focus on Now

How to control what you can as political and regulatory changes unfold.

22 Empowering Leadership

Two Minnesota-based manufacturers develop leaders at every level to transform their cultures and strengthen their businesses from the inside out.

27 No Com(Peat)ition

American Peat Technology pioneers a peat-based solution to sulfate contamination that could add thousands of mining jobs on Minnesota’s Iron Range.

Subscribe to our e-Trends newsletter today! Get updates on the people, companies, and trends that drive Minnesota’s manufacturing community. To subscribe, please visit http://www.enterpriseminnesota.org/Resources/ Magazine-eNewsletter/Subscribe.aspx.

Neil Crocker, president, Schaefer Ventilation Equipment

Visit the Enterprise Minnesota Web site for more details on what’s covered in the magazine at www.enterpriseminnesota.org.

in every issue:

Bob Kill:

Innovations:

Innovations:

Final Word:

Why this year’s national election is a win-win for manufacturers.

Page 2

HerdStar’s inventive livestock solutions reach new international markets.

Page 4

RedEye On Demand jets into the aerospace industry with ISO 9001 and AS9100 certifications.

Page 6

Hands-on, competitive lessons in lean can transform your workforce and your business.

Page 32

ENTERPRISE MINNESOTA NOVEMBER 2012 1

bob kill

Manufacturing’s Win-Win Bob Kill Election Year We don’t need a panel of cable news pundits to realize that America’s manufacturers were among the big winners of the recent national election.

Just look at the political advertising. As the American economy still struggled to regain its economic mojo amid the expensive barrage of negative political advertising this Fall, several savvy politicians – of both parties -- used their campaign messaging to emphasize that the path back to prosperity will be paved principally by manufacturers. That’s why so many of Bob Kill is president and CEO their positive campaign ads featured video footage of them of Enterprise Minnesota. visiting local manufacturing companies.

In Minnesota, two come to mind: Congressman Erik Paulsen used an ad that touted his leadership to successfully beat back a tax on medical manufacturers that might have been devastating to Minnesota’s nation-leading high tech sector. The legislation was supported by the entire Minnesota Congressional delegation.

Another ad, perhaps best among them, was created by the re-election campaign of U.S. Senator Amy Klobuchar. In it, she emphasizes the value of manufacturing. “We can’t be a country anymore that just earns money on Wall Street and shuffles paper,” she said. “We have to be a country that makes stuff again, that invents things, that exports to the world.”

Bravo, Senator. Your ad reminds us all once again that good policy often produces the best politics.

So, it appears that supporting manufacturing might become a non-partisan policy priority for elected officials at every level, from the part-time volunteer members of a town council to the occupant of the Oval Office. They are realizing that people who “make stuff” sit at the crossroads of our whole economy. Manufacturers not only create jobs, they create steady, well-paying jobs that increasingly form the foundation of their local economies. They also help facilitate a huge integrated ecosystem of support industries, from bankers and accountants to transportation, energy, and a wide assortment of American innovators.

If I can offer one bit of advice: Get to know your legislator or, better, make sure your legislator knows you. The Minnesota Legislature’s many new members need to make a personal connection with their local manufacturing enterprises.

A legislator’s visit to your manufacturing floor – especially a new legislator – is an opportunity to transform manufacturing statistics and talking points into living, breathing, flesh-and-blood realities.

Elected officials likely already know the statistics, but they are worth repeating: Manufacturing is the third largest industry in Minnesota, employing almost 300,000 people. Manufacturing employees average $56,328 in annual compensation, 20 percent higher than the average wage for all industries. And if you factor in a multiplier of 1.9, manufacturing accounts for nearly one in every three jobs in Minnesota.

Nothing animates those stats like an in-person tour of your company. Enterprise Minnesota has helped organize hundreds of these meetings. The clean, high-tech processes of your manufacturing operation quickly debunk preconceptions of dark, dirty, boring jobs. Elected officials are impressed by the advanced skill sets required of many manufacturing jobs and genuinely shocked to learn that so many high-paying manufacturing jobs sit unfilled for lack of qualified potential employees.

Elected officials also get another great surprise during their visits to manufacturers.

While most every group in the state will fill its initial visits with an agenda of its legislative “needs and wants,” manufacturers want mostly to be left alone -- to focus on serving their customers with high-quality products and services. In return, manufacturers can promise to do more than anybody to fill Minnesota’s top economic priorities: Jobs.

Jobs. And Jobs.

2 ENTERPRISE MINNESOTA NOVEMBER 2012

Helping Manufacturing Enterprises Grow Profitably Publisher Lynn K. Shelton

Editors Tom Mason tmason@mason-publicaffairs.com Andrea Lahouze andrea@mason-publicaffairs.com

Contributing Writers Virginia Harn Kate Peterson Photographer Patrick Kelly Art Director Amy Bjellos

Contacts To subscribe subscribe@enterpriseminnesota.org To change an address or renew ldapra@enterpriseminnesota.org For back issues ldapra@enterpriseminnesota.org For permission to copy lynn.shelton@enterpriseminnesota.org 612-455-4215 To make event reservations events@enterpriseminnesota.org 612-422-4239 For additional magazines and reprints contact Lynet DaPra at lynet.dapra@enterpriseminnesota.org 612-455-4202 To advertise or sponsor an event jim.schottmuller@enterpriseminnesota.org, 612-455-4225 To pitch a story andrea@mason-publicaffairs.com

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All rights reserved. Reproduction encouraged after obtaining permission from Enterprise Minnesota magazine.

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INNOVATiONS

Smart

Solutions, Global Success HerdStar’s inventive livestock solutions reach new international markets.

Despite the fact that its U.S. customers are this year enduring the deepest agricul-

photograph COURTESY OF Mark Jaeger

tural drought since the 1950s, Mankato-based HerdStar is continuing to enjoy the robust 2530 percent growth that it has notched in each of the past five years.

HerdStar manufactures high-tech solutions to challenges in livestock operations. Each solution is designed for a very specific application, from tracking the amount of feed left in a feed bin, to providing newborn piglets with the correct amount of warmth.

Many of HerdStar’s domestic customers are feeling the effects of the drought-induced spike in U.S. feed prices. But Vice President Mark Jaeger says the company’s doubling of international sales over the past year has helped it to maintain steady and significant growth.

HerdStar’s signature BinTrac® product line digitally and remotely measures and tracks feed bin weight and feed consumption, and can alert HerdStar Vice President Mark Jaeger developed the patented bin legs that form the producers of low feed levels and potential feed basis for HerdStar’s BinTrac® feed bin weighing and monitoring system. line malfunctions preventing feed from being delivered to the animals. Bin legs are equipped The company’s MicroZone™ product is an electronic with patented, screw jack-like brackets that lift bins half an inch to weigh them and immediately send the monitoring system that regulates the temperature of the heat lamps and heat mats that keep piglets warm in fardata to a website.

Jaeger says the system is a safer and more accurate alter- rowing barns. While nature’s way has been for piglets to native to traditional bin weighing and monitoring meth- stay close to their mothers, a 1995 survey of U.S. swine ods, which require lifting bins between six and eight inches management practices conducted by the U.S. Department by crane to place them on a loadcell, or climbing up the of Agriculture shows that the number-one cause of death bins to estimate the amount of feed remaining by sight. among pre-weaned piglets in farrowing barns is being acThe accurate readings prevent “feed out” events, in which cidentally laid on by their mothers. This accounted for feed runs out on weekend days when many feed mills don’t 48.7 percent of all pre-weaned piglet deaths. MicroZone™ deliver, and the animals go hungry. Up the supply chain, creates what Jaeger calls a “micro-environment” for the BinTrac® also helps streamline feed mill delivery schedules piglets, taking into account both the age of the piglets and by providing an accurate gauge of when and how much the surrounding temperature to provide each litter with to deliver to each bin, often enabling them to deliver full the correct amount of warmth.

“Before, producers would just raise the heat lamps manloads to a single site.

4 ENTERPRISE MINNESOTA NOVEMBER 2012

ually as the piglets got older, in order to provide the correct amount of warmth. But our unit regulates the power to those lamps based on the room temperature,” Jaeger explains. “As the piglets grow older, the unit decreases the amount of warmth accordingly.”

Jaeger says producers using the product can expect their heat lamps and mats to require about 30 percent less electricity than they would with manual heat adjustments. Among all their customers, this results in a collective electricity savings of about $2.8 million each year.

HerdStar products have been sold in Argentina, Australia, Canada, Columbia, Ecuador, England, Japan, Mexico, Paraguay, South Africa and the United States. Jaeger says diversification into foreign markets has helped the company avoid volatility in sales when U.S. agriculture takes a hit. Earlier this year, the company also began selling BinTrac® products in South Korea, where sales already exceed 10 percent of its total sales.

Jaeger next hopes to sell into Eastern Europe. To do so, HerdStar’s products must meet requirements for Europe’s CE marking, which is affixed to all European products to indicate compliance with a common set of European safety, environment, health and consumer protection laws. The products’ current UL mark is the U.S. equivalent to Europe’s CE marking, but U.S. product laws differ

“

“Before, producers would just raise the heat lamps manually as the piglets got older, in order to provide the correct amount of warmth. But our unit regulates the power to those lamps based on the room temperature.”

”

Mark Jaeger,

vice president, HerdStar

from those in Europe. Jaeger says this may make meeting CE requirements challenging and costly, particularly if it requires modifying the products themselves. But he remains optimistic: “As a company, our goal is to grow our markets geographically, both domestically and worldwide.

We know this will only help us grow and become more stable.”

To learn more about HerdStar, visit www.bintrac.com and www.herdstar.com.

ENTERPRISE MINNESOTA NOVEMBER 2012 5

INNOVATiONS

Taking Off Between 2010 and 2011, rapid prototyping business RedEye On Demand nearly doubled its sales to the aerospace market. This year, the seven-year-old Eden Prairie-based company anticipates a 25 percent overall sales increase, and is poised for 30-40 percent sales growth in 2013. Continuous Improvement Manager Luanne Eisenschenk attributes much of the company’s accelerating success to its recent ISO 9001:2008 and AS9100 certifications.

“ISO certification allows us to show our customers that we care about our quality and that there is a formal system in place. It’s not really a choice if you want to get into these industries and grow and be competitive. To go above and beyond, we had to do the AS9100 as well,” she says.

As the service division of 3D printer manufacturer Stratasys, RedEye uses Stratasys printers to form customers’ design files into three-dimensional prototypes and end-use parts by extruding thermoplastic material layer by layer and fusing each layer to the one beneath it. Parts vary in size from model trains to wind turbines.

For larger parts, RedEye bonds multiple components together. With more than 75,000 parts produced each year and turnaround times as short as two days, a variety of machines and locations is essential. Its 126 3D printing machines are housed at five facilities around the world, with 79 machines at its headquarters in Eden Prairie, and the other 47 scattered across smaller facilities in Europe, Australia and Turkey.

To standardize quality across companies and nations, ISO published the first family of international quality management standards, called ISO 9000, in 1987.

Today, ISO 9000 standards are recognized as the most widely known standards in the world. Once a rarity, ISO certification is becoming an industry standard among manufacturers selling to the tightly regulated aerospace, defense and medical industries. AS9100 certification takes quality management a step further, focusing on contract reviews and analyzing and minimizing risks when companies are asked to quote a project. RedEye worked with Enterprise Minnesota on both certifications, receiving ISO certification in January 2011 and AS9100 certification in December 2011.

RedEye had always had a few aerospace customers, but Eisenschenk says they were only interested in the company’s prototype capabilities. Its new certifications have piqued the industry’s interest in purchasing enduse components as well. As of August, the company had attracted 123 new customers this year in Minnesota alone.

Eisenschenk says the certifications provide internal 6 ENTERPRISE MINNESOTA NOVEMBER 2012

photograph by PATRICK KELLY

RedEye On Demand jets into the aerospace industry with ISO 9001 and AS9100 certifications.

Continuous Improvement Manager Luanne Eisenschenk holds a product manufactured by one of the company’s 129 Stratasys 3D printers.

benefits, too. ISO 9001’s requirement of written job instructions for each position means fewer opportunities for information to get “lost in translation” and easier transitions for new employees.

“We lost our operations manager. When the new one started, he was able to sit down and see our flow chart and our procedures so he could draw connections and understand how our processes work,” Eisenschenk says.

“The onboarding of new management and of our salespeople is much faster.”

Salespeople also have access to each set of work instructions, which enables them to answer specific customer questions about the company’s production, assembly and finishing processes.

For other companies considering ISO certifications, Eisenschenk recommends forming a project team of leaders from each department, with support in place to free up their time for the project.

“It seems unfair because these people are often the busiest, but they are the drivers in their departments,” she says. “It is so critical to have a group that can stay energized and hit that end goal. These certifications are benefitting our whole company.”

For more information about RedEye On Demand, visit www.redeyeondemand.com.

Northern Exchange

Canadian and Minnesota manufacturers share industry challenges and best practices.

In a lively exchange with Canadian manufacturers last

month, Enterprise Minnesota’s president and CEO Bob Kill found that Minnesota manufacturers share many challenges with our neighbors to the north.

Kill helped kick off a visit by Canadian manufacturers who were in Minnesota to tour six manufacturing facilities in Alexandria and the Twin Cities. Their tour was sponsored by Innovation Insights, a manufacturing best practices exchange program for Canadian industry. The program is delivered by the National Research Council - Industrial Research Assistance Program (NRC-IRAP) and Canadian Manufacturers & Exporters (CME), Canada’s largest trade and industry association. The visitors toured Douglas Machine, Donnelly Custom Manufacturing, Medtronic, 3M Innovation Center, New Flyer and Arctic Cat. Kill used the results of the 2012 State of Manufacturing® poll to show the Canadians in real terms how Minnesota manufacturers temper their overall optimism with concerns regarding the availability of qualified workers. Enterprise Minnesota’s annual State of Manufacturing® poll is a nationally-recognized project that probes Minnesota manufacturing executives’ attitudes, opinions and experiences regarding their own businesses and industry.

The conversation that followed his presentation revealed several commonalities between the two groups.

After one Canadian executive described how Canada’s qualified worker shortage is more acute in welding, machining and engineering and in rural areas, Kill discussed how Minnesota manufacturers have sought out partnerships with both private and public entities to attract and develop a larger pool of qualified talent. When the city of Alexandria built a new high school, he said, manufacturers rallied to have it include advanced manufacturing.

Manufacturers in both countries have worked to dispel the myth that manufacturing jobs are dirty and monotonous by opening their plants to students and parents for tours. One Canadian manufacturer said he starts recruiting potential employees as early as elementary school, to encourage students to pursue relevant classes in high school.

When asked about the rising cost of employee-based health and wellness benefits, Kill said the State of Manufacturing® revealed it is a top concern. “A lot of manufacturers have tried to figure out how to embrace wellness with practical means into the company. Wellness is something companies can invest in to their benefit,” Kill told manufacturers.

The visitors saw technologies and processes in action on plant floors and networked with company employees during their tour. Hosting companies learned from their guests, as well.

“

“The Canadian manufacturers’ visit provided a great exchange of ideas for best continuous improvement practices.”

” RICK PAULSEN,

PRESIDENT AND CEO OF DOUGLAS MACHINE

“The Canadian manufacturers’ visit provided a great exchange of ideas for best continuous improvement practices,” said Rick Paulsen, president and CEO of Douglas Machine in Alexandria.

Paulsen said he especially appreciated the wrap-up session, in which each participant shared both a positive and constructive comment about his company’s operations.

“The feedback was important to our continuous improvement journey,” he said.

Diane de Jong, executive director of Innovations Insights, also felt the exchange was “mutually beneficial” for the Canadian and Minnesotan manufacturers. “Each and every site we visited was world class and offered value-add for all,” she said.

To read more about Innovations Insights in Canada, go to www.innovationsinsights.ca.

ENTERPRISE MINNESOTA NOVEMBER 2012 7

INNOVATiONS

photograph by PATRICK KELLY

Hanson Silo’s Matt Hanson demonstrates how Lakeland Companies’ remote grain pile monitoring system tracks grain temperature to help farmers prevent crop spoilage.

Peer Council Partnership Two Enterprise Minnesota CEO Peer Council members team up to market Lakeland Companies’ new wireless grain monitoring system.

When Lakeland Companies

COO Gregg Phelps joined Enterprise Minnesota’s CEO Peer Council last year, he gained access to candid discussion among manufacturing leaders, a network of trusted advisors, and, unexpectedly, a new business partner. Phelps and fellow peer council member Matt Hanson, president of precast concrete bunker wall manufacturer Hanson Silo, have since joined forces to sell one of Lakeland Companies’ newest products.

The Plymouth Minnesota-based industrial process control systems manufacturer’s Ground Pile Remote Monitoring System consists of several wireless temperature probes driven into several locations throughout grain piles stored in outdoor bunkers. The product is designed to help farmers and grain handlers, who face the ongoing challenge of

8 ENTERPRISE MINNESOTA NOVEMBER 2012

knowing the condition of their grain at all times to maximize profit while minimizing spoilage.

“It might be a good day to sell at Christmas; it might be a good day to sell next June. This product gives you the ability to know the health and condition of your grain well in advance of it becoming a problem, so that you can make better business decisions about when to sell,” Phelps explains.

Lakeland first developed remote monitoring system capabilities to provide railway workers with diagnostic and visual information for snow melters, which are used to melt snow and ice from railroad track switch points. Seeing a broader potential for its remote monitoring capabilities, Lakeland adapted it for the agriculture industry.

The probes monitor temperature in about 40 locations

throughout a large grain pile, then send the data to a secure, cloud-based system where farmers and grain handlers can track the condition of their grain from their computer, iPad or smart phone through a web browser interface.

Any number of ground piles from one to hundreds or even thousands can be monitored from a single location using banking level security. The system also alerts farmers and grain handlers if certain locations in the pile are becoming too warm and are at risk of spoiling or rotting through the Notification System.

Hanson and Phelps met through the CEO Peer Council, one of 11 that Enterprise Minnesota facilitates across the state. Several conversations later, they discovered that Hanson Silo had manufactured the grain bunker for the company conducting Lakeland Companies’ pilot test.

“There was a natural synergy there,” Phelps says.

Hanson agrees. “We have a lot of customers that use corn bunkers and bean bunkers, otherwise known as grain bunkers, and they’re always wondering how long they can leave the commodities in the bunker and still maintain good, healthy grain. They’ll have millions of dollars’ worth of corn in a system, and they won’t really know how it’s doing. With Lakeland’s monitoring product, they can determine whether there is a problem, and if there is, they can isolate exactly where it is within the corn pile,” he says.

While a widespread drought devastated field conditions

“ ”

Innovations

“With Lakeland’s monitoring product, [farmers] can determine whether there is a problem, and if there is, they can isolate exactly where it is within the corn pile.”

Matt Hanson,

president, Hanson Silo Company

across much of the U.S. this year, Phelps says farmers in areas that experienced good crop yields, including Minnesota, have been among the first to install the system as corn has notched record-high prices this year.

“All of a sudden, that million-bushel pile of corn is now worth $8 or $9 million instead of $4 or $5 million, so protecting that pile for a nominal fee makes sense,” Phelps says.

Over time, Phelps expects the product to constitute 10 percent of the company’s annual revenue.

To learn more about The Lakeland Companies and Hanson Silo, go to www.lakelandgrain.com and www.hansonsilo.com.

ENTERPRISE MINNESOTA NOVEMBER 2012 9

INNOVATiONS

Achieving Growth Through Operational Excellence Enterprise Minnesota Business Event speakers Ron Kirscht and Neil Crocker reveal how operational excellence has spurred major growth at their businesses.

Between 1991 and 2012,

10 ENTERPRISE MINNESOTA NOVEMBER 2012

Minnesota. Crocker says the new layout maximizes capacity and efficiency, and has allowed Schaefer to bring its short-run metal product fabrication in-house, a move that has boosted the company’s ontime delivery rate.

Crocker says the company’s commitment to defining and regularly improving upon seven “s’s” has also been essential.

The seven s’s are superordinate goals, structure, strategy, systems, style, skills and staff. Systems Top: Ron Kirscht, president, Donnelly Custom Manufacturing. Bottom: Neil Crocker, president, Schaefer is particularly im- Ventilation Equipment LLC. portant to Schaefer, Crocker says, because it includes a string of regular meetings on topics like sales, problems, and product development that keep employees up to date on the state of the company, and continuously engaged in taking actions to improve it.

Skills are another essential “s” for both the company and its customers. In addition to bringing its short-run metal products fabrication in-house, Schaefer has built upon its exporting skills to grow from an “accidental” to a “strategic” exporter, defining Middle Eastern countries like Egypt and Turkey as its ideal international markets. To serve a wider customer base, the company has recently become trilingual, as well, with English, Spanish and Chinese speaking capabilities.

Schaefer’s organizational efforts and resulting growth have also transformed its style, which Crocker believes will continue to bolster the company’s success. “Schaefer was a very risk-averse company [before]. We’re a bit bolder now, and we take more chances,” he says.

For more information about Donnelly Custom Manufacturing and Schaefer Ventilation Equipment LLC, go to www.donnmfg.com and www.schaeferfan.com.

photographs by PATRICK KELLY

short-run injection molding company Donnelly Custom Manufacturing has soared from $6 to $30 million in annual revenues. And since 2008, industrial ventilation products company Schaefer Ventilation Equipment LLC, which is well-known for its dairy cooling systems, has tripled its sales volume. The secret behind both companies’ sensational success? A comprehensive approach to operational excellence.

At Enterprise Minnesota’s October Business Event, speakers from both companies shared how they have leveraged multiple improvement initiatives into a competitive advantage.

Donnelly’s improvement initiatives have included a mix of training, communication and mistake-proofing. The first step when Donnelly Custom Manufacturing President Ron Kirscht joined the management team in 1991 was to train more workers in proper mold changeover techniques.

At the time, one employee was trained to complete mold changeovers. Today, the company’s many certified mold operators change between 40 and 60 molds per day—more than 15,000 per year. That flexibility has come to define Donnelly and is reflected in its slogan, “How Short Run Is Done.”

Kirscht also hosts daily “war room meetings,” half-hour brainstorms to pinpoint problems that occurred within the past 24 hours. Specific meeting participants are assigned to each identified problem, with the expectation that the corrective action item will be closed within 48 hours. Since April 1, 1997, Donnelly has opened and closed about 6,000 corrective action items.

“Having a problem-solving process that is not top-down that brings a cross-functional team of people together is key,” Kirscht says. “It built pride, and it continuously improves the function of the organization.”

Lean 101 training for every Donnelly employee has also improved processes through more than 100 lean improvement events. Any employee may suggest an improvement.

In addition, Donnelly has taken a proactive approach to problems, “judiciously mistake-proofing” its processes by considering the risk to the customer’s company. The riskier the potential problem, the more the company invests in a solution to avoid it.

Schaefer Ventilation Equipment LLC President Neil Crocker attributes much of Schaefer’s operational excellence to its organizational excellence, which began with a restructured plant layout in partnership with Enterprise

Innovations

Innovations

Photograph courtesy of Baker Tilly Virchow Krause, LLP

with Scott Ebert Position: Partner, Manufacturing and Distribution Services Group, Baker Tilly Virchow Krause, LLP

Questions

Role: Scott Ebert, CPA, is partner-in-charge of the Minneapolis Manufacturing and Distribution Services Group and leader of the firm-wide SEC practice of Baker Tilly Virchow Krause, LLP. Scott has spent his career as a client advisor focused on the manufacturing and distribution sector, and has been a partner with the firm since 1986.

In February, the 2012 State of Manufacturing® poll found that manufacturers were cautiously optimistic about the futures of their companies. What is your sense of their current perspective?

In speaking with clients, it appears that manufacturers were right in their predictions for this year with regard to a gradual increase in the number of jobs and in capital spending for equipment purchases, so I believe that the conservative optimism continues.

Manufacturers appear to be in a holding pattern as they wait to see how the presidential election will affect them.

While concern is typical of any election year, it seems manufacturers are especially curious as to how this year’s election will affect the U.S. economy, specifically as it relates to increased taxes and investments.

In your experience, have you seen an up-tick in offshore business returning to Minnesota?

I have not seen business officially returning to Minnesota quite yet. However, I have spoken directly to many business owners who are considering bringing business back to the state. Many are manufacturers of complex, highly-engineered products, and are considering returning due to challenges with consistent quality and copyright infringement.

is considering a new plant or an expansion, I would advise them to consider how that investment would affect the business if their sales numbers took a 5 percent dip. They should continue to operate with conservative optimism, but be careful not to increase their fixed and overhead costs until “stable” is known.

What should manufacturers consider when it comes to making wise investments?

I think investigating qualifications for government credits and incentives is something that is often overlooked, because many business owners assume they won’t qualify. If you seek out and work with advisors, you may learn that what you do today doesn’t necessarily get you a large credit or incentive, but if you look at what you want to do in the future and plan for it appropriately, then you could get some credits and incentives. For example, many people think that qualifying for an R&D credit requires developing something entirely new, but the qualification requirements are in fact much broader.

There are also many opportunities to qualify for new market credits, investment credits and energy credits. If you are manufacturing a component part for an energy savings product, for instance, you may qualify for an energy credit.

It’s important to explore these possibilities with an advisor, because they can really help you to grow your business.

What advice do you have for manufacturers over the next six months?

It’s important to avoid increasing long-term fixed and overhead costs beyond a stable revenue base. If someone

To learn more about Baker Tilly Virchow Krause, LLP, visit www.bakertilly.com.

ENTERPRISE MINNESOTA NOVEMBER 2012 11

Greater

than the

Sum

of the Parts

By Kate Peterson

12 ENTERPRISE MINNESOTA NOVEMBER 2012

In communities across the state, coordinated efforts to address the qualified workforce shortage are yielding better results than any single manufacturing company or educational institution could create independently.

By now, the stories and data are so familiar to manufacturers they almost seem cliché. In recent decades, the U.S. manufacturing sector was declared dead, interest in manufacturing careers has evaporated, and high schools and technical colleges have lost enrollment in manufacturing-related classes. Local economies have suffered as the growth of manufacturers that generate high-paying jobs with solid benefits has been hampered by the limited pool of talent available.

For many years, manufacturers worked independently to fill the gaps, advertising openings for positions that often went unfilled indefinitely. Or, they tried novel approaches to recruiting and training employees, only to find nearby manufacturing firms luring those newly-minted workers with more generous compensation packages.

While the qualified worker shortage persists, many areas are trying a new approach to the problem. Working collaboratively, manufacturers, educational institutions and government officials are able to dispel myths about manufacturing, promote careers directly to high school students, their teachers and families, and shape programs for training current and future employees. Often, administrators at high schools and technical colleges are taking a lead role, bringing manufacturers together in ways that allow them to act as collaborators in increasing the overall pool of talent, rather than competitors fighting over the same finite group of potential employees.

Joint efforts are helping restore a strong, qualified workforce for individual companies, industries and local economies. They also are capturing the attention of elected officials, who reinforce their efforts by using the bully pulpit to draw attention to the issue and increase interest in manufacturing careers.

For those regions that haven’t yet embraced a cooperative approach, two Minnesota communities offer excellent examples of how working together can produce tangible results.

“

“This summer [teachers and administrators] spent time in our factories, and they are trying to develop curriculum that fits into math and science standards within industrial arts.”

”

Al Sholts,

chief operating officer, Alexandria Industries, on partnering with the Alexandria school district

Bringing long-time experience to a new high school

Sometimes, the most effective collaborative efforts center around a specific project. Consider the Alexandria area in west central Minnesota, for example. The region boasts a thriving contract manufacturing sector, as well as a core of packaging equipment, aluminum extrusion and plastics manufacturers. Still, despite their relatively high profile as economic engines and employers in the community, manufacturers in the Alexandria area face many of the same challenges as other regions when it comes to encouraging promising potential employees to consider manufacturing careers.

Al Sholts is chief operating officer at Alexandria Industries, a contract manufacturer with approximately 380 employees in the Alexandria area. “There aren’t enough machinists, for example, but we also need people in mechatronics, machine building, machine assembly and engineering,” Sholts says.

In recent years, the high school programs that give students exposure to the manufacturing field have faced diminishing interest, Sholts says. Even in Alexandria, where the broad base of manufacturers is widely recognized as a key component of the area’s economy, Sholts says high school students and their families need to be educated about opportunities in manufacturing. “So we’ve been working to reach out to students, parents and grandparents, who don’t always understand the state of manufacturing in the U.S.,” he says.

Alexandria Technical and Community College President Kevin Kopischke says manufacturers in the area have cooperated on broad issues for decades. In recent years, the group has been involved in career fairs and open houses, but collaboration between manufacturers and educators got a huge boost last fall when local taxpayers approved a new high school building, which will open in the fall of 2014. Because of their history of working together, members of the group were well-positioned to assist with the school.

Over the last year, a group of manufacturers and educators, including the administrators from School District 206 and the technical college, has gathered to discuss the creation of a high-profile industrial program at the new high school. “We are working with them on designing space, labs, location, and in some cases, helping add new curriculum,” Sholts says. “They were very wise. By having everybody involved, the space will truly reflect manufacturing today.”

In the curriculum discussion, the teachers have been very open to the manufacturers’ input, adds Sholts. “This summer they spent time in our factories, and they are tryENTERPRISE MINNESOTA NOVEMBER 2012 13

ing to develop curriculum that fits into math and science standards within industrial arts,” he says. “These teachers and administrators have just been awesome to work with.”

The manufacturing group also worked with school officials to encourage the inclusion of a high-visibility location for the industrial center. In the center of the new high school, the lab is ideally situated for exposure both during the school day and at after-school events that take

14 ENTERPRISE MINNESOTA NOVEMBER 2012

place in the auditorium down the main corridor from the industrial area, Sholts explains.

Successes like the high school project increase the group’s credibility and visibility, which enhances the manufacturing sector, and in turn boosts the region’s economy. “We have some very visionary leaders, in all industries, but particularly in manufacturing. They understand that if things go well for them, they are going to go well for the whole community,” Kopischke says.

“

As board chair of the Alexandria Area Economic Development Commission, Kopischke also sees the value of cooperative efforts from a different perspective. “This really increases the credibility of this community, and it helps when everybody is sitting around the same table.”

Joint effort yields solid results

While manufacturers in the Alexandria area have worked together on these issues for some time, relatively new cooperative efforts are also proving fruitful. Manufacturers and educators in the Pine City area have also come together to address regional workforce issues as members of “The Manufacturing Alliance,” which focuses on the I-35 corridor between the Twin Cities and Duluth.

Robert Musgrove, president of Pine City Technical College and the coordinator of the group, says the alliance has created partnerships and programs that encourage high school students and recent graduates to pursue careers in manufacturing. Members have also developed avenues to deliver cost-effective, customized training to small- and medium-sized manufacturers through advanced technology.

There hasn’t always been such a coordinated force for qualified worker development in the Pine City area. After the 2001 crash, Musgrove says, manufacturing program enrollment numbers at the college were down, so he invited company owners and plant managers to discuss possible solutions. “We had always talked to manufacturers for support for our program, but they didn’t talk to each other,” he says.

The companies were facing aging workforces, and all were in need of qualified workers, Musgrove says. “We asked questions,” says Musgrove. “What did they need?

What did the data show? What were reasonable things we could do as a group?” They started the alliance in 2004, and the group has continued to meet four or five times each year ever since.

Among the members of the group are Lori and Traci Tapani, co-presidents of Stacy-based Wyoming Machine, a precision metal manufacturing firm with 55 employees.

Musgrove says the Tapanis provide the kind of leadership the alliance needs to keep moving forward. They not only encourage other manufacturers to get involved, he

“

“The strength of the workforce is critical to the growth of manufacturing in our state and I applaud the communities that join together to attract new workers to the dynamic industry.”

”

Representative Erik Paulsen

“We’re maxed out in manufacturing now. ... Every graduate last May had a job by February, many with local firms that are part of the alliance.”

”

Robert Musgrove,

president, Pine City Technical College, on the Manufacturing Alliance’s effect on the college’s manufacturing program enrollment

says, but they also play a role in broader efforts, such as a statewide initiative to encourage young girls to pursue manufacturing careers, which increases the region’s visibility to outsiders.

While it takes extra time and energy to get involved in these groups, Lori Tapani encourages others to make the effort. “I know they are busy, but I think manufacturers should take every chance they can to participate in career fairs and in articles on this issue, or make presentations at the camps these kids can go to now,” she says.

The Manufacturing Alliance began with the type of outreach and awareness efforts Tapani mentions. Initially, the group focused on demonstrating the potential in manufacturing careers, with events aimed at high school students and their families and teachers, and those out of school who are either unemployed or underemployed.

By 2009, Musgrove says, “The partnership had matured enough to be in a position to apply for a U.S. Department of Labor community-based job training grant.”

The alliance won $1.9 million, which it used to fund a mobile technology lab that can be taken to high schools to demonstrate what Musgrove calls “the glamour” of manufacturing.

The grant also funded a video conferencing system that gives companies across the region access to live training classes from their plants or from nearby plants that host employees from other companies. Though the grant funding has officially ended, Musgrove says both of the programs will continue to provide avenues to attract new talent and opportunities to continue skills development among existing employees.

The alliance’s work has paid off in other tangible ways as well. Since the group convened, enrollment in Pine City Technical College’s manufacturing programs has leaped from 12 to 50. “We’re maxed out in manufacturing now,” says Musgrove, adding, “We have 100 percent placement. Every graduate last May had a job by February, many with local firms that are part of the alliance.”

The effort has also attracted the attention of local economic development officials. “If there is a manufacturing company looking at a location, relocation or expansion in this region, I’m going to get a call from the economic development folks to be at the table,” Musgrove says. “We have to be able to show that we have the ability to recruit

ENTERPRISE MINNESOTA NOVEMBER 2012 15

“

“I just think we’re in a golden era here. There is so much national attention focused on manufacturing, from the White House on down. We couldn’t ask for a better time to get involved.”

”

Traci Tapani,

co-president, Wyoming Machine

and train employees in the area.”

Members of the alliance, including Pine City Technical College, recently joined Central Lakes College and St. Cloud Technical Community College to apply for a U.S. Department of Labor grant to further develop the workforce in central Minnesota. The $13.1 million grant will fund programs to connect foreign trade impacted workers, other dislocated workers, veterans and incumbent workers in need of skill enhancement with comprehensive advanced manufacturing training and other student services.

With support from the 360° Manufacturing and Applied Engineering Center of Excellence at Bemidji State University, the grant-funded programs will focus on increasing the quantity, quality and diversity of the manufacturing workforce in Minnesota. The two-year colleges involved in the grant will create new on-campus programs in automation technology, rapid prototyping and plastics.

Musgrove says the Alliance’s successful track record stems from the ongoing commitment of participating companies. “If it’s industry driven, then it’s going to have legs. We can offer some help with staffing, but it needs to be under their leadership,” he says.

Reaching a broader audience

As Kopischke points out, collaborative efforts have more credibility and higher visibility than companies or educational institutions could achieve on their own. Government officials in particular tend to take notice when groups of constituents work thoughtfully on a particular issue.

Sen. Amy Klobuchar, who chairs the Senate Commerce Subcommittee on Competitiveness, Innovation and Export Promotion, held a hearing on this issue in the U.S. Senate last spring. The hearing, which featured testimony from Enterprise Minnesota President Bob Kill, gave national attention to the manufacturing industry’s vitality and its high demand for qualified workers.

Rep. Erik Paulsen, who chairs the House Ways and Means Subcommittee on Human Resources, is also well-positioned to draw national attention to these issues. “Almost every week I get the chance to visit one of our state’s manufacturing leaders to witness firsthand as they invent and develop the best products in the world. From life-saving medical devices, to healthy food products, Minnesota manufacturing continues to provide cuttingedge innovations and ideal opportunities to pursue a fulfilling career,” Rep. Paulsen says. “The strength of the workforce is critical to the growth of manufacturing in our state and I applaud the communities that join together to attract new workers to the dynamic industry.”

That high-level attention is precisely what is needed to entice young people and their teachers and families to take a close look at the career opportunities in manufacturing.

Traci Tapani is excited about the opportunity manufacturers have to make an impact. “I just think we’re in a golden era here. There is so much national attention focused on manufacturing, from the White House on down, including in the presidential campaign. We couldn’t ask for a better time to get involved,” she says.

16 ENTERPRISE MINNESOTA NOVEMBER 2012

Five Key Priorities

Manufacturing Should Focus on Now

As we watch the political drama unfold in our nation’s capital, it is easy to fall into the trap of waiting and reacting to what might happen next. However, great leaders seek to control what they can during uncertain times, knowing their actions can create a competitive advantage in any economy.

By Virginia A. Harn, CPA CliftonLarsonAllen LLP 18 ENTERPRISE MINNESOTA NOVEMBER 2012

“

Virginia Ham and Mike Nyberg, founder and CEO of Packnet Ltd., inside Packnet’s Eagan facility.

“Regardless of outside forces, a robust operating model, strong leadership team, and healthy workforce remain essential factors in economic success.”

”

Concentrating on these priorities before the next economic “race” begins is the difference between being ready for the starting flag and being asleep at the wheel. The five key priorities for manufacturers now are: 1) Build on your business plan, 2) plan for uncertainty and volatility, 3) get close to the customer, 4) control the controllable, and 5) protect profitability. Regardless of outside forces, a robust operating model, strong leadership team, and healthy workforce remain essential factors in economic success.

Mike Nyberg, Founder and CEO of Packnet Ltd. in Eagan, is keeping all five priorities top of mind heading into 2013. Packnet designs, manufactures, and distributes custom packaging for shipping a broad range of products within North America and overseas. While Nyberg credits his executive team, employees, and outside advisors with the company’s success, it’s clear that his leadership has been the most important factor in the company’s solid foundation and its adaptability.

Build on Your Business Plan

photograph by PATRICK KELLY

Given the uncertainty of the economy and public policy decisions ahead, manufacturers find themselves in a unique position heading into 2013. They are reserving cash and looking at opportunities to build value every day and improve the bottom line. When the economy stabilizes and regulatory policies become more predictable, they will be poised to execute additional growth strategies and watch profits rise.

Successful manufacturers are focusing on five key areas in their control as they await public policy decisions.

Owning a small manufacturing business creates significant opportunity, but realizing this opportunity requires continuous planning. In a time of uncertainty, one best practice is to build a margin of plus or minus 20 percent revenue into the plan and anticipate potential scenarios that could disrupt operations. With a good plan, the company will be well-positioned for the future.

Nyberg and his team have been building and expanding their business plan in the 25 years since he launched the company as an entrepreneur. The Packnet management team meets annually with a trusted strategic planning professional to update the plan.

“We brainstorm to come up with different ways to remain relevant in our marketplace and provide the best value,” Nyberg says. “I also have a number of outside professional sources that have been key to our success in offering their help and advice with our business.”

Nyberg says the team concentrates on three primary aspects of the plan: 1) resources and “energies” that add value for the customer, 2) cost containment, and 3) sales and marketing.

“One of our first goals is optimizing our resources,” he says. “This includes our facility space, our equipment capacity, and our people utilization. In order to add the most value, we try to determine how to maximize utilizaENTERPRISE MINNESOTA NOVEMBER 2012 19

tion of our resources. Secondly, we’re either looking to reduce costs or minimize any cost increases in our direct manufacturing or administrative expenses.”

Many Minnesota manufacturers also use strategic planning to focus on pricing, inventory control, capacity including number of shifts, volume purchases, shop-floor machinery placement to maximize productivity, and organization of parts and tools. Business owners also may take a close look at more complex decisions, such as performing an assessment of the opportunities of a merger, acquisition, expansion, or consolidation.

Sales and marketing is also a major strategic focus: Savvy companies find novel ways to differentiate themselves by communicating their exceptional service and high-quality products. Planning here should emphasize opportunities to build new business, communicate potential new products and resources to existing customers, and budget and plan marketing strategies and tactics. A slower economy can stimulate customer diversification and strategies targeting current customers.

Two marketing tactics Packnet deploys are opening its facility for tours and leveraging its website to proactively communicate with customers and prospects. “Tours give people a visual picture of what we can do,” Nyberg says.

“And we have a blog that keeps our customers up to date on industry and company news.”

“ ”

“As people have been added to our team over time, everyone has had the same priority for our customers.

They know that if we don’t meet the customer’s needs, somebody else will.”

Mike Nyberg,

founder and CEO, Packnet Ltd.

Plan for Uncertainty and Volatility

Very few small and midsized companies succeed at taking big risks during economic readjustment periods. Now is not the time to bet cash on an unknown outcome — no matter how attractive it appears — as the economy has not picked up momentum. It is wise, however, to build enterprise risk into day-to-day business operations.

Packnet literally relies on its customers’ unpredictability. The company was set up to respond quickly to customers — a must in packaging, the last phase in the product cycle before transportation. “We have the manufacturing flexibility to produce either a single requirement or a large production run,” Nyberg says, “so we’ve become flexible in order to meet both of these needs.”

Designing cost-effective custom packaging that will

20 ENTERPRISE MINNESOTA NOVEMBER 2012

never be used again and standardizing products that will be produced regularly require two different “disciplines” for product design and manufacturing capabilities, he says.

“We have an internal system that includes proprietary design software that allows us to develop a print for packaging very, very quickly that we can get out to the floor and into the production cycle as soon as possible,” Nyberg explains. “If someone needs something the next day, we can’t spend the majority of that first day in engineering. It’s got to be designed, it’s got to be priced, we have to receive a purchase order, we have to develop our internal order, we have to produce it, and then it has to get shipped to the customer. This all might happen in the same day.”

Nyberg says flexibility has always been a factor in business success and is a mindset for everyone at Packnet. At the launch of the company, he handled sales, production, and even delivery at times by himself.

“As people have been added to our team over time, everyone has had the same priority for our customers,” he says. “They know that if we don’t meet the customer’s needs, somebody else will.”

Get Close to the Customer

In the current marketplace, supply chains are shifting and consolidating and international markets represent some of the best growth opportunities. This environment calls for close and regular contact in order to know where customers are headed and how to stay relevant. At times of slower growth, lack of communication is a businessrelationship killer.

Business owners and customers need to be partners in the truest sense of the word: Too many people in their micro-economies depend on the cost-effective, on-time deliverables involved for them to be distant relatives.

As Nyberg explains about Packnet: “With some customers, we get to the point where we know their packaging needs better than they do. They ask us to get involved in package design while the product development cycle is still occurring, which can reduce costs for packaging and shipping in the end. Over time, we’ve built up enough trust that we’re viewed as part of their team.”

Packnet’s blog provides information about regulations and industry news for customers, which builds trust from a credibility standpoint.

“The trust that develops with our customers is intentional but it’s natural also, as both of us exceed each other’s expectations,” Nyberg says.

Control the Controllable

Perhaps the most challenging aspect of running a business now is that everyone is looking at a blank slate with regard to the regulatory environment. It will be a while before new laws and regulations are enacted and take hold following the elections in Washington and Minneso-

“

ta. While business owners do what they can to participate in business associations, most are taking a wait-and-see approach to the regulatory environment.

Nyberg sums up the situation many people say they face: “As a small business with lean resources, we really don’t have the wherewithal to be proactive with things that sometimes feel out of our control. We’re more reactive than anything when it comes to outside government regulations and influences. A lot of times we are uncertain; we’re small and we’re lean and we don’t have the resources to do anything more than react.”

Like other manufacturers, Packnet has long-term relationships with professionals who help the executive team manage tax, employee benefits, and other aspects of the company relating to government regulations. These professionals help them make decisions that impact profitability and also affect customers and employees. Packnet also frequently passes along regulatory information to customers.

Even though the company does not have a formal wellness program beyond regular safety and injury-prevention programs, it has controlled its health care costs. “Our costs have decreased slightly in the last two years because we have a healthy group of people,” Nyberg says. “Our claims against premiums have gone down, so the insurance companies have viewed our group in a more positive light. We’ve gotten a 1 or 2 percent reduction and haven’t

“Our [healthcare] costs have decreased slightly in the last two years because we have a healthy group of people.”

”

Mike Nyberg,

founder and CEO, Packnet Ltd.

had to increase our employee or company contributions, so that’s been helpful for us.”

Packnet has 44 people on the payroll, which exempts it from some of the provisions of health care reform.

Employers with 50 or more full-time equivalent employees do need to factor the Patient Protection and Affordable Care Act (ACA) into their business plans overall.

The best practice is for each manufacturer to perform an analysis of costs under ACA and determine the best approach for the individual company, as ACA’s impact varies dramatically from company to company.

Under reform, beginning in 2014 health insurance exchanges will allow millions of individuals and small employers to access and compare insurance plans. These exchanges are also central to determining whether individuals are eligible for Medicaid or premium tax credits to assist in purchasing health insurance coverage. Also in 2014, employers with 50 or more full-time equivalent

Mike Nyberg, founder and CEO, Packnet Ltd.

photograph by PATRICK KELLY

ENTERPRISE MINNESOTA NOVEMBER 2012 21

employees become subject to penalties if they fail to comply with the ACA. However, in some cases, the total cost of these penalties may be less than the total cost of providing coverage. CliftonLarsonAllen has a Health Insurance and Penalty (HIP) Calculator to provide employers with specific information about how reform will impact them. The calculator helps manufacturers weigh their options about coverage, cost-sharing, and health plan design. (To learn more, visit http://www.cliftonlarsonallen.com/healthcare/.)

Controlling what’s controllable also includes maintaining a skilled workforce. Many manufacturers face challenges with recruiting and training new workers in the current environment. Their strategies for a prepared workforce include building relationships with business associations, technical schools, high schools, and even middle schools. STEM — science, technology, engineering, and math — educational efforts are cropping up across the country, bridging the needs of employers with opportunities for young people.

At Packnet, Nyberg has made a prepared workforce an essential part of his business plan. This year, the business plan includes stepping up cross-training to further improve production capabilities and prepare for uncertainties. Machine operators at the company learn how to operate multiple pieces of equipment and increase their knowledge.

The company’s hiring strategy is simple: Recruit responsible people who have the aptitude to learn. “We don’t necessarily need any particular outside skills from a production standpoint; we do our own internal training,” Nyberg says. “Our machine operators are home-grown.”

Preserve Profitability

As many business owners await economic and policy stability, they are carefully managing their assets, including facilities, equipment, and cash. They are also preparing for succession of the business, whether a leadership change is imminent or not.

Federal Tax Update for Manufacturers

None of us has a crystal ball beyond December 31 when it comes to tax law. However, there are some significant tax issues to be aware of that currently affect manufacturers.

Tax Rates

Individual Income Taxes

The majority of privately owned manufacturers in the United States are taxed as flow-through entities (S Corporations, Partnerships, or Sole Proprietors). Beginning January 1, 2013, a mix of expiring tax provisions and newly enacted taxes are scheduled.

Assuming no compromise is made, on January 1, the graduated individual income tax rates on ordinary income jump from 35 percent for high-income taxpayers to 39.6 percent. Even individual taxpayers in the lower-income brackets will see a minimum increase of 5 percent. The rate increases are due to expiring provisions dating back to the Bush administration.

Capital Gains

The tax rates on capital gains are also set to increase from

15 percent to 20 percent and will be as high as 23.8 percent when considering the newly enacted surtax on investment income for high-income taxpayers.

Owners of manufacturing companies who sell their businesses in 2012 and utilize an installment sale should consider the potential benefit of electing out of the installment sale and recognize the entire gain in 2012. Owners might also consider deferring the sale of loss securities until 2013 to maximize the benefit of the loss.

Dividend Income

Another tax increase is scheduled on dividend income.

Currently qualified dividends are taxed at the capital gains rates, but come 2013, the dividend rates jump back to the ordinary income rates. For high-income taxpayers, this could result in a 39.6 percent income tax plus a new 3.8

22 ENTERPRISE MINNESOTA NOVEMBER 2012

percent investment-income surtax.

Due to this potential significant increase in tax rates, manufacturers who are taxed as C corporations or S corporations which were previously taxed as C corporations should consider a plan to accelerate dividends into 2012.

Health Care Reform Surtax

New surtaxes are also being imposed for the first time.

For high-income individuals, additional taxes are set to take effect. These were enacted with the Patient Protection and Affordable Care Act. The first tax is a 0.9 percent surtax on earned income for single taxpayers earning greater than $200,000 ($250,000 for married couples). The second tax is a 3.8 percent surtax on “net investment income” for single taxpayers with adjusted gross income greater than $200,000 ($250,000 for mar-

ried couples). Net investment income includes more than traditional investment income and encompasses income from passive business and rental activities. (Although the dollar limits are the same, note that the 0.9 percent surtax threshold is based upon earned income and the 3.8 percent surtax is based upon modified adjusted gross income.)

Excise Tax on Medical Device Manufacturers

Beginning January 1, a 2.3 percent excise tax on the sale of any taxable medical device will be imposed on the manufacturer. A taxable medical device refers to any device defined in Sec. 201(h) of the Federal Food, Drug, and Cosmetic Act which is intended for humans. A retail exemption exempts any medical device which is generally purchased by the general public at retail for individual use such as eyeglasses, contact lenses, and hearing aids.

Packnet is a case in point. “As revenue has fluctuated over the years, whether as the result of recessions or what have you, we’ve still maintained profitability because we’ve managed our resources tightly,” Nyberg says.

“We’ve made sure that we operated in a lean fashion for our customers. We put together procedures and processes so that we’ve worked smarter, not necessarily harder.”

The executive team made a conscious decision to upgrade and add equipment that increased efficiency and automation. In addition, the company has a detailed preventive maintenance program and keeps extra machine parts on hand to limit down time.

Packnet also pays close attention to minimizing waste and maximizing materials. Nyberg says it has programs in place to reduce waste and maximize the yield on materials as much as possible. Four years ago, a company-wide program was initiated to digitize documents. Now, for example, anyone can access a product spec any time.

Also, scrap is recycled. “Not only are we conserving the environment through recycling efforts, we’re also adding

Fixed Assets The annual limit for Sec. 179 expensing and qualified property additions drops from $139,000 to $25,000. Bonus depreciation, currently set at 50 percent in 2012 for new shorter-lived property, expires.

For manufacturers considering purchases of new or used equipment in the first quarter of 2013, making these purchases and placing them into service prior to January 1 would accelerate the depreciation of the property. A number of bills submitted in Congress have proposed to increase the Sec. 179 expense levels for 2013 or extend 100 percent bonus depreciation to 2012 and 50 percent bonus depreciation for 2013, but at the time of writing, none had passed Congress.

Research & Development Credit At the time of writing, Congress had not extended the R&D credit for 2012. Senate Bill

3521, The Family and Business Tax Cut Certainty Act of 2012, proposes to extend the R&D credit through the end of 2013.

How long will it be before Congress comes to some compromise? It appears that federal lawmakers might not address the majority of the expiring tax provisions until the post-election lame-duck session. They will need to address a temporary “tax extenders” bill pending Senate and House approval.

Ultimately, taxpayers need to stay informed and develop flexible tax plans; the only certainty is that tax law will change. Every taxpayer situation is unique; business owners should consult their personal tax advisors.

to the bottom line,” Nyberg says.

Employees are included in preserving profitability at Packnet. The company has several committees that employees rotate between, including a safety committee, quality committee, and housekeeping committee. These groups address many short- and long-term issues that together add value for the customers, employees, and company. Even in lean times, Packnet has been able to maintain a year-end cash bonus program for employees, providing them with a “return” on their efforts.

On the intangibles side, “we’ve worked to preserve our investments internally,” Nyberg says. “We’ve been pretty aggressive with resource conservation. We kept extra capital on hand to take advantage of different projects that we may need to cash-flow. We’ve used capital to add new equipment that might bring us a new capability.

We’ve been really diligent about how we preserve and then allocate our assets.”

Sustainability and longevity are the primary motivators for the work that goes into a manufacturing business plan and daily decisions and operations. This work would not be complete without a succession plan. Ensuring business succession is not a separate priority: It ties into virtually every aspect of the business.

Even though Nyberg is an athlete and exudes vitality, he doesn’t take chances with his business or his family. “From a succession standpoint, I’ve got an awesome executive team; I’m comfortable that they could run the company,” he says. “It’s been a very conscious part of the plan.”

Conclusion

Despite looming changes, successful Minnesota manufacturers are focusing on controllable actions amid uncertainty. In doing so, they have increased profits and hung onto cash in favor of more predictable times ahead.

Business owners who concentrate on the five priorities outlined here are making short- and long-term decisions to build profits, regardless of the economic and tax climate. When the environment stabilizes, they will be well-positioned to seize the day.

Virginia A. Harn, CPA is a tax partner at CliftonLarsonAllen LLP. She has more than 20 years of experience specializing in tax, tax compliance, and tax planning for closely held businesses and their owners. She works closely with small to midsized business owners, primarily in the manufacturing and distribution sector. She is a member of the Minnesota Society of CPAs and American Institute of CPAs, and an adjunct professor in the graduate tax program at the University of Minnesota, specializing in S Corporations. She can be reached at virginia.harn@cliftonlarsonallen.com.

About CliftonLarsonAllen CliftonLarsonAllen is one of the nation’s top 10 certified public accounting and consulting firms. Structured to provide clients with highly specialized industry insight, the firm delivers assurance, tax and advisory capabilities. CliftonLarsonAllen offers unprecedented emphasis on serving privately held businesses and their owners, as well as nonprofits and governmental entities. The firm has a staff of more than 3,600 professionals, operating from more than 90 offices across the country. For more information about CliftonLarsonAllen, visit www.cliftonlarsonallen.com.

ENTERPRISE MINNESOTA NOVEMBER 2012 23

Empowering

Leadership Two Minnesota-based manufacturers cultivate leaders at every level to transform their cultures and strengthen their businesses from the inside out.

By Andrea Lahouze

“If your actions inspire others to dream more, learn more, do more and become more, you are a leader.�

President John Quincy Adams

24 ENTERPRISE MINNESOTA NOVEMBER 2012

There is no doubt that behind every great company is great leadership. Think of Apple, for example, and you can’t help but think of Steve Jobs. The words “Microsoft” and “Bill Gates” are inextricably tied. And any glimpse of the Virgin Group logo is likely to conjure up a mental image of Sir Richard Branson’s Cheshire Cat-like grin. But two Minnesota-based manufacturers have recently taken that truth one step further. Alexandria Industries and Ultra Machining Company serve as proof that developing leadership skills not only in top management but also in employees throughout a business can reap even greater rewards, from culture to quality to customer satisfaction.

“We now have the ability to make acquisitions at a time and in an industry where so many are shutting their doors. That speaks to the success of the leadership development program.”

Lynette Kluver, Director of Organizational Development at Alexandria Industries

Growing Pains

For Monticello-based Ultra Machining Company, leadership development began as a strategic pursuit to formalize a fuzzy organizational structure. The company manufactures precision-machined parts for a variety of industries including medical and aerospace, and got its start in 1968 in founders’ Terry and Mary Tomann’s family garage.

UMC has since grown to 160 employees and is a secondgeneration family business, owned by Don and Jenny Tomann.

UMC Director of Human Resources Mary Pettit says lack of role clarity among employees “wearing multiple hats” was a major hurdle in expanding from a small business to a large organization. Limited leadership experience among the management team presented a second hurdle, as many supervisors and managers had risen through the ranks over time.

“They started out on the floor, then they moved into the office and grew to be on a strategic team, etc. They had an understanding of the breadth and depth of the organization, and a passion for the business, but they didn’t necessarily have formal leadership education or experience in leading people,” Pettit explains.

Growth was also the catalyst for leadership development at Alexandria Industries. The business began as Alexandria Extrusion Company in 1966 and now produces custom, aluminum-extruded, components for everything from boats, docks and trailers to hospital beds and CT scan imaging equipment. In response to customer requests, it added capabilities in a series of strategic acquisitions beginning in 2003. The company now offers custom aluminum extrusions, precision machining, plastic injection and foam molding, finishing, welding and assembly services, including heat sinks, used to dissipate heat from energy sources. Renamed Alexandria Industries, the company has manufacturing facilities in Indiana, Minnesota and Texas and employs about 525 people, with approximately 415 at its three Alexandria, Minn. locations.

As Director of Organizational Development at Alexandria Industries, Lynette Kluver had long wished to create a leadership development course for company employees.

She says the new acquisitions were an ideal opportunity to bring leadership development to the forefront of Alexandria Industries’ internal improvement activities, as more employees would be needed for leadership roles.

“Everyone on our executive team is about the same age, so when acquisitions began, we started thinking about what would happen to the organization if we all were to leave or retire within the next five years. We realized that we needed to be proactive in preparing the next generation of leaders, for two reasons. First, because the business need was dictating it, and second, because it is a tremendous retention tool,” Kluver says.

Customized Approach

Both UMC and Alexandria Industries took particular care to tailor leadership training to their unique business needs, a step that Enterprise Minnesota Business Growth Consultant Yvonne Kinney-Hockert considers crucial.

“Leadership development isn’t ‘one size fits all,’” Kinney-Hockert says. “It’s really important to understand the culture and the organization.”

UMC used a tool called the Velocity Leadership program to define competencies it felt were important to develop within its three levels of management, which include executives, directors and managers. Once competencies were discussed and agreed upon, the company called upon Enterprise Minnesota Business Growth Advisors Jan Hepola and Roger Hurd to lead training sessions with each management group. Each training session focused on building a different competency, including leading change, decision-making, empowering others and managing performance.

UMC’s Pettit also worked with management to rewrite every job description throughout the business, specifying authorities, accountabilities and responsibilities. She attributes a major portion of the company’s continuing success to the role clarity that came as a result.

“The chain of command was made much more clear, and each job description includes both what we expect from each person, and what we don’t expect from them, so people can come to work and do their best,” Pettit says.

Like UMC, Alexandria Industries also defined essential leadership competencies for three different levels of leaders within the business, and then assembled a relevant curriculum to develop them. The company handpicked 15 employees based on the needs of the expanding business to participate in its first Leadership Academy beginning in July 2008.

ENTERPRISE MINNESOTA NOVEMBER 2012 25

3 Tips for Leadership Development Success

Thinking about developing the leaders and emerging leaders at your company? Consider these tips from Enterprise Minnesota’s Yvonne Kinney-Hockert:

1. Get buy-in from the top.

There must be commitment from the executive level in any company when it comes to providing resources and opportunities for their people. First, you must be willing to invest time and resources to understand leadership and what leadership means for your company. Second, you must ensure that the environment within the company is truly committed to allowing the leaders that are growing to step away from their daily tasks without feeling like there is a negative impact.

2. Support developing leaders. The leaders that are de-

veloping want to take what they’ve learned and apply it to work situations to change the way certain things are done, whether it’s the way that they organize their team, the way they conduct meetings, or the way that they interact with other people. That in and of itself is change, and sometimes it’s embraced, but sometimes it’s not.

When an organization commits to developing its leaders, an element of support should exist to support the participants by checking in and communicating with those emerging leaders to really understand what they’re learning and to encourage them to keep moving forward.

3. Customize, customize, customize. Leadership develop-

ment is not a “plug and play” pursuit.

Companies should begin with a solid understanding of what leadership is for them, because the approach may look a bit different for every company based on their needs. There are a lot of similarities, too, but the differences are important. Implementing a customized leadership development program will lead to more alignment with a company’s unique values and culture.

26 ENTERPRISE MINNESOTA NOVEMBER 2012

Participants met monthly for classes, which covered topics like accountability, values, business acumen, leadership styles, conflict communication, building teams and empowering others. Kluver says each class was carefully constructed to build upon the competencies Alexandria Industries defined as necessary for successful leadership within its organization. Classes also included an element of practical application for participants to practice what they’d learned, and integrated the company’s core value of “servant leadership” – the expectation that company leaders lead with a servant heart.

Outside of Leadership Academy classes, participants also received individual leadership coaching from Enterprise Minnesota’s Kinney-Hockert. While confidentiality agreements keep session content under wraps, Kluver says coaching focused on helping each individual overcome any specific hurdles that had the potential to limit their leadership capabilities.

The success of Alexandria Industries’ first Leadership Academy, which graduated in May 2010, has since spurred two more sessions. While most participants in the second and third sessions were selected through an open application process, a few were specifically invited to participate.

“There were a few people where it was such a treat for me to approach them and say, ‘we didn’t get an application from you, but we would really like you to consider participating in this,’” Kluver says. “One young man could hardly get out of my office. His grin was so huge because he had never been thought of as a leader. He is doing amazingly well in that group. He is not in a leadership position today, but we know that if we give him the skill sets, he will be a key contributor going forward.”

The company had originally intended to lead just one more session of 15 employees, but when it received 83 applications from interested employees, it kicked off two groups of 15 instead. Because the training is corporatewide, participants working at one of Alexandria Industries’ out-of-state locations are flown to Minnesota each month to participate in Leadership Academy classes.

In the spirit of continuous improvement, Alexandria Industries has this year introduced two additional levels of leadership development. Leadership 101 teaches foundational leadership skills, including communication and team building. Participants “may not be leaders by title, but you don’t always have to have a title to be a leader.

They are people who we have our eye on for the future, and so we want to start helping them to develop very basic skill sets,” Kluver says.

The second new offering is called Leadership Masters, an invitation-only training to groom employees for future top management positions. While training at this level has not yet begun, Kluver says it will be highly customized to each individual, and will likely involve formal training from a post-secondary institution.

Benefits For All

Alexandria Industries is currently determining metrics to capture the tangible successes that have resulted from

“By going through this series of courses, I feel we are more one now.”

Mary Pettit, Director of Human Resources at UMC

its leadership development activities. But even without hard numbers, Kluver says the company’s commitment to developing leaders has enabled it to capitalize on current and future growth opportunities.

“We now have the ability to make acquisitions at a time and in an industry where so many are shutting their doors.

That speaks to the success of the leadership development program,” she says.

Rising leaders also have fostered a higher trust level among employees, something that Kluver considers essential.

“It’s a ‘servant leadership’ perspective. We need to be there for our people,” Kluver says. “The employees look to leaders every day for clarity, for trust, for confidence in their role. The more unified, civil, rewarding, tapped in and tuned in we can be as leaders, the more the business and its employees will benefit.”

Pettit would agree. She says the trust resulting from UMC’s leadership development efforts has enabled managers to delegate more tasks with confidence, in turn empowering greater productivity across the business.

“When you put people in place to do a job and you give them authority, you need to trust that they’ll do it. Before, that was not happening because the role clarity wasn’t there and when things fell through, there was blame and

then people didn’t want to take the risk again. Making roles very clear helps trust to reappear, and high performance comes out of that, so it’s a definite progression,” Pettit says.

That progression has also led to a greater sense of unity among UMC employees in leadership positions at all levels.

“By going through this series of courses, I feel we are more one now. We discipline the same, we lead the same, we go after problem-solving the same, and we talk the same talk. We have a common vision of our culture, goals and mission,” Pettit says.

UMC’s shared vision is apparent to outside observers as well, including potential employees. In the past few months, the company has hired a new director of sales and a new president, both of whom had multiple job offers. Pettit says UMC’s newfound unity played a key role in attracting both.

“When we interviewed them and talked about our culture and who we are, they could see that management was truly connected,” Pettit says.

To learn more about Ultra Machining Company and Alexandria Industries, visit www.ultramc.com and www.alexandriaindustries.com.

ENTERPRISE MINNESOTA NOVEMBER 2012 27

28 ENTERPRISE MINNESOTA NOVEMBER 2012

No Com[PEAT]ition American Peat Technology pioneers a peat-based solution to sulfate contamination that could add thousands of mining jobs on Minnesota’s Iron Range.

By Andrea Lahouze Trudging through the spongy peat bog that was once Glacial Lake

American Peat President Doug Green holds peat soil that formed after the retreat of Glacial Lake Aitkin 10,000 years ago.

photograph by PATRICK KELLY

Aitkin, it’s hard to imagine that the peat soil beneath your feet could hold the key to adding an estimated 5,300 mining jobs on Minnesota’s Iron Range. But peat’s quotidien appearance belies a complex chemistry that offers a variety of applications just beginning to be understood.

Among them is the ability to remove dissolved heavy metals from water—and the potential ability to remove the sulfate that forms and enters the water supply when metals are mined from sulfur-bearing rock.

At high levels, sulfate can affect crop growth, particularly the Range’s plentiful supply of wild rice, spurring the Minnesota Pollution Control Agency to enact more stringent regulations regarding its presence in water, reducing the acceptable level to 10 parts per million (ppm) in 1973. To date, Minnesota’s mining industry has not found a way to sufficiently and economically mitigate the sulfate discharge that enters the surface and ground waters as a result of mining activity. As a result, the Duluth Complex, one of the largest deposits of identified copper, nickel and precious metals in the world—about 4.4 billion tons, according to the Minnesota Department of Natural Resources— remains an untapped resource.

Aitkin-based American Peat Technology is on a mission to change all that.

President Doug Green’s background as a geologist and retired Alaska gold miner give him a unique perspective on the mining industry’s current challenge, and confidence in peat’s ability to solve it.

ENTERPRISE MINNESOTA NOVEMBER 2012 29

“Peat is one of the least valued and most valuable natural resources we have,” Green says.

Since 2003, Green, along with the rest of American Peat’s management team Mark Krezowski, executive advisor, and Ryan Menzel, vice president of operations and safety, have been on a mission to analyze peat’s molecular structure and capabilities, and engineer useful products in the process.

Natural remedy

Northern Minnesota’s vast supply of peat deposits is a parting gift from the glaciers that once covered much of the state. Upon their retreat 10,000 years ago, they left behind a multitude of shallow lakes filled with plants like Peggy Jones, lab manager and research chemist, tests APTsorb’s ability to adsorb selenium as Doug Green, president, displays APTsorb in pelletized form, before it is crushed into a fine granule.

photograph by PATRICK KELLY

cattails, reeds and sedges. When these plants die, they sink into the water and decompose at an extremely slow rate, forming peat. Peat has an inherent ability to adsorb heavy metals, but the waxes and resins on its surface make it impervious to water in its natural state. The challenge has been finding a way to allow water to flow through the peat, thereby facilitating the adsorption of metals the water contains.

Over five years, American Peat worked with Igor Kolomitsyn. PhD, a researcher from University of Minnesota Duluth’s Natural Resources Research Institute (NRRI), to alter the molecular structure of peat growing in local bogs.

The solution involves a patented, active heat process that as a final processing step turns peat into a hard, porous granule. That granule constitutes American Peat’s newest product, APTsorb.

APTsorb is currently used to meet environmental regulations for industrial wastewater and storm water runoff, particularly in urban spaces where particulate levels can be higher. The product removes a variety of metals and other compounds from water, including zinc, mercury, copper, iron, manganese and others, by creating bonds between the metals and the active sites of the peat molecules. The chemical bonds, known as “chelated” bonds, have been tested and pass EPA TCLP tests, suggesting they would hold for an estimated 200-plus years, making APTsorb safe for landfill disposal once it is saturated with metals.

With a $100,000 loan from the Iron Rage Resources and Rehabilitation Board and support from the NRRI Development Fund, researchers at American Peat are working to tweak the APTsorb product so that it can also bond with the sulfate ion. American Peat will repay the loan when the product becomes profitable. Green says the company is close to a solution, which he anticipates will hit the market within two years.

In the meantime, APTsorb’s predecessor, which accounts for the majority of American Peat’s current sales, is an agricultural treatment product called bioAPT. Essentially the granular, untreated form of APTsorb, bioAPT is inoculated with a bacteria called

30 ENTERPRISE MINNESOTA NOVEMBER 2012

“ ”

“Peat is one of the least valued and most valuable natural resources we have.”

rhizobia, then sold to farmers to spread on their fields when they plant legumes. The bacteria attaches to the legume plants, and converts nitrogen from the air into a form the plants can easily absorb. This allows the bean plants grow stronger and healthier, and helps the soil to retain more nitrogen. As a result, farmers can plant corn, a more profitable crop, for two years in a row, instead of having to alternate corn and beans each year in order to protect the quality of the soil.

Over time, Green hopes bioAPT will prove to be a more economical and environmentally-sustainable alternative to nitrogen fertilizer, which is derived from oil products and is therefore becoming more expensive.

the necessary bacterial processes to occur, thereby causing peat to grow much more quickly than it would in nature.

Current decomposition tests suggest peat could grow about 100 times faster, if perfect conditions are supplied.

“Ideally, we want to produce peat as fast as we’re using it and therefore make our company truly sustainable,” Green says.

Green by necessity

Mining credibility

For all the ingenuity required to develop the products themselves, manufacturing them has demanded equal resourcefulness. Green, a self-proclaimed “junkyard engineer,” estimates that about 85 percent of American Peat’s facility has been constructed with repurposed materials.

The company’s cyclone, which draws wet peat up into the first of two dryers, is actually a vertical Readymix concrete mixer truck. Its number-one dryer is a 1960s era Hardinge classifier, originally built as a rock tumbler for the taconite mines. The company purchased and modified it for $43,000 after receiving a $277,000 quote for a new dryer. To turn pelletized peat into powder for American Peat’s APTsorb product, Green rescued a circa 1950 ball mill from a local scrap yard. The walls of APT’s peat drying operation are stands from a Minneapolis parking garage that were built to the wrong specifications. The company got them for free, just for hauling them away.

It would be easy to consider American Peat’s approach to building an environmentally conscious pursuit. But Green says it’s a matter of practicality.

“When you’re trying to start a business, the biggest problem is having enough capital to get everything going.

We were able to circumvent that to a large degree by being able to buy junk,” he says.

All in all, Green estimates the facility cost around $5 million—$10 million less than a contractor’s $15 million bid.

Apart from cost savings, Krezowski says the design also gives American Peat a leg up on any future competitors that may come along.

“Nobody is doing what we’re doing, but if somebody wanted to, it would probably cost them about three or four times as much to put together a plant today, so they couldn’t be cost-competitive,” Krezowski says.

While environmental stewardship is an opportune byproduct of American Peat’s thrifty approach to building, it is a core focus when it comes to the company’s raw material supply. American Peat has 320 acres of peat bogs under permit in Aitkin County, and has recently acquired another 157 acres, giving it an estimated 400-year supply of peat. But the company’s ultimate goal is to create a continuous peat supply by fostering an ideal environment for

Doug Green,

president, American Peat Technology

As American Peat draws nearer to a sulfate solution, Krezowski says the company’s next challenge will be winning the trust of its largest tarket market: the mining industry.

“All the other [sulfate and heavy metal removal] solutions the mining industry has considered are very costly and are developed by big, multi-billion dollar companies.

We’re sitting here with a little company right in their backyard, and so many of them think it’s too good to be true,” Krezowski explains. “They are also very risk-adverse.

Until they see proof that it truly works, they are not going to invest in American Peat’s solution.”

According to Green, the mining industry has also seen its share of peat-based water treatment products that proved ineffective, making them skeptical of American Peat’s offerings. But Green says those past products used raw, loose peat, which is impervious to water, unlike American Peat’s pelletized, granular and heat-treated peat.

Products currently available for treating water containing heavy metals are petroleum-based ion-exchange resins, which Krezowski says can cost about $1,200 per cubic foot.

APTsorb costs about $60 per cubic foot in volume, and is equally effective, according to third-party studies.

To demonstrate to miners APTsorb’s efficacy at heavy metal adsorption, American Peat began their fifth pilot test in October at the Soudan Mine near Tower, Minn. Four previous pilot tests over the past four years all yielded successful results. This fifth test is a full-scale, full-production test to reduce specific metal concentrations in the mine’s affluent water to meet EPA requirements. The company will conduct additional tests once the product is also able to adsorb sulfate. Until then, Krezowski says it’s a matter of casting off preconceptions and educating potential customers on what peat-based products can do.

“It took the tractor 30 to 40 years to displace the horse and plow after the first tractor was developed,” Krezowski says, “but eventually, enough people were convinced of the tractor’s benefits that it overtook the horse and plow. We’re up against a shorter yet similar learning and confidence cycle.”

To learn more about American Peat Technology, go to www.americanpeattech.com.

ENTERPRISE MINNESOTA NOVEMBER 2012 31

final word

Healthy Competition Hands-on, competitive lessons in lean can transform your workforce and your business.

By Samuel Gould and Harry Larson “I hear and I forget. I see and I remember. I do and I understand.”

— Confucius

For more information about Samuel Gould and Harry Larson, visit http://www.enterpriseminnesota.org/about-us/enterprise-minnesota-team.html.

32 ENTERPRISE MINNESOTA NOVEMBER 2012

photograph by patrick kelly

One of the common challenges employers face on their lean journey is sparking employee engagement. Change, no matter how small, can draw skepticism and pushback, particularly if employees don’t understand the benefits of the change.

To help remedy this circumstance, we drew on the wisdom of Confucius to develop the 5S Value Stream, a new approach that helps employees learn about lean by doing. The 5S Value Stream combines elements of 5S (sort, straighten, shine, standardize and sustain), Value Stream Mapping and Kaizen event processes. Like 5S, it organizes individual workspaces using lean principles. Like Value Stream Mapping, it takes into account both a current state and a desired future state. And like Kaizen events, it all happens in a matter of days.

Participants split into three teams and assume various roles within a fictitious factory. Each must produce as many products as possible within a given timeframe. The catch? The first team begins production without learning how to apply any lean tools. The second team is familiarized with some of the tools before production, and the third team is familiarized with all of the tools. Between the first and final simulation rounds, production typically increases between 800 and 1,200 percent.

This internal competition may seem unfair, but it’s actually a carefully constructed motivator. Members of the first team feel they were set up to fail and want to improve. Members of the second and third teams experience how lean tools aid production, and are eager to apply those tools to their own workspaces. And naturally, all three teams want to be the best. Over the next two to three days, the first team conducts a rapid improvement event in one area of the production floor as the other teams watch. The second and third teams follow with rapid improvement events of their own.

Each of the companies we have guided through the process has reported significant gains, among them cutting lead-time in half, reducing scrap by 90 percent and realizing $250,000 in bottom-line savings. Additionally, more involved calculations will reveal other improvements. Because each team includes a mix of people from different departments, employees develop new relationships that can result in a higher trust levels and better communication between production and office employees, and a team-oriented attitude across the business. As one operations manager put it, “Success is when I go out on the production floor and notice that the guy talking to me is looking me in the eye instead of looking at his shoes.”

If you are considering a lean transformation at your company, or if you are looking for ways to engage your employees in lean activities, 5S Value Stream may be your most accelerated option to consider. We invite you to learn more about 5S Value Stream by visiting www.enterpriseminnesota.org.

Enterprise Minnesota Business Growth Advisors Harry Larson and Samuel Gould

Business Growth Advisor Harry Larson draws on his background of more than 40 years in sales and management to help clients reshape operations. Larson has worked with clients in a variety of industries, from woodworking to medical device. He holds an Associates Degree in Sales and Marketing from Alexandria Community and Technical College.

Business Growth Advisor Samuel Gould employs engineering and manufacturing expertise in advising businesses on strategies to improve efficiencies and operational excellence. Gould holds Bachelor’s degrees in Electronics Technology and Applied Mathematics from College of the Ozarks, a Master’s degree in Electrical Engineering from University of Tennessee, and a Master’s degree in Management Technology from the University of Minnesota’s Carlson School of Management.