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Helping Manufacturing Enterprises Grow Profitably
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CALM AND DEEP
Minnesota’s manufacturers say they’ll grow, create jobs and increase salaries.
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But the skills gap, the costs of health insurance and zealous government oversight remain possible impediments.
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DISTRIBUTION DILEMMAS
TRACTION & TRIAGE
How to avoid conflicts with customers and collusion with competitors.
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2 Steady As She Goes This year’s State of Manufacturing® survey, while optimistic, is far from a goodnews-is-no-news situation.
Filling the Gaps Doherty Staffing celebrates 35 very successful years helping employers find the right employees—a task never more important than it is today.
How former banker Dean Atchison has used simple business disciplines to take Spectrum Aeromed from the brink of bankruptcy to the top of an industry.
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Bringing their Work Home
Distinctions with a Difference
Chamber exec Dee Schutte gets valuable insights from her manufacturer husband.
2015 State of Manufacturing® survey accounts for wide geographic diversity.
Visit the Enterprise Minnesota website for more details on what’s covered in the magazine at www.enterpriseminnesota.org.
Subscribe to The Weekly Report and Enterprise Minnesota® magazine today! Get updates on the people, companies, and trends that drive Minnesota’s manufacturing community. To subscribe, please visit http://www.enterpriseminnesota.org/subscribe. MAY 2015 ENTERPRISE MINNESOTA /
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bob kill
Steady As She Goes
Helping Manufacturing Enterprises Grow Profitably Publisher Lynn K. Shelton
This year’s State of Manufacturing® survey, while optimistic, is far from a good-news-is-no-news situation. Custom Publishing By
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s I read through the results of this year’s State of Manufacturing® survey, I’m reminded of the CEO of a renowned local Fortune 500 company who used to lament that the stellar year-toyear performance of his firm’s stock price received scant media attention because, he was told, there is nothing newsworthy in predictably good news. The data and analysis that follow will show you that Minnesota’s manufacturing executives are overwhelmingly bullish about their prospects for 2015. (Not all of
them. The folks who rely on agriculture, in particular, are far less sanguine about their prospects.) They think the economy is stable, that their industries are relatively strong, and they intend to add jobs to the economy and generally raise the wages of their employees. But this is far from a good-news-is-nonews situation. I’ll grant that the survey doesn’t uncover any hair-on-fire urgencies that demand the attention of the markets, vendors, communities or policy-makers. 2
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The State of Manufacturing® interviews reveal that manufacturing in Minnesota today is by and large a steady market sector in which savvy executives are planning and pondering opportunities they can exploit while they grow revenues. This is important. We’re all tempted to celebrate the poll’s finding that 89 percent of manufacturing executives are confident about the future of their companies. And it is very good news, but their confidence doesn’t imply the underlying theme of this year’s survey. Rob Autry, our pollster, points out that manufacturers are always confident about their futures. When we fielded our first survey just after the economic crash in 2008, 79 percent of the executives we interviewed were also confident of their futures. Think of it: their markets were in chaos, drying up order sheets, pummeling vendors, and roiling international relationships. And their bankers, who were in the midst of their own turmoil, were re-examining even their safest lines of credit. Yet 79 percent of manufacturers in that survey were confident about the futures of their companies. When we got to the focus groups, we found out why. Instead of emotional hand-wringing and fingerpointing, the conversations generally revolved around finding opportunities in the downturn. Do we retrain? Do we retool? Do we look for new markets or new products? Do we use the time to reinforce our personal sales relationships? Don’t get me wrong. The exchanges also included a good measure of genuine anguish as executives shared the personal pain involved in cutbacks and layoffs. Small and medium size manufacturing companies are mostly highly personal continued on page 9 Bob Kill is president and CEO of Enterprise Minnesota.
Contributing Writers Lynn Shelton Quentin R. Wittrock Photographers John Borge Mark Trockman Colleen Harrison
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 612-455-4239 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
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PEOPLE TO WATCH
Filling the Gaps
I
n 1983, just three years after starting a staffing company, Tim Doherty was feeling confident that his fledgling company just might succeed. So comfortable, in fact, that he decided to close his operation on the day after Thanksgiving and reward his employees with a long weekend. That Saturday, Doherty made his regular Saturday visit to the office and saw that his answering machine was blinking. It was a message from a Fridley-based meatpacker, his first, and at the time, his biggest, client. Short and sweet: “We’re working today,” was the message. “Apparently you aren’t. We’re going to find a company that is.” Click. Doherty learned a lesson. “We lost the business,” Doherty remembers, adding that he has never since closed his offices on the day after Thanksgiving. The lesson: Be there when your clients are. And, as he commemorates his 35th year in business, Doherty has earned the reputation of being there for his clients. Headquartered in Minneapolis for 35 years, Doherty Staffing Solutions offers customized workforce solutions to companies doing business in Minnesota and across the nation. Doherty Staffing is the largest staffing firm based in Minnesota. Today, Doherty’s 225-plus employees operate nearly 20 office locations and over 25 remote (client on-site) locations across the Midwest. Aside from its corporate offices in Edina, additional main territory offices are located in St. Cloud and Owatonna. For staffing and recruiting,
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PHOTO BY MARK TROCKMAN
Doherty Staffing celebrates 35 very successful years helping employers find the right employees—a task never more important than it is today for manufacturers.
Doherty’s service area reaches as far east as Eau Claire, Wisc., as far south as Lennox, Iowa, as far west as Wakefield, Neb., and as far north as Crookston. Doherty grew up with four brothers in Minnetonka. When he was in the 10th grade, in the summer of 1970, his father moved the family to Litchfield and bought an A&W Root Beer stand. Doherty moved back to Minneapolis to attend the University of Minnesota, where he received a degree in business. After a year selling insurance and a couple of years selling for Proctor & Gamble, he joined a local staffing company in the fall of 1979, in the midst of a recession. He was let go after just
Tim Doherty today employs 225 people in 20 office locations and 25 on-site locations.
a few months. Undeterred, he took his father’s advice and decided to establish his own staffing firm, using a bank loan secured by the equity in his parents’ home. No Minnesota bank would make the loan, so Doherty went to Wisconsin, where looser usury laws allowed the family to get a loan with a 24 percent interest rate. “That was one of my first lessons,” Doherty says. “When you need the money, it doesn’t matter what the interest rate is.” His first operation was a decidedly low-tech affair—a very small office and a phone. His staff included two employees, including his mother. He tracked work orders by clipping them to a clothesline, not unlike in an old-fashioned diner. The application process, the payroll and the invoices were all hand-written, “by my mother,” Doherty recalls. A lot has evolved since then. His operation became an early adopter of computers in 1980 and he expanded greatly by creating Doherty Employer Services, a human resources outsourcing business. He talks today about the sometimes confounding development of employment law, the creative and useful growth of temporary employees, possible resolutions to the skills gap, and how to confront the growing maze of bureaucracy behind health care reform. After founding his company in a recession, he has survived at least four others, along with his manufacturing clients. And like most manufacturers, he says recessions can be a time to learn lessons. “Each time, the staffing industry has grown bigger,” he says. “And then each time, in each downturn, the industry has taken a much larger downturn.” One outgrowth of the most recent recession has been the increased use of temporary employees, which Doherty attributes to the rapid increase in the sophistication of technology. “The costs of having product sitting on the shelves has gone away, by the ability to forecast and the ability to ramp up quickly,” he says, adding that executives also want to minimize the pain of downturns. “Companies have managed to learn how to manage the workforce
more productively by ramping up when they need to ramp up and then ramping down. The whole pain of having to lay off full-time employees is a bad memory for a lot of them. They want to be more diligent in being loyal to their core workforce and then to utilize contract employees to ramp up for a particular project, and then have the ability to ramp down again.” Doherty is also keenly aware of the skills gap. His recruiters still work closely with tech schools to find potential employees, but the opportunities are rare. “Most students have multiple offers before they graduate,” he says. The trend, he says, began in the mid-’80s, as cost-cutting high schools eliminated shop class. “There really is no such thing as vocational-type training in high schools anymore,” he laments. To compensate, Doherty Staffing makes an effort to help educate students about potential career opportunities. “Like it or not, our country seems to be on a path in which all high school students should be looking to go to college, to get a degree in liberal arts,” he says. “Over the past couple of years, that realization and the publicity has started to come back. But how do you reverse a trend that took 20 years to develop and change it in a year or two?” Doherty has also worked directly with employers to help train employees. For example, Doherty helped the AGCO Engineering Center in Jackson set up a mobile facility in which it helped employees receive welding certifications. Doherty says his company also is keenly aware of finding employees with basic soft skill behaviors, such as showing up on time, five days each week. “It’s one of the things that our staffing clients look to get from us,” he says. “It’s expensive to recruit employees. That’s one of the key reasons that companies will use a staffing company. [They want to] streamline that process and watch and observe the soft skills of employees.” The soft skills attitudes seem to always be an issue between generations. “It was said back in the ’80s, too,” he notes, “I don’t know if it is any different. You are always going to have individuals that, as much as they may want to, have a hard time showing up five days per week.”
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PROFILE
Bringing their Work Home Chamber exec Dee Schutte gets valuable insights from her manufacturer husband. t is often said that Dee Schutte, executive director of the Litchfield Chamber of Commerce, is one of Minnesota’s chamber of commerce execs who “gets” manufacturing. She acknowledges that she and her husband, Marlin Schutte, “have conversations every night after work about manufacturing. That personal connection really strengthens that understanding.” The reason: Marlin is a manufacturer. He owns Seal Tech Industries, a Chanhassenbased company that makes foam-in-place gaskets. The couple lives in Litchfield, and Marlin makes the 75-minute commute twice a day. Those insights are especially valuable when you consider that one in five jobs in Litchfield is directly connected to manufacturing, according to Dee. During Dee’s eight-year tenure as a vice president at the TwinWest Chamber of Commerce, she helped launch the Grow Minnesota! business retention and expansion program, an initiative created by the Minnesota Chamber. Among her responsibilities was to visit local manufacturers in the TwinWest’s west metro market. “Those visits were the highlight of my day,” she says now. She used that time to understand the processes, the products and the challenges that manufacturers face. Grow Minnesota!, she says, was among the first initiatives she brought to the Litchfield Chamber. Dee estimates that almost 70 chambers are using the Grow Minnesota! program and, she adds, “I believe that those chamber execs also ‘get it.’ ” Marlin says he also benefits from Dee’s experience and insights. “I’m really, really big on education of our workforce,” he says. “I’ve been working hard with our local school district to get more and more education about industrial manufacturing. We’ve put in a nice STEM [science, technology, engineering and math] lab at the school. One of the big things we’re facing—and the chamber has helped
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PHOTO BY MARK TROCKMAN
I
Dee Schutte is executive director of the Litchfield Chamber of Commerce. Her husband, Marlin, owns Chanhassen-based Seal Tech Industries.
a lot with this—is getting quality people into the manufacturing business. There are some great jobs in manufacturing. You don’t have to have a four-year college degree. You can get training and learn CNC programming or welding and other things. There are some great jobs here.” Marlin taught school for a few years, then earned a master’s of business administration and eventually spent seven years as president of Spuhl Anderson Machine, a company that manufactured machinery for the bedding industry. The company made foam for mattresses, and company engineers designed a process to adapt their machines to manufacture gaskets. In 1994, Spuhl sold its mattress line to Leggett and Platt, a huge German conglomerate that had no interest in the gasket business. Marlin purchased Spuhl’s U.S. assets and started Seal Tech Industries. Manufacturers sometimes undervalue the chamber’s impact to their business because they perceive that the chamber is only a
retail promoter, Dee says. The reality, in her experience, is that her chamber collaborates with businesses on a wide variety of front-line issues, particularly workforce initiatives. “We are at the table in initiatives like the new welding and machining training center in Winsted,” she says, adding that the chamber sponsors two scholarship programs that target students who are pursuing technical or vocational certificates. “Skill levels is one of the factors for our manufacturers that makes them wake up in the middle of the night and worry.” In addition, the chamber lobbies on statewide issues at the legislature and with regulatory agencies, as well as at the local level. “We have relationships with the decision-makers to help when a business is expanding or when they need help with even minor problems, like potholes,” Dee says. “Once that CEO is better informed, they almost always want to be involved with and support the chamber.”
Our manufacturing
Special Delivery Willmar-based MO Welding & Fabrication beat its logistics challenges by taking logistics in house. bout 18 months ago, Matt Olson, founder of Willmar-based MO Welding & Fabrication, found himself with a great new customer, but like a lot of manufacturers, hindered by huge challenges related to logistics. His customer, WASP, Inc., designs and manufactures ground support equipment for the aircraft industry, package conveyor products, and military munitions trailers. Its Glenwood headquarters is just an hour from MO, but the process of picking up parts and delivering final products to implement the contract was “turning into more of a hassle than it was worth. We would have twoweek lulls, waiting for a semi to show up.” His solution? He got into the transportation business, now running his own delivery operation with three one-ton delivery vehicles with flatbed gooseneck trailers. Customers, he says, jumped all over it.
PHOTOGRAPH BY RAND MIDDLETON
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Matt Olson and his wife, Maggie. In just three years, Olson has grown exponentially, based in part on his gamble to start making his own pick-ups and deliveries.
“Right away it was awesome. They were more than happy to pay my delivery charge. We could go up and get all our parts and get them back every day. It was two hours versus two weeks.” Far from an expense, his delivery capability became a profit center. “I’ve gotten jobs just because I deliver,” Olson says. “Nobody offers that service in the industry we’re in.” MO is in just its third year of operation. Olson started the company as a one-man shop with a $3,500 bank loan. After working 353 days out of 365 days in his first year, he hired two employees. “Basically I’ve been compounding and compounding ever since.” In year one, MO did $200,000 in gross sales. Year two topped out at $800,000 and, now with 12 employees, he’s projecting revenues of $1.5 million for 2015. “I found a niche.” he says. “I’m that guy that you can come to with any project and I’ll still do it. At the same time, I have the capability to bring on bigger projects. I’m not focused on one thing. I have a wide variety of skills, anything from food grade all the way down to aluminum manufacturing, welding and repair.” Olson says he’s looking looking at expanding again, having now completely exhausted his shop space. Olson recruits by word of mouth, either friends or relatives -- or their friends. “I know their work ethic, and what they’re going to do,” he says. He prefers someone who knows a little about welding, but not too much. “And then I can teach him what he needs to know in a short period of time, get him in the shop working, turning out product.” Does he object when one of his protégés takes his training and moves to another employer? He laughs. “I played that game when I started out, too,” he says. “There’s no way around it. When you got companies offering a $3,000 signing bonus, guys are going to jump on it. And then when the bonus is gone they are going to move on to the next job.”
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True results stem from true collaborations.
Baxter Comes to Donnelly The Alexandria-based manufacturer takes delivery on two new robots
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n the world of workforce readiness, the folks at Donnelly Custom Manufacturing may have met the future. It’s name is Baxter. The Alexandria-based company this year became only the third in Minnesota to take delivery of a Baxter robot (it now has two). Baxter is a three-foot tall (5’10” - 6’3” with pedestal), two-armed robot used for simple industrial jobs such as loading, unloading, sorting, and handling of materials. Jerry Bienias, Donnelly’s
$12,000 for just one job. Bienias says that employees have been enthusiastic. “It’s been very exciting for a lot of people,” he says. “The first couple times we put it out there, people would stop by, ask questions and look at it.” Donnelly President Ron Kirscht jokes that the cool factor may even get in the way. “I expressed concerns to Jerry that it was not a cost-saver. People were walking by and stopping to watch it. When I see four or five people watching, I say, we should
director of operations, says the company was initially attracted to the robots’ flexibility and low cost of operation two years ago, but he felt they were not yet ready for show time. “The software was a little bit too basic and the movements were kind of jerky,” he says. But when new models brought on large-scale improvements, the Donnelly team decided it was ready to buy. Each Baxter, with accessories, retails for about $40,000. Bienias says that costbenefit does not seem to be an issue. He cited one job that typically runs 1,600 hours over the course of a year, requiring a half-time operator. Using Baxter, the human operator time was cut to one-tenth, saving the company between $10,000 and
charge admission.” Safety is also a factor, Kirscht says, adding that collaborative robots have no pinch points and radar awareness of where people are. “If you move unexpectedly into the moving path of the arm, it won’t knock you over. It stops itself.” From a space standpoint, it is more efficient, he adds. “It’s flexible about where it can be located. You don’t need a cage around it.” “It’s positive,” Kirscht. “As time goes on our people will get more opportunities to appreciate what they they are. It takes activities that they don’t necessarily love to do and frees them up to do things that are more interesting or that make time go faster.”
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continued from page 2
Steady As She Goes This year’s State of Manufacturing® survey, while optimistic, is far from a good-news-is-no-news situation. places in which everybody knows everybody else. Employees are people, not statistics. Yet it was evident that these executives had been through previous downturns and would be through them again. They were—and are—long-haul thinkers and planners. So this year, even through the economy appears steady, markets are mostly strong, and manufacturers are anticipating solid revenue growth, not one focus group even hinted at irrational exuberance (due in part also, I suppose, to our Norwegian
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Thanks. I say this every year because it is always true. The State of Manufacturing® would not succeed without the selfless collaboration of so many organizations and individuals. As always, we’re all grateful to our sponsors, whose financial backing helps us defray the considerable costs of the event and whose insights and ideas always contribute to a meaningful questionnaire and whose individual networks always plug us into a new set of thought leaders. Pollster Rob Autry has conducted the survey in each of the past seven years. Rob, founder of Meeting Street Research, is one of America’s premier pollsters. We’ve drawn great credibility from his creativity, patience and keen analytic skills. And Tom Mason, our long-time consultant, has also been with us from the beginning. He has now conducted more than 100 State of Manufacturing® focus groups. Finally, a special thanks goes to Lynn Shelton, the director of marketing and communications at Enterprise Minnesota, who has managed the State of Manufacturing® since it was nothing more than a concept. It is impossible to overestimate the amount of effort that she and her staff—Lynet DaPra, Constance Fantin and Chris Morse—devote to quietly completing the detail-laden schedule of tasks that comprise the various elements of this project.
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heritage). Manufacturers are, always, looking ahead. That’s why it’s important to emphasize some of the systemic challenges for manufacturers that still loom in the background of the optimism, even if the elixir of profitability might diminish their urgency. Most prominent is the growing skills gap. The survey—and the focus groups, in particular—underscored that manufacturers recognize the impending double whammy of increasing retirements
strategic
T:4.875”
Bob Kill
and the already chronic shortage of wellqualified employees to replace the retirees. One manufacturer told a focus group that he is looking for a 10 percent increase in revenues in 2015, but that he might achieve a 100 percent increase if he could find and hire qualified workers. Another told of paying employees a $5,000 bonus for recruiting qualified candidates who get hired and who stay for six months. The time to address this situation with urgency is now, not to wait until the survey identifies it as a crisis.
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PROFILE
Flameout A
t about 9 p.m. on March 25, Reggie Clow had just finished shooting pool with some friends in his Brainerdarea home when he got a call from a reporter at the Brainerd Dispatch who wanted a comment about the fire at his plant. “Fire?” he asked. Clow is president of Clow Stamping, a company that has been making stamping and metal components for original equipment manufacturers since 1970. It took him five minutes to drive the three-and-a-half miles to his massive 275,000-foot manufacturing facility in nearby Merrifield. His company runs production shifts 24 hours a day, so he knew there would be people there. He looked for a red glow in the night but didn’t see one. “That’s good,” he remembers thinking. “It was pretty scary,” he remembers. “We’re not very flammable, but it is always a scary proposition to hear that your place is on fire.” He arrived to see his parking lot filled with fire trucks and firefighters from five different local departments but, thankfully, most of the people were standing around, watching. The fire, chiefly extinguished by the company’s sprinkler system, inflicted relatively minor damage. According to Clow, the probable culprit was a cigarette butt that had been flicked to the ground instead of into the receptacle and ignited some dead vegetation. He says he was gratified by the response of the local fire teams. “They responded really well,” he says. “We had a lot of firemen standing around, doing nothing, but I’m glad they showed up. I certainly thanked them.” And they were probably happy to help protect one of the region’s premier
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employers. By providing some 445 manufacturing jobs, Clow is by far the biggest employer in tiny Merrifield (population 140), but also the largest in the tourism-heavy Brainerd Lakes region. Clow Stamping has been a major regional economic presence since the company first moved from its original St. Louis Park headquarters into a 15,000-foot Merrifield warehouse in 1973. The company operated a parallel operation in Monticello for a time as well, but consolidated to Crow Wing County in 2008. Reggie Clow says the move was opportune for a lot of reasons. Even though his company still does its steel plating
Clow Stamping’s Personnel Manager Twyla Flaws and President Reggie Clow examine the damage the night of the fire.
and painting in the Twin Cities, the added transportation expenses are more than offset by workforce stability. “There are a lot of metal stampers in the Twin Cities,” he says. “People were moving for 10 or 15 cents an hour more. You get up here, north of Brainerd, you give these guys an opportunity and you don’t lose them.” The recession of 2008-2009 challenged
the typical stability of Clow Stamping. The company had to reduce overhead by as much as $400,000 per month, causing 75 layoffs. It froze wages for hourly staff and salaried people took a 10 percent acrossthe-board cut. The company replaced its generous health insurance benefits with health savings accounts and froze its 401(k) retirement contributions. “We’d been through this four or five times before,” Clow says. “You have to regroup for a while. And when things get back to normal, you return everything you took away.” The challenge was that things didn’t exactly get back to normal—they blew right past normal. Over a five-year period, Clow’s sales doubled. “The first year was easy to handle because we had a lot of unused capacity,” Clow says. “All I had to do was hire.” But beginning in year two, the company had to adapt quickly. In a relatively short time, the company hired more than 200 people and invested $16 million in new equipment and three separate expansions of the physical plant. “We were in catch-up mode all the time,” Clow says. “When you are looking at 20 percent or 25 percent, it’s hard to handle, but it’s hard for me to turn down work.” At one point, the company was working 24/7, employing up to 70 temp workers on weekends. The intense growth has settled down in the past year, curbed mostly by the lagging agriculture economy, Clow says. He expects 2015 growth to be in the neighborhood of minus 6 percent. “We can see out maybe two or three months at a time,” he says. “How busy will we be a year or two from now? If history is anything to lean on, we average about 6 percent growth annually. It is very seldom that. It is usually something negative or something very high.”
PHOTO BY THE BRAINERD DISPATCH
Fast-growing Clow Stamping unhindered by factory fire.
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/ ENTERPRISE MINNESOTA MAY 2015
Albert Lea discovers that an old idea can be a good idea.
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hree years ago, Mike Larson, apprenticeship program, a solution that CEO of Lou-Rich, the $75 million might incrementally improve the pipeline manufacturing conglomerate that operates of students who will ultimately benefit out of Albert Lea, arranged a meeting from a lucrative, challenging and stable with his local school superintendent and career in manufacturing. other administrators to discuss the scarcity Working with the Minnesota Department of potential manufacturing employees of Education, Ponce found a curriculum graduating from their ranks. that would enable students to work partHis talking points would have been time, for pay, while being mentored by familiar to virtually any manufacturing an employee and tutored by a certified executive in Minnesota, or probably instructor. anywhere. On one hand, a growing number of the 400-plus people he employed in four local facilities were starting to think about retirement, taking with them skills and deep institutional knowledge and experience. On the other hand, he watched as the local resource of potential employees—the high school—seemed intent on guiding its students toward anywhere but manufacturing. Gone were the shop classes (along with their teachers) At Lou-Rich: Val Kvale, placement specialist, Workforce that might have exposed Development, Inc.; Al Johnson, former apprentice and current students to manufacturing employee; Roxanne Ponce, HR manager at Lou-Rich; and Dillon and the school counselors Johnson, current apprentice. who understood the genuinely good career opportunities in manufacturing. “It was our way of trying to show the Roxanne Ponce, Lou-Rich’s human youth that this is not a dirty, dingy place to resources manager, recalls how Lou-Rich work,” Ponce says. “And we show them managers stressed the need to give students what the job is about, because it is very the kind of “practical skills that employers technical. It is not as repetitive as they think need. I talked to [school administrators] it might be.” about our needs for skilled employees for Lou-Rich now has its third cohort engineering-type folks. How do we get of apprentice workers, and the school students prepared for that?” district has reached out to the Albert Lea The result of that meeting was the Workforce Center to find other interested resurrection of a good, old-fashioned businesses.
PHOTOGRAPH BY COLLEEN HARRISON
Governing and Growing Companies in Greater Minnesota.
Four Questions Kevin McKinnon, Minnesota Department of Employment and Economic Development (DEED)
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his year’s State of Manufacturing® survey showed that almost half of Minnesota’s manufacturers are planning for increased revenues in 2015 and almost two-thirds expect average wages to increase during that same time frame. How bullish is DEED on the prospects for the state’s manufacturers? Everything we see supports the survey. Manufacturing companies have been a large component of our work over the past two to three years. We traditionally have always worked with manufacturing companies but it has ramped up significantly. We’re working with them on facility needs, the purchase of equipment and, of course, on helping add new employees to their workforce. Approximately 65 percent of our work through DEED’s main programs has been targeted at manufacturing companies. At the same time, more than a third said it was difficult to attract qualified candidates; more than a third said this problem would impede their ability to meet growth projections. What is DEED’s take on that? What role might you plan in helping them out? Minnesota’s workforce is aging, which means the state’s demographics will look vastly different in the next decade and beyond. While the state’s economy is strong, the labor force is already beginning to tighten. With the fifth lowest unemployment rate in the country at 3.7 percent, Minnesota has about a 1:1 ratio of available workers to vacancies. The more Baby Boomers retire, the higher the ratio will be for vacancies to workers. While this issue is not specific to Minnesota, we are trying to address these needs through training underutilized or unprepared workers for the available jobs. We’re also working with individuals who have barriers to
INNOVATIONS
employment to build marketable skills. This supports the supply side of the equation—to provide the skills they need to participate in the workforce. If you look at the unemployment situation in Minnesota today, the question is how to get those who are underemployed or not gainfully employed into these positions. Did it surprise you that only a third of manufacturers collaborate with local educational institutions for training? What can be done to improve that? What is the role of the Minnesota Job Skills Partnership? It is surprising that more companies have not reached out, but in some respects, it isn’t. Manufacturers often provide significant training on their own. I look at the training higher education institutions can provide from two different perspectives: The first being the young people who go through programs to ultimately get jobs. What skills do they have and how do those skills meet the demands of the existing positions? The second piece is that higher education institutions train more than 150,000 incumbent workers each year—including in collaboration with the Minnesota Job Skills Partnership. This program designs curriculum in partnership with businesses and higher education institutions to meet training needs. It is an important program as it increases the skills of employees, increases productivity and ultimately prepares an additional onboarding or training program that can be offered to new hires. You’ve talked about the coming shift in the workplace as Baby Boomers retire and they are replaced by Millennials who bring different kinds of skillsets and attitudes to the workplace. What does DEED do to evolve with that? That’s an interesting question. DEED is just a small part of the
As DEED’s deputy commissioner, Kevin McKinnon oversees its Business and Community Development programs, as well as the Minnesota Trade Office and the Office of Broadband Development. Business and Community Development.
equation as the industry must adapt as well. DEED’s Workforce Development division partners with companies on long-term workforce development planning issues and is constantly partnering with companies to serve their workforce needs. A lot of our work is through incumbent training, whether through DEED programs or directly through higher education institutions. That being said, manufacturing isn’t necessarily what most people expect from today’s operations. A lot of communities and companies take pride in finding ways to create interest and involvement in manufacturing careers. Automation has played a large role in our competitiveness, which goes back to addressing what skillsets are required today versus what was needed 20 years ago. Those are areas where you can offset some of the human demand, but it doesn’t solve the entire problem. MAY 2015 ENTERPRISE MINNESOTA /
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EXCLUSIVE POLL
Calm Deep AND
Minnesota’s manufacturers say they’ll grow, create jobs and increase compensation. By Rob Autry
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innesota’s manufacturers overwhelmingly expect to parlay previous success and a sturdy economy into solid business growth in 2015, during which they’ll expand hiring and increase wages, much as they say they’ve done over the past two years. At the same time, they remain apprehensive about the looming skills gap being fueled by retirements among Baby Boomers. These are the results of the seventh annual 2015 State of Manufacturing® survey, which my company, Meeting Street Research, conducted on behalf of Enterprise Minnesota. We interviewed 400 Minnesota-based manufacturing
But the skills gap, the costs of health insurance and zealous government oversight remain possible impediments. executives between February 23 and March 18 of this year. The enthusiasm of this year’s respondents continues the trend of previous years. Minnesota’s manufacturers have consistently expressed optimism about the long-term prospects of their
companies, even during the dark economic days of the 2008-2009 recession. Over the past four years, between 82 percent and 84 percent of the executives said they were confident about the future of their companies. This year’s executives revealed their highest level of confidence yet, reaching a whopping 89 percent, up five points from a year ago. At the same time, the percentage who said they are “not confident” is down to its lowest level (11 percent) in the seven years we’ve been doing this work. We also heard that 42 percent of manufacturing executives believe the coming year will be one of economic expansion, up from 37 percent a year ago
and up from 34 percent two years ago. This year’s level surpassed the high in 2011 when 40 percent of executives said we were on the verge of an economic expansion. Interestingly, this increased optimism is not necessarily being driven by surging bottom line gains—at least not in the short term. Manufacturers’ predictions about their companies’ gross revenues, profitability and capital expenditures remained relatively unchanged from previous years. Respondents anticipate growth in revenues (45 percent), profitability (30 percent) and capital expenditures (27 percent), all very similar to their attitudes about the past three years.
MAY 2015 ENTERPRISE MINNESOTA /
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The percentage of manufacturers who say their workforce has grown in the past year is at the highest level since we first started asking this question.
Prominent challenges
Despite their bullish attitudes, manufacturers still cite several potential areas of concern, many of which will look familiar to those who have seen the survey data from previous years. What’s interesting about this year’s data set is that opinions are clearly less intense than in previous years. 16
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§ Health care costs. The cost of providing health insurance to employees remains the highest concern of manufacturing executives, but the level of concern overall has dropped for the fourth consecutive year. In our 2011 survey, taken immediately after passage of the Affordable Care Act, 71 percent cited health care costs as a serious con-
cern for their firm. Today, that’s down to 56 percent, a drop of three percentage points from a year ago (59 percent). Similarly, health care coverage also remains the top factor for companies when it comes to recruiting and retaining new employees; 46 percent say it is very important. But, that percentage is down five points from last year’s survey (51 percent very important). § Government oversight. This year’s survey data also indicates a conspicuous drop in concerns about government policies and regulations, although it remains the second most prominent concern, with 46 percent saying it is a serious concern compared to 55 percent in 2014 and 58 percent in 2013.
(Strategic)
Planning for Growth
Nearly four out of ten firms (39 percent) have a formal plan for strategic growth. Of those who do have formalized plans, 95 percent are confident in their company’s financial future. They also are much more likely to expect greater increases in gross revenues (56 percent to 37 percent over those who don’t) and have similar expectations about increased profitability (40 percent to 23 percent).
§ Finding and keeping qualified workers. The ability to attract and retain qualified workers continues to be a major concern—33 percent identify it as a serious concern to their firm—and ranks third on our list of concerns for the fourth year in a row.
Constraints to growth
When asked to rank the one or two biggest challenges that might negatively impact future growth, some noticeable shifts occurred compared with a year ago. Minnesota’s unfavorable business climate (taxes, regulations and business uncertainties) comprises the biggest potential impediment to growth, but its percentage is down five percentage points (43 percent, compared to 48
percent in 2014). A weak economy and the rising costs of energy and materials also both dropped in significance, with the economy falling from 31 percent to 23 percent this year, and energy costs declining from 29 percent to 20 percent. In contrast, concern about health care costs still ranked second and was up 10 percent (41 percent, compared to 31
percent) and the ability to attract and retain a qualified workforce also grew in 2015 to 29 percent, from 20 percent the year before.
More hiring, better pay
The percentage of manufacturers who say their workforce has grown in the past year is at the highest level since MAY 2015 ENTERPRISE MINNESOTA /
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we first started asking this question in 2012. Twenty-eight percent said their workforce grew, while 61 percent said it stayed the same. Only 11 percent said their company’s workforce shrank. Last year, just 23 percent of firms said their workforce had grown over the past 12 months (22 percent in 2013). Interestingly, non-metro firms have a slightly higher growth rate—29 percent compared to 27 percent for metro firms. Thirty-six percent of firms in the West Central Initiative, 32 percent of firms in the IF (Little Falls) Initiative, and 30 percent of firms in the Southwest Initiative say their workforce has grown in the past year. While 68 percent of manufacturers say they expect their workforce will stay about the same for the next year, there are about a quarter (28 percent) of firms
Regional Results This year’s poll featured additional interviews to allow greater regionalization of the results. It divided the state into areas that follow the borders of Minnesota’s Initiative Foundations. They are: Northwest Minnesota Foundation (Bemidji), Northland Foundation (Duluth), Southwest Initiative Foundation (Hutchinson), The Initiative Foundation (IF) (Little Falls), Southern Minnesota Initiative Foundation (Owatonna), and West Central Initiative (Fergus Falls).
About the pollster Rob Autry, founder of Meeting Street Research, is one of the nation’s leading pollsters and research strategists. The Meeting Street Research team has 25 years of combined public opinion research experience and 2,000 research projects under its belt. He has conducted all seven State of Manufacturing surveys. Before founding Meeting Street, Autry was a partner at Public Opinion Strategies.
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that report they will be growing their company’s employee base. The biggest level of growth is expected in larger companies: 43 percent for companies with revenues of $5 million or more and 42 percent for those with more than 50 employees. The most optimistic companies are in the Southwest Initiative (36 percent) and the Southern Initiative
(34 percent). Nearly six in ten firms (58 percent) say they have increased wages over the past two years and 61 percent expect that trend to continue for the next two years. Our surveys have shown a consistent rise in wages since 2011 when 41 percent said they had increased wages, with only 2 percent expecting a drop. This tracks
closely with the performance of the past two years, in which 58 percent of manufacturers increased wages and only 5 percent decreased them. There was a slight drop (from 25 percent to 22 percent) in companies that expect to invest in employee development in 2015, while 71 percent said their spending will stay the same. It is interesting to note that these numbers have remained virtually unchanged through all seven years of the poll. Similarly, metro firms and large companies are more likely to have formal, structured leadership development programs for supervisors and managers. Despite growing workforces and growing wages, we also continue to see a growing skills gap with manufacturers. The number of executives who said it is difficult to attract qualified candidates to their company’s vacancies grew again in 2015 to 71 percent, up from 67 percent the year before. To illustrate how significant the change has been, in 2010, just 40 percent of executives said attracting qualified candidates to their firms’ vacancies was difficult. The number who say finding candidates is not difficult is at 27 percent, the lowest point in the history of the poll. Metro-based companies reported a notable increase in concern about the skills gap. Last year, we saw a sizeable urgency gap where 75 percent of nonmetro companies said it was difficult, far outpacing metro companies (61 percent). This year, the gap has narrowed considerably with 72 percent of nonmetro firms and 70 percent of metro firms saying it’s difficult to find the workers they need. The skills gap is most acute in the Southwest Initiative (86 percent), Southern Minnesota Initiative (78 percent) and West Central Initiative (76 percent). Even though more metro firms find it difficult to hire qualified candidates, they’re not necessarily more concerned about it. Only 28 percent of metro firms say they are very concerned about the impact not finding qualified workers will have on their firm, compared to 41 percent of non-metro firms. The reason might lie in what these firms say are the biggest challenges they face in attracting qualified candidates. Fully 46 percent of metro firms and 42 percent of non-metro firms say it’s
difficult to attract new workers because applicants don’t have the needed skills or education to do the job. While they largely agree on that point, non-metro firms are much more likely to report a lack of applicants or interest (41 percent of all non-metro firms compared to just 28 percent of metro firms) and firm location or geography (20 percent
of non-metro firms and 8 percent of metro firms) as significant obstacles to finding qualified workers. On a different question, we also find that 25 percent of non-metro firms say a job candidate has not taken a job with them because of long commuting times or distances. That’s twice as high as metro firms (12 percent). The need for employees with training MAY 2015 ENTERPRISE MINNESOTA /
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2015 THE STATE OF MANUFACTURING®
FOCUS GROUPS
SPONSOR
Feb 27
Custom Products, Litchfield
Litchfield Chamber of Commerce SealTech Industries, Meeker Co. Economic Development, Custom Products of Litchfield
March 9
Riverland Community College, Albert Lea
Albert Lea-Freeborn Co. Chamber, Interstate Packaging Corp., Lou-Rich, Inc., Riverland Community College
March 11
Saint Paul College
Saint Paul College, St. Paul
March 11
Minnesota Precision Manufacturers Association headquarters, Minneapolis
St. Paul Port Authority, Minnesota Precision Manufacturers Association
March 13
MRA headquarters, Plymouth
MRA
March 13
Elk River City Hall
City of Elk River Economic Development Authority
March 17
South Central College, Mankato
South Central College
March 17
Duffy’s Restaurant, Redwood Falls
Redwood Area Development Corp, Southwest Initiative Foundation
March 18
Surly Brewing Company, St. Paul
Baker Tilly
March 19
Gray Plant Mooty, St. Cloud
Gray Plant Mooty
March 19
Ridgewater College, Willmar
Ridgewater College
March 20
Alexandria Technical & Community College, Alexandria
Alexandria Technical & Community College, Alexandria Area Economic Development Association
and experience is down over last year, 47 percent to 39 percent. The demand for entry-level employees is up slightly (25 percent from 22 percent), while the need for employees with technical training has increased a tad, 23 percent from 21 percent. Machinists (29 percent) and assemblers (23 percent) are the most coveted employees, according to manufacturers. Metro firms were looking for more machinists (32 percent to 25 percent). Engineers were also in greater demand in the metro (13 percent to 6 percent), while the non-metro had a more significant need for welders (14 percent to 4 percent). The expected uptick in Baby Boomer retirements is having a significant or modest impact on 29 percent of Minnesota manufacturers. Non-metro firms expect it to have a slightly higher impact (31 percent), led by southern Minnesota firms (44 percent). Just 16 percent of northwest Minnesota 20
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companies reported an impact. Higher revenue and larger companies expect to experience the greatest retirement challenge: 41 percent of companies larger than $5 million and 40 percent of companies with 50 or more employees say it will have either a significant or modest impact on them.
Metro-based companies are notably more concerned about the skills gap. Non-metro firms appear more inclined to solve their workforce issues by collaborating with local educational institutions by a wide margin: 43 percent to 30 percent of metro firms. Companies in the Southern Minnesota Initiative Foundation reported the highest interest in collaborations at 58 percent. At the same time, larger companies are also inclined to relationships with educational
institutions: 65 percent with revenues over $5 million and 72 percent with more than 50 employees.
Trade
Fewer than one in ten manufacturers (9 percent) say they shipped more than 25 percent of their product overseas last year—the same figure we saw a year ago. Canada (19 percent) and China (13 percent) continue to be seen as the countries with the greatest potential for international business. Minnesota companies appear to be benefiting from the fact that original equipment manufacturers continue to bring their supplier relationships back home after experimenting with relationships in India, China and elsewhere. More than a quarter of them (26 percent) say they have found increased business in the last year from “home-shoring.” They say this is due to shorter lead times (30 percent), closer relationships with regional suppliers (25 percent) and total costs versus only product costs (23 percent).
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Distribution
DILEMMAS How to avoid conflicts with customers and collusion with competitors. By Quentin R. Wittrock
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anufacturers always desire to improve the ways they sell, store, ship and service the products they make. Improvement requires change. Change, in turn, tends to leave some former distribution partners or would-be competitors on the outside looking in. It is in these situations when disputes, threats and even litigation can result. It is in these same situations, therefore, when the manufacturer is best served by having clear documentation in its files, having legal compliance programs in place, having trained its employees how not to violate antitrust laws and other legal boundaries, and by having understood and followed rules relating to pricing, exclusivity and termination. The case study at the end of this article demonstrates how all of these preventive measures can allow a manufacturer to take the steps necessary to improve its business through a change in distribution. Changes and the resulting conflicts most frequently arise in the following scenarios: • The manufacturer concludes it can reach customers more effectively and get products to them more efficiently by “selling direct” rather than through intermediaries. Direct selling can occur from the manufacturer to dealers, bypassing two-step wholesale distributors (i.e., wholesalers who buy, warehouse, resell and deliver the manufacturer’s products to independent dealers). Or, the direct relationship can be between the manufacturer and the end users, bypassing all independent wholesalers and dealers. 22
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• “Fewer, stronger dealers” is adopted as a business strategy. • The manufacturer believes it can compete better and grow market share best through a dedicated sales force employed by the manufacturer rather than through independent sales representative organizations. • In the course of a merger or acquisition, the manufacturer consolidates its distribution. In each of these scenarios, the manufacturer faces both business and legal risks. On the business side, what if existing distributors, dealers or sales representatives have relationships with end users that allow them to steer business to your competitors’ product lines? Legally, what if your soon-to-be-former distribution and sales partners go to lawyers in an attempt to force you to continue those relationships or to compensate them for losing access to your lines? What if, heaven forbid, termination of distributors, dealers or sales representatives brings out claims that you have been engaging in unlawful activity, most commonly alleged to be violations of antitrust laws? Indeed, it is termination (or other significant change) that leads to most distribution disputes and litigation. At the very least, terminated partners often demand that unsold inventory be bought back or that more time be allowed before the change occurs. Sometimes these parties insist that their entire business or significant assets be purchased to repay them for the “harm” they will suffer
MAY 2015 ENTERPRISE MINNESOTA /
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due to termination. Often, they welcome termination as opening the door to an exit strategy, and they simply demand a large sum of money to go away, sometimes using alleged antitrust violations by the manufacturer as leverage to force a buyout. To weigh these risks, manufacturers contemplating distribution changes should first review two basic things: (1) what the contracts they have in place allow and require; and (2) what is mandated by state and federal law. Many contracts, and the existing laws in many states, delineate when termination is allowed and on what grounds, how much notice is required, whether inventory must be repurchased, what commissions must be paid to sales representatives upon or after termination, whether the manufacturer has the right or obligation to buy business assets, and what rights and obligations the parties have regarding post-termination competition. Intellectual property, such as trademarks, confidential information, and trade secrets, may also be protected. ANTITRUST CONSIDERATIONS Antitrust law provides an entirely separate, but equally important, set of risks that generally do not get mentioned by distributors or dealers until termination is imminent. Pricing is the most frequent topic of antitrust concern, as companies wrestle with how to avoid “price discrimination” in selling to their various customers. It is common knowledge in business that suppliers do not charge all buyers the same price. Yet most suppliers also know that a federal antitrust law (the RobinsonPatman Act) on its face seems to require that all customers—at least to the extent the customers compete against each other in reselling the products—be treated equally, not only in price but also in promotional support. Given these dueling realities, there is plenty of room for misunderstandings to turn into legal claims, particularly when termination is occurring because of failures of the dealer’s business. The key to avoiding or defeating price discrimination claims is to understand and apply the exceptions to the requirement of equal pricing. For example, the law allows companies to have programs in place that allow for greater discounts to customers who meet published criteria, 24
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such as growth, loyalty or volume. The availability of such programs can insulate the seller from liability, so long as the program is reasonably attainable and will not destroy competition by significantly favoring just one or a handful of buyers. Programs like this also can be effective tools to motivate dealers and distributors to sell the manufacturer’s products instead of competitors’ brands. Other legally permitted exceptions to the law prohibiting price discrimination, such as
Pricing is the most frequent topic of antitrust concern. “meeting competition,” also can allow the manufacturer flexibility to increase sales while obeying the law. Control of resale pricing is another distribution-related antitrust issue. For a century, suppliers were strictly forbidden from agreeing with their dealers and distributors as to resale prices down the distribution chain. That has changed in recent years, at least under federal law in the United States. Now, the more important question is the state or country in which resale control is sought to be exerted, as state and country laws vary. The economic effects and the reasons for the control also matter. Given these nuances, companies increasingly are adopting minimum advertised price (MAP) programs. The rise of internet resellers also has fed this practice, with some companies specifically calling their programs “iMAP” policies, limiting them to control of price advertising on the internet. A decision to terminate
often is linked to the topic of resale pricing generally and MAP programs specifically, as termination might be a dealer or distributor’s punishment for not following the manufacturer’s resale pricing requirements or policy on price advertising. Exclusive arrangements are a third common category of legal concern for manufacturers who sell through independent distribution. These arrangements run the gamut from the traditional practice of granting exclusive territories, to requiring dealers not to sell competing lines. The latter option provides a form of exclusivity to the manufacturer. Like challenges regarding pricing parity and controls on pricing and advertising, disputes about whether exclusivity requirements are being followed often arise when the parties are nearing the end of their relationship. Collusion with competitors provides the most serious form of antitrust risk—“go to jail” serious. Certain forms of collusion—such as bid rigging and price fixing—are criminal offenses, and individuals receive prison sentences when they engage in such conduct on behalf of their companies. The more common forms of collusion are much closer to the line that divides legal collaboration from illegal conspiracy to restrain trade. Trade association activity, while generally legal, can lead to competitors working together too closely and ending up in trouble. Worries arise when competitors discuss a merger or acquisition: How soon can they start presenting a unified face to customers on central terms such as pricing and who deals with whom? Joint ventures by their nature involve competitors cooperating, thus the collusion line is never far away and needs to be watched closely in all joint venture discussions. What about bid situations? When a customer wants to use the manufacturer’s product but needs multiple bids, what involvement can the manufacturer have in working with various potential bidders, or in submitting a factorydirect bid itself? Or, when a competitor is also your customer or supplier for certain components or in a particular geographic area, it is tricky to separate the cooperation needed in any buyer-seller relationship from the collusion generally forbidden of competitors. Perhaps the most common antitrust
collusion problem for manufacturers occurs not at the manufacturing level but when independent dealers conspire to rig bids or fix prices and then attempt to draw the manufacturer into their illegal arrangement. In this scenario, some dealers may complain about other dealers, and they may ask the manufacturer to “police” their anticompetitive agreement. They also may ask the manufacturer to participate directly by agreeing that its company-owned distribution outlets or direct sales activities will be curtailed to facilitate the dealers’ arrangement. Vexing issues face the manufacturer who wants to do the right thing legally while seeing to it that its good dealers are profitable and happy. PREVENTIVE MEASURES FOR MANUFACTURERS Prevention is the best cure for antitrust problems in all of the above scenarios. The time of termination or after a claim has been lodged are too late. We recommend that manufacturing companies review their compliance with antitrust laws by formally gathering and scrutinizing all of their pricing programs, sales policies, competitor communications and customer agreements, among other documents, to uncover and defuse landmines. Sales leaders and other executives should be interviewed about their interactions with customers and, crucially, any competitors with which your company has contact. Top management should receive a report of this compliance review. Training should be provided to all involved. This can be accomplished through legal sessions presented at company-wide sales meetings, for example, and through online training modules that are mandatory for all employees who deal with customers or competitors. Carefully drafting documents is a third good way to avoid legal liability before terminations occur and claims arise. Having clear contracts, policies and programs in place should avoid most disputes about termination, pricing and resale controls. In the same vein, having clear documentation of what is and is not a part of the relationships with competitors is crucial in avoiding collusion.
CASE STUDY In January of 2015, following a nine-day jury trial at the federal courthouse in St. Paul, our client won a jury verdict defeating all counts in a product distribution/ antitrust case. This lawsuit followed the decision of our client—a manufacturer of fireplaces and related products—to terminate its wholesale, two-step distributor in Pennsylvania, Ohio, Maryland and West Virginia, and to sell direct to several dozen dealers in those areas. The terminated
Collusion with competitors provides the most serious form of antitrust risk—“go to jail” serious. distributor alleged antitrust, contract and tort claims against our client and a large Pennsylvania dealer, which was our client’s co-defendant. Following termination, the plaintiff went out of business after 30 years as our client’s distributor, and it claimed at trial to have lost its entire business value of $3.5 million, plus other “lost profits.” All told, with potential damages tripled under antitrust law, the plaintiff was seeking more than $10 million plus attorney’s fees, which were substantial. The plaintiff was represented by an experienced large-firm lawyer from Pittsburgh, Penn., along with a major Minneapolis-based law firm. After eight hours of deliberation, the jury answered “no” on the questions of whether there was an antitrust conspiracy, breach of contract and tortious interference. This provided a complete trial victory for our
client. (Price discrimination claims had been dismissed by the judge earlier in the case.) The case was of great importance to all concerned. In addition to not wanting to get hit with a large judgment, our client wanted confirmation of its right as a manufacturer to terminate wholesale distributors and other intermediaries when it wants to sell directly to dealers or to others down the product distribution chain. Many of our manufacturing clients struggle with this same desire to improve their competitiveness and profitability by eliminating long-time wholesalers who no longer add sufficient value. Key issues in this case included whether statements and documents created an “implied” contract precluding termination except with good cause, and whether the manufacturer had “conspired” with the large Pittsburgh dealer to eliminate as competitors the plaintiff wholesaler and some other Pittsburgh-area dealers the wholesaler had supplied. As is often the case with our manufacturing clients who use our firm for product distribution matters, this client had asked us in advance whether it had the legal right to terminate this wholesale distributor. We had advised that termination would be legal, as there was no contract and no state or federal law prohibiting it. Nevertheless, at the same time our client sent the termination notice, we commenced a declaratory judgment action so that any litigation would be conducted here in Minnesota. This proved to be a good strategy, as the Minnesota jurors carefully weighed all of the evidence from 18 witnesses (including four expert witnesses, two for each side) and scores of exhibits, then applied common sense and the law, as provided by the court, to find there was no unlawful action on the part of the manufacturer. Our client is a company that has legal compliance programs in place, and it regularly trains its employees regarding antitrust and termination matters, which also helped. Good documentation was another key to victory. Quentin R. Wittrock is a shareholder at Gray, Plant, Mooty, Mooty & Bennett, P.A. MAY 2015 ENTERPRISE MINNESOTA /
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The Interview
Traction&Triage How former banker Dean Atchison has used simple business disciplines to take Spectrum Aeromed from the brink of bankruptcy to the top of an industry.
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ean Atchison, president of Spectrum Aeromed, was at a trade show recently when someone chased him down to tell him how much he hated Spectrum Aeromed. Atchison considers the encounter a high point in the eight years that he’s owned the Fargo-based manufacturer of critical care transport solutions for airplanes and helicopters. His accoster was an executive at a similar company that, although located in another part of the world, worked on some of the same projects as Atchison’s company. “You have these big crates for your equipment that have the Spectrum Aeromed logo on the side, right?” the man asked. Atchison agreed that was true. “When we’re in project management meetings, the [original equipment manufacturer] points to all the vendors who are late and says, ‘Why can’t you be like those guys,’ and points at the Spectrum Aeromed crates. ‘Their equipment has been here for two months, waiting for you guys to catch up, so that we can put it into the aircraft.’ ”
What career path takes someone from banking to critical care air transport? That’s the unique piece of the puzzle. I wore a lot of hats at the bank, but what I did the most of was small business banking—working with small manufacturers or mom-and-pops throughout the upper Midwest. I spent a lot of years working with these people from my side of the desk; they’re asking me for money and I’m trying to decide whether to give it to them. With that, they’d also get a whole bunch of my advice. I spent a lot of time wondering if the advice I was giving was really any good because I’d never been on their side of the desk. I’d never made payroll. But I always wanted to do what they did, or at least to try. So for about 10 years, I looked for a business to buy. Spectrum Aeromed was the company that got me off the banking side of the world and over onto the entrepreneurial side.
Atchison admits, “I couldn’t have been happier.” The brief interaction highlights exactly the kind of reputation Atchison wanted to cultivate for his company. In the 20 years before he took over Spectrum Aeromed, it was one of the worst offenders in an industry that has been notorious for over-promising and under-delivering. Atchison had been a banker for 17 years when he purchased Spectrum Aeromed in 2007. “It was a true turnaround,” he says. In its first two decades, the company had never exceeded $1.5 million in
How did you find out about it? A former customer of mine was a vendor for Spectrum Aeromed. He mentioned that the company was struggling, probably moving toward bankruptcy. He made the introduction. I worked through the due diligence in 2007, and ultimately decided that, yes, this was the thing we were going to buy and try to turn around. Spectrum Aeromed had been unsuccessful for a long time. What persuaded you that its prospects outweighed the challenges? Essentially, I was buying a company at asset value. There was no premium to be paid. It was bankrupt. It had lost a lot of
money. It seemed to have a good product, but the company had always been undercapitalized. And it was a pretty good team, but they had never been managed or led correctly. When I was in the due diligence phase, I would ask customers if they wanted to do business with Spectrum Aeromed. They’d say, “Yes, we really like their product. What we worry about is, are they going to be around to service us? If that piece of the puzzle was fixed and stabilized, we would like to order more of the product, and some peers in our space would also like to have this product.” We thought some business discipline, some strategy, and a different operating style would improve both the product and the team. And that’s what we were able to do. OK. How did you do it? We acquired the company on June 13, 2007, and we made it all of two weeks
Spectrum Aeromed was the company that got me off the banking side of the world and over onto the entrepreneurial side before we said we’re going to do strategic planning. A strategic plan existed, but it existed only in the mind of the owner. The information was never shared with anybody else. It’s really hard to get everybody behind the plan and moving in the same direction if they really don’t have any idea what that plan is. So, what I did was to get the leadership team together. It was five or six people— the sales side, the engineering side, the production side—and I said, OK, this is the group of five or six people who are going to help turn this company around, and they should all have some say in developing this strategic road map. We took it to the base level. It had never been done in the company. We asked: Who are we? What are we good at? What do our customers need us to be good at? How do we prioritize opportunities? How receptive was the team? They were very willing and passionate about saying, yes, thank goodness, we finally have some say in this, and we want MAY 2015 ENTERPRISE MINNESOTA /
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PHOTOGRAPHS BY JOHN BORGES
sales and had always lost money. Due diligence told Atchison that Spectrum Aeromed had a surprisingly good product and quality employees, but “a really bad reputation in the industry.” “It had no processes,” he remembers, and the staff was reactive and poorly prepared. “Their ‘do:say’ ratio was terrible.” Today, the company is looking at $12 million in sales and has appeared for three consecutive years on Inc. magazine’s list of America’s 500 fastest growing companies. Atchison and his executive team have mapped out plans to grow to $40 million within the next five years.
to help you get this thing turned around. It was really neat to see because they didn’t know me from anybody. But because they had never really been involved in any decision-making or strategy, they lacked the experience to make some good business decisions and to prioritize. But it was a hand-holding, coaching process of saying, there’s no way to get good at doing this other than to practice it and then
We thought some business discipline, some strategy, and a different operating style would improve both the product and the team talk about it. For example, you made a bad decision; how could it have been done differently? How long did that process take? The strategic piece actually came together pretty quickly; I’d say two weeks. The people knew the industry, they knew the competitors, they knew what we did, and they had an idea of what they thought we should do. We needed to prioritize five or six things that we do right out of the chute. We moved away from the old days of doing a three- to five-year strategic plan that’s a big ream of paper that sits on your credenza and nobody looks at it. We moved to more of one or two pages of bullet points—a road map—the things we needed to work on for the next 12 or 18 months, and kept it fresh, and kept it moving forward.
can help you put processes in place on the manufacturing side. Lean is great for manufacturing and engineering, but we didn’t have the 90-day planning and the 90-day scheduling we needed to have from the perspective of business leadership. That’s where the EOS system came in. How would you describe the discipline that EOS brought to your operation? Even in a simplified road map format, a strategic plan can be overwhelming and the challenge is to prioritize and break it into bite-size chunks in order to begin executing and making improvement. The EOS system has tools specifically designed to help small business leadership teams gain traction with their strategy. Implementing a weekly leadership meeting and a weekly scorecard was a great way to start. We then added personal EOS traction plans that helped team members prioritize yearly and quarterly goals as well as identify and cure the issues and challenges in front of them and their departments. These personal EOS
plans are updated every 90 days and play an important role in executing the strategy and continuously improving. You came up with your vision statement—“to be the best provider of air ambulance equipment in the world”—very early in your ownership of the company. How did staff react to that? We were having a staff meeting. We’d been through strategic planning; people were excited about what we were doing. Someone asked, “You bought this company. What do you want to do with it?” And I said, “I want us to become the best provider of aeromedical equipment in the world.” I wish I could have taken a snapshot of the looks on their faces. They looked at me like I was either drunk or high, or some bad combination of the two. Has he really looked around at what we’re doing here, at how much trouble we have? We’re virtually bankrupt. It’s still our vision statement because about three years later, people started to say, “You might be right. We think that we
Did you do it yourself? Actually, we did the strategic plan with outside help. I always do that because, like most entrepreneurs, if you let me drive the bus, I’ll drive the bus and nobody really gets any input on where we’re going. So, I try to bring a good, strong third party, like an Enterprise Minnesota, to help out. I’ll still get my say, but they’ll be good referees and coaches to make sure it doesn’t become the Dean Atchison show. You have said that Gino Wickman’s book Traction and his Entrepreneurial Operating System (EOS) was important to your turnaround. Even though I’m a banker, you can quickly understand how lean principles 28
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Sara Engen Weick, manufactured parts coordinator
Dean Atchison and Mike Gallagher, vice president, director of production
could do this. We could become the best.” I expect it will probably always be our vision because it’s just one of those things I never even thought about. I just honestly answered the question, what do you want this company to be? I didn’t put my family’s whole livelihood on this thing to do something mediocre. I figure if you’re going to set a goal, it might as well be a good one. If you say, I’m going to be an A student and you miss it and you become a B or a C student, that’s better than saying, I just set out to be average and I got a D. How did you fix the on-time delivery issue? This year, actually, has been one of those years where we’ve made another quantum leap. I think we’re running at 96 percent on-time delivery right now. Aerospace is notorious for not doing ontime delivery, customer service and all these kinds of things. That was the easiest place for us to differentiate ourselves. It’s become a cultural thing for us to say we can shave a day here, we can shave a day there, just by implementing mundane, simple manufacturing processes. We’re
actually able to build people’s aeromedical equipment faster than they’re able to process checks inside their system to pay for the equipment. Does it have an effect on attitudes at the company? They feel really proud. People are upset when we have a month where we don’t hit our 100 percent on-time delivery. Lately, we’ve been missing because of a
A strategic plan existed, but it existed only in the mind of the (previous) owner. vendor issue. But we have to own that. We have to either figure out how to coach our vendors up, or we have to find other vendors because the customer doesn’t care. They bought the equipment from Spectrum Aeromed and, ‘You said you were going to ship it to me on time. You didn’t do it. Don’t tell me about how the vendor that you chose didn’t perform.’ We’ve got to own that. That’s kind of the next learning phase for us, to say, we don’t get a pass on this. If it lives in our
world, then it’s part of our project. We take ownership and have to figure out how to fix it. Employee engagement seems to be an integral part of how you manage. You recently said “I’m not all that involved sometimes.” I think you said something like someone could work “… two years with us and not know that I’m involved.” I gather it’s because you built a team you trust. It’s the way we operate. My job is to support my team. They are the experts; they are closest to the customer, the production floor, the design process so they should drive the process and management’s job is to support them. Quite honestly, I have a number of peers who say, “What are you doing? This is insanity. I would never run my company this way.” I shake my head, look at them and say, “That’s your mistake, not mine.” I’m far from asleep at the switch. Quite honestly, I find [employees] make better decisions and they’re more engaged if I’m not micromanaging them, and they’re given some rope to make decisions and sometimes to make some mistakes. Like MAY 2015 ENTERPRISE MINNESOTA /
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a lot of entrepreneurs, in 2009, 2010, I was hitting the wall. I was working way too many hours. I was micromanaging too many things down here. Our sales and profits have improved significantly as a result of the improved leadership style. How have you integrated the whole process of peer benchmarking in running the company?
We needed to prioritize five or six things that we do right out of the chute. It’s something I brought with me from banking. Bank credit analysis does a lot of financial peer analysis just because a company like Spectrum Aeromed is a hard comparison. There’re just not that many companies out there like us in terms of the aeromedical industry. So, then you open up a bigger field. How about small design manufacturing firms; how do they compare to others in a bigger,
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less unique space, a less niche space? We need to objectively compare our performance against high performing peers. What I always want to look at is that upper quartile or 10 percent, to ask if I am performing at least as well as some of these best companies in the space. In the areas where we’re not performing as well, then we have to say, what can we do to improve this? In some cases, we just say it’s a different animal, our business is different, and we may not get there. That’s helped us continue to fine-tune how we run the business and what we should be allocating resources toward. Let’s talk about your other company, Midwest Fire, which is run by your wife, Sarah. How does that experience compare or contrast with Spectrum Aeromed? Were you attracted to it for some of the same reasons? Midwest Fire is purely Sarah’s company. She owns it and runs it. And, yes, we very much like the designmanufacture aspect of the company.
It’s about the same size, employee-wise and revenue-wise, and it’s lifesaving and property-saving equipment. It has similarity to Spectrum Aeromed, but the company was nowhere near a turnaround. It was a very strong performing company, but the previous ownership was more traditional, old-school, top-down management—no EOS, no lean processes.
I didn’t put my family’s whole livelihood on this thing to do something mediocre. What are its prospects? Sarah is seeing that now. The company worked through a transition after acquisition, lots of internal focus in building a strategic road map. All those things were done in 2013, and 2014 was a good year in terms of getting sales back to where they needed to be. The first quarter of 2015 was, I think, probably the
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best the company has ever had in terms of sales, leads, brand awareness and all the things they’re working to do inside the strategic growth map. One by one, they’re seeing them light up. What’s next? Is there another business on the horizon? Is it two and done? Right now, I’m really happy doing what I do at Spectrum Aeromed. I help, quite honestly, in a very light advisory role with Sarah and her team. She’s good. As a matter of fact, in the March edition of Prairie Business magazine, she was recognized as one of the top 25 women in business. How about that for somebody who, two years ago, was a dental hygienist? She was nominated by a group of people out of the southwest Minnesota area. A group of women down there saw what she was doing with that company and took notice and said, “We think she should be considered for this honor.” Pretty neat. I’m finding that I have to raise my game in order to keep up with her.
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Final Word
Distinctions with a Difference 2015 State of Manufacturing® survey accounts for wide geographic diversity.
W
e like to think that no single effort does more to capture and encapsulate the challenges and aspirations of Minnesota’s small and medium-sized manufacturers than our annual State of Manufacturing® survey (and we’re right!). But we also have a less obvious research tool out there who keeps us even closer to intimate day-today efforts of manufacturers. His name is Bob Kill, our president and CEO. Bob is well known for personifying Enterprise Minnesota as “the voice” of manufacturing, yet many are not aware of his tireless efforts to identify the growth needs of industry by personally connecting with manufacturing executives throughout the state. If there is anyone out there who spends more
reported higher levels of difficulty in attracting qualified candidates to their firms’ vacancies than other Minnesota manufacturers (Southwest: 86% difficult; South: 78% difficult; West Central: 76% difficult). They are also more likely to say their wages have increased in the past year and more likely to say wages will be on the rise in the coming years, compared to companies elsewhere in the state.
Lynn Shelton is director of marketing and communications at Enterprise Minnesota.
This year’s State of Manufacturing® poll bumped up the number of interviews so that we could regionalize results. We used the Minnesota Initiative regions.
time each year interacting with the wide diversity of manufacturing executives throughout the state, I’ve not met him or her. Bob clocks thousands and thousands of miles each year visiting manufacturers from Greenbush to Winona. When he talks about the survey, Bob always emphasizes that it is wrong to 32
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ever think that all manufacturers face the same challenges or opportunities. Manufacturers in Minnesota’s diverse geographic areas behave differently. That’s why this year, we decided to bump up the number of State of Manufacturing interviews so that we could compare different regions of the state. This year’s survey divided the state into areas that follow the borders of Minnesota’s Initiative Foundations. They are: Northwest Minnesota Foundation (Bemidji), Northland Foundation (Duluth), Southwest Initiative Foundation (Hutchinson), The Initiative Foundation (IF) (Little Falls), Southern Minnesota Initiative Foundation (Owatonna), and West Central Initiative (Fergus Falls). We over-sampled so that we could get at least 50 respondents in each region. Southern Minnesota/Southwest/ West Central: These three regions
Northland/Northwest Minnesota: Manufacturers here tend to be more concerned about shipping and logistics of getting their products to market than companies elsewhere. Fully 22% of Northland and 20% of Northwest Minnesota region executives say this is a significant concern for their businesses, compared to just 14% of manufacturers statewide. Similarly, they also tend to be more concerned about managing supply chain relationships than the rest of the state. Interestingly, those in the Initiative regions are more likely to say they are collaborating with local educational institutions for workforce training or other programs. • • • • • • •
Southern 60% say they do West Central 54% Southwest 42% Northwest 42% Northland 38% IF (Little Falls) 36% All manufacturers-- 36% say they do
IF (Little Falls): While firms in the IF are largely confident about their futures, fewer companies here expect to see an increase in profitability in 2015. Just 18% say they expect an increase in profits for the coming year, while 9% say they expect a decline in profits. Firms here also expect capital expenditures to rise — 34% increase — making it the highest increase percentage of any region in the state.
A whopping 95 percent of manufacturers who have a formal planning process expect increases in gross revenues and profitability in the coming year. — 2015 State of Manufacturing® Enterprise Minnesota’s expert strategy consultants help manufacturing companies achieve operational excellence and profitable growth.
Call us today at 800-325-3073 or visit www.enterpriseminesota.org for a free initial consultation on how our formal business strategy process can help your company! Scan here to learn more about how we can help your business 310 4th Ave So., Suite 7050 • Minneapolis, MN 55415
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